This is the pace-setting mechanism that controls the rate at which the ‘cap’ on the EU’s Emissions Trading System squeezes on an annual basis.

Each year a fixed reduction is applied to the total number of EU allowances – the amount of carbon pollution that market participants are allowed to produce that year – circulating in the market for the following year, by a fixed  percentage. That percentage is the linear reduction factor.

The LRF rate is set relative to the 2013 total cap. Between 2013 to 2020, the LRF reduced the volume of EU Allowances by 1.74% per annum, and from 2021 to 2023, it became 2.2% – the equivalent of around 43 million EUAs per year.

From 2024 to 2027, the rate increased to a 4.3% reduction each year, and will become 4.4% from 2028 to 2030.

In our recommendations to strengthen the EU ETS, Carbon Market Watch strives for the LRF to be set at a rate that is in line with the science and is ambitious enough to ensure that the EU can achieve its climate goals.