Negotiations on the EU Sustainable Finance Disclosures Regulation (SFDR) stalled last week, whilst the European Commission moved forward with plans to soften the bloc’s carbon pricing regime and set a legally binding electrification target.
The Parliament’s committee on economic and monetary affairs, known as ECON, was scheduled to vote on how it wanted to revise SFDR on Wednesday, but a lack of consensus prompted the meeting to be postponed.
Given the upcoming summer break in Brussels, it’s now expected to take place in September – ahead of a vote by the wider parliament and then negotiations with the Council and Commission.
Meanwhile, on Friday the Commission published its Electrification Action Plan, which includes a proposal for a legally binding electrification target of 46% by 2040 and potentially lower electricity taxes for European industry.
On the same day, it published a long-awaited proposal for reforming the EU Emissions Trading System (ETS), which contains plans to extend the regime to waste incineration, strengthen its coverage of the aviation and maritime sectors, and make it easier to use carbon removals.
A report published by the London School of Economics on Thursday found “a clear trend” for companies covered by the EU ETS to decarbonise faster than others.
Between 2021 and 2024, there was a 41% reduction in emissions, according to the research, which the authors said made “the EU ETS the most impactful climate policy in the world”.
Crucially, the Commission plans to slow the pace of emission reductions – known as the Linear Reduction Factor (LRF) – to 3.7% annually between 2031 and 2035, and 1.7% between 2036 and 2040.
The LRF is currently set at 4.3% until 2027 and 4.4% thereafter.
“For banks, insurers, asset managers and private equity firms, this changes the timing of capital deployment”
Sean MacHale, head of climate and sustainability at EY’s financial services unit
Companies are scheduled to stop receiving any free carbon allowances under the EU ETS from 2039, but the Commission now wants that deadline extended into the 2040s.
However, from 2031, companies will need verified decarbonisation investment plans in order to access those free allocations.
They will receive 80% of allowances when they submit an eligible plan, and the remaining 20% if they can demonstrate they’ve reduced their emissions accordingly over the following years.
Governments will also be required to dedicate at least half the revenues they generate from the EU ETS to industrial decarbonisation investments under the new proposal.
Sean MacHale, head of climate and sustainability at EY’s financial services unit, described the proposal as “a capital allocation story that could reshape Europe’s industrial competitiveness for the next decade”.
In a LinkedIn post, he noted that heavy industry and carbon-intensive sectors would benefit from the moves to bring down the cost of carbon, while clean technology providers may face slower uptake as businesses delay major decarbonisation projects.
“For banks, insurers, asset managers and private equity firms, this is far more than a climate policy update, it changes the timing of capital deployment,” he wrote.
“Markets ultimately reward productivity, innovation and investment. If global capital continues flowing towards the regions building tomorrow’s industries while Europe extends the transition runway for yesterday’s economy, today’s competitiveness measures could become tomorrow’s competitive disadvantage,” MacHale noted.
But Peter Adrian, president of the German chamber of commerce and industry (DIHK), said the Commission’s proposal “balances climate protection and competitiveness”.
“Frontrunners are not disadvantaged, the CO2 price retains its incentivising impact, and most companies gain time for successful transformation,” he insisted.
Other industry bodies are frustrated that the proposal doesn’t go further: Europe’s chemical-industry association, Cefic, called for stronger measures to curb the EU ETS, and criticised the plan to require firms to invest in decarbonisation in order to secure carbon allowances.
“Companies should not be forced to make investment commitments in exchange for regulatory support when the conditions required to deliver those investments are not in place,” the body argued in a statement. The ETS package also includes a €100bn commitment to a new Industrial Decarbonisation Bank (IDB), first announced as part of the EU’s Clean Industrial Deal.
“The IDB is the EU’s flagship investment instrument to support the large-scale deployment of proven decarbonisation technologies in energy-intensive industries,” the Commission explained.
“With an estimated budget of €100bn, it will help reduce the commercial risks of industrial decarbonisation projects and bring mature technologies into widespread use after 2030.”
The bank will allocate €30bn by 2030, financed through the sale of 400 million ETS allowances. Eligible projects include those capable of generating high-quality carbon removals.
