The EU is serious about decarbonization. Over the next twelve months, Brussels will finalize a massive energy and climate package, “Fit for 55,” that aims to accelerate progress towards net zero carbon emissions over the next decade. It is the EU’s most ambitious green effort yet. Though it will apply only within the bloc, its consequences will be felt globally — and, of the world’s major economies, China has the most to lose.
At the heart of the proposals is carbon pricing. The idea is to internalize the cost of pollution by forcing producers to pay for each ton of CO2 they emit. The EU has long had a carbon pricing mechanism in place — the Emissions Trading System (ETS). ETS allocates a fixed number of pollution permits to certain industries and allows firms to trade them at a market-determined price. Strengthening the ETS mechanism further is a cornerstone of “Fit for 55.”
However, ETS currently provides a much weaker incentive for firms to decarbon
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