Estonia Faces Fine for Refusing to Join Second Phase of Emissions Trading System

The European Commission proposed changes to the emissions trading system (ETS) last Friday. Under the new plan, the number of carbon quotas available on the market will decrease more slowly over the next decade, and industrial companies will continue to receive free quotas, provided they submit decarbonization plans and do not sell quotas to move funds out of Europe.

Helena Braun, head of the policy sector at the European Commission representation in Estonia, said the ETS reform is driven by two issues: energy prices and the climate crisis. She noted that energy prices in Europe are very high, partly because Europe buys more than half of its resources from third countries. Since Russia's full-scale war against Ukraine began in 2022, it has used Europe's dependence as a weapon. The current crisis in the Strait of Hormuz has cost Europe 50 billion euros.

Braun also pointed out that NATO considers climate change a defining challenge, and annual investment needs for climate adaptation in Europe amount to about 70 billion euros.

Estonia has the lowest support for climate goals in the EU at only 46%, compared to the EU average of 81%. Prime Minister Kristen Michal said Estonia wants to delay or even cancel the introduction of ETS2, calling the system too bureaucratic. This is also the official position of the Estonian government.

Braun said 18 EU member states have already transposed ETS2 into national law, three have done so partially, and six have not done so at all. Estonia is among those six, and together with nine other countries, it also wants to revise the ETS. If Estonia does not adopt the system by 2027, it could face a fine under an infringement procedure, which may ultimately lead to a lump sum or periodic penalty from the European Court of Justice.

The Commission also plans to extend free quotas for energy-intensive industries until 2038, but with conditions: 80% of quotas will be allocated if companies have a decarbonization plan, and 20% after investments are made according to the plans. In the future, at least 50% of revenue from quota sales must be spent on decarbonization, rather than at the discretion of member states. Currently, only 5% of revenue is used for this purpose.

Braun could not answer whether the changes to ETS would increase heating or waste disposal prices in Estonia.