Emissions trading for road transport and buildings
- Category: European Union Carbon Market Glossary
Current legislative intentions regarding emissions trading for the buildings and road transport sectors envision an introduction of a separate but adjacent to the EU ETS emissions trading system.
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25 April 2023 ‘Fit for 55': Council adopts key pieces of legislation delivering on 2030 climate targets A new, separate emissions trading system for the buildings, road transport and additional sectors (mainly small industry) has been established, in order to ensure cost-efficient emissions reductions in these sectors, which have thus far proven difficult to decarbonise. The new system will apply to distributors that supply fuels to the buildings, road transport and additional sectors from 2027. A safeguard has been put in place whereby if the price of oil and gas are exceptionally high in the run up to the start of the new system, this will be postponed until 2028.
18 December 2022 The co-legislators agreed that the system will start in 2027. The emissions reduction trajectory and the linear reduction factor was set at 5.10 from 2024 and 5.38 from 2028. The Council and Parliament agreed to auction an additional 30% of the auction volume for the first year of the launch of the system, so that it runs smoothly (“frontloading”). The agreement extends the scope of the system to fuels used in certain industrial sectors. As a consequence, it has been agreed to increase the size the Social Climate Fund correspondingly. The co-legislators agreed on a temporary possibility for member states to exempt suppliers from surrendering allowances until December 2030, if they are subject to a carbon tax at national level, the level of which is equivalent to or higher than the auction price for allowances in the new emission trading system. There will be a simplified monitoring reporting and verification requirements for small fuel suppliers. In case the energy prices will be exceptionally high, the start of the new ETS will be delayed until 2028. Once the system has started if the price of allowances exceeds 45 EUR over a certain period of time, additional allowances will be released increasing the supply on the market. 14 July 2021 Commission Communication 'Fit for 55': delivering the EU's 2030 Climate Target on the way to climate neutrality, COM/2021/550 final Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757, COM(2021) 551 final, 2021/0211 (COD), Recitals 43 - 51, 55 - 59, Article 1(21) adding Chapter IVa Questions and Answers - Sustainable transport, infrastructure and fuels Transport Factsheet Buildings Factsheet |
This is to avoid disturbances of the well-functioning emissions trading system for stationary installations and aviation, given the different reduction potentials in those sectors and different factors that influence the demand. Legislative drafts do not exclude possible merger of the two trading systems, nevertheless reserve that it should be assessed only after a few years of the functioning of the new emissions trading, and based on information and collected market experience.
The inherent and distinctive feature of the design presently on the table is an upstream approach to regulated entities in the buildings and road transport sectors.
According to the European Commission in its Communication of 14 July 2021 ('Fit for 55': delivering the EU's 2030 Climate Target on the way to climate neutrality, COM/2021/550 final) system will be focused on upstream fuel suppliers, putting the responsibility on fuel producers to comply with the system, rather than requiring individual households or road transport users to take part directly. The Commission proposes to start emissions trading - at the EU level (for example, Germany has its own carbon pricing system for transport and buildings) - in the sectors of road transport and buildings from 2026.
Hence, emissions will be capped, with the cap reduced over time so that total emissions fall.
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EU ETS and transport - Fit for 55: European Commission proposal of 14 July 2021
• Extension of the ETS to road transport and building fuels from 2026
• Tighter cap on the number of allowances for intra-EU flights, starting from current levels and reduced by 4.2 % annually
• Gradual extension of the ETS to maritime starting in 2023, with a 3-year phase in period |
The reasons behind the proposal are that the EU ETS directly or indirectly covers only around 30% of buildings emissions from heating (this is related to the system’s coverage of district heating and electricity used for heating purposes).
Covering all emissions of fossil fuel combustion in this sector and integrating them in the EU emissions trading would present, in the European Commission's opinion, important benefits in terms of effectiveness of emissions reduction.
Key features of the future scheme are presented in the Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757 (COM(2021) 551 final, 2021/0211 (COD)), see the table below.
| Act that triggers the compliance obligation | Recital 45 |
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| Greenhouse gas emissions permit requirements | Recital 47, 56 |
Member States should ensure that regulated entities falling within the scope of the new emissions trading have a valid permit as of the start of the system in 2025 and should report their associated historical emissions for 2024.
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| Linear reduction factor (LRF) | Recital 48 |
The total quantity of allowances for the new emissions trading should follow a linear trajectory to reach the 2030 emissions reduction target, taking into account the cost-efficient contribution of buildings and road transport of 43 % emission reductions by 2030 compared to 2005.
The total quantity of allowances should be established for the first time in 2026, to follow a trajectory starting in 2024 from the value of the 2024 emissions limits (1 109 304 000 CO2t), calculated in accordance with Article 4(2) of Regulation (EU) 2018/842 of the European Parliament and of the Council on the basis of the reference emissions for these sectors for the period from 2016 to 2018.
Accordingly, the linear reduction factor should be set at 5,15 %.
From 2028, the total quantity of allowances should be set on the basis of the average reported emissions for the years 2024, 2025 and 2026, and should decrease by the same absolute annual reduction as set from 2024, which corresponds to a 5,43 % linear reduction factor compared to the comparable 2025 value of the above defined trajectory. If those emissions are significantly higher than this trajectory value and if this divergence is not due to small-scale differences in emission measurement methodologies, the linear reduction factor should be adjusted to reach the required emissions reduction in 2030.
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| Allocation method | Recital 49 |
Both the buildings and road transport sectors are under relatively small or non-existent competitive pressure from outside the Union and are not exposed to a risk of carbon leakage. Therefore, allowances for buildings and road transport should only be allocated via auctioning without there being any free allocation.
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| Rules on validity, transfer, surrender and cancellation of allowances | Recital 55 |
Regulated entities should surrender allowances for the first time for their verified emissions (corresponding to the quantities of fuels they have released for consumption) in 2026.
In order to minimise the administrative burden, a number of rules applicable to the existing emissions trading system for stationary installations and aviation should be made applicable to emissions trading for buildings and road transport, with the necessary adaptations.
This includes, in particular, rules on transfer, surrender and cancellation of allowances, as well as the rules on the validity of allowances, penalties, competent authorities and reporting obligations of Member States.
Emissions will be attributed to regulated entities on the basis of fuel quantities released for consumption and combined with an emission factor.
Regulated entities should be able to reliably and accurately identify and differentiate the sectors in which the fuels are released for consumption, as well as the final users of the fuels.
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Monitoring/Reporting (MRV) |
Recital 56 |
Emissions should be attributed to regulated entities on the basis of fuel quantities released for consumption and combined with an emission factor.
Regulated entities should be able to reliably and accurately identify and differentiate the sectors in which the fuels are released for consumption, as well as the final users of the fuels, in order to avoid undesirable effects, such as double burden.
To have sufficient data to establish the total number of allowances for the period from 2028 to 2030, the regulated entities holding a permit at the start of the system in 2025 should report their associated historical emissions for 2024.
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According to the draft Annex III to the EU ETS Directive activities covered by the projected Chapter IVa of the Directive with respect to carbon dioxide (CO2) are: “release for consumption of fuels which are used for combustion in the sectors of buildings and road transport”.
The exclusions cover:
“(a) the release for consumption of fuels used in the activities set out in Annex I to this Directive, except if used for combustion in the activities of transport of greenhouse gases for geological storage (activity row twenty seven);
(b) the release for consumption of fuels for which the emission factor is zero”.
The said draft Annex III also explains that the sectors of buildings and road transport “correspond to the following sources of emissions, defined in 2006 IPCC Guidelines for National Greenhouse Gas Inventories, with the necessary modifications to those definitions as follows:
(a) Combined Heat and Power Generation (CHP) (source category code 1A1a ii) and Heat Plants (source category code 1A1a iii), insofar as they produce heat for categories under (c) and (d) of this point, either directly or through district heating networks;
(b) Road Transportation (source category code 1A3b), excluding the use of agricultural vehicles on paved roads;
(c) Commercial / Institutional (source category code 1A4a);
(d) Residential (source category code 1A4b)”.
Point of regulation
The point of regulation is a key issue in establishing the new ETS as it refers to the obligated party or the entity to whom the emissions are attributed. In the current EU ETS, the point of regulation are industrial and energy installations, as well as aircraft operators, i.e. the emitters themselves. Such approach is not feasible for the new ETS given the large number of small emitters in the road transport and buildings sectors (many of which are private persons). As the European Commission argues, an upstream approach is more adequate, whereby not the emitters themselves but entities further up the supply chain, significantly smaller in number than the emitters, are regulated.
The act that triggers a compliance obligation under the new ETS would then be the putting on the market of fuels for combustion in the covered sectors. As in the current EU ETS, regulated entities would need to have a permit under the new ETS for the activity that triggers a compliance obligation.
Regulated entities in an upstream system must be able to monitor and report accurately, per type of fuel, the fuel volumes put on the market. The regulated entity must be able to distinguish energy flows for road transport and buildings from other energy flows. The regulated entity therefore needs to know the end-use of the fuel, that is, whether the fuel is used in road transport and/or it is used in buildings.
In order to avoid double coverage, the regulated entity therefore should be able to distinguish fuels for use by installations already covered by the EU ETS from those to be used by entities not covered by the EU ETS - otherwise alternative solutions (such as compensation mechanisms) should be foreseen.
Moreover, as follows from Recital 46 of the draft Regulation, to properly set up the point of regulation the infrastructure of the excise duty established by the Council Directive (EU) 2020/262 of 19 December 2019 laying down the general arrangements for excise duty is going to be used - "with the necessary adaptations". The said Directive already sets a robust control system for all quantities of fuels released for consumption for the purposes of paying excise duties.
End-users of fuels in those sectors are not intended to be subject to the new obligations.
Compliance system
At this stage of legislative train the preferable option for the new ETS is to mirror analogous, existing compliance system for stationary industrial installations and aircraft operators.
The European Commission argues that such a move has numerous advantages, in particular:
- the administrative authorities could benefit from their experience in managing EU ETS,
- significant savings can be attained as regards administrative burden and capacity building matters.
Considerable option that might materialise in the future is also to link the existing ETS to the new created ETS. In such a case both systems’ similarities will bring further benefits.
Hence, it can be expected that the emissions trading system for road transport and buildings will reflect the existing EU ETS compliance cycle, which, in short, is based on the following main principles:
- stationary industrial installations and aircraft operators covered by the current EU ETS report their annual CO2 emissions, which have been monitored based on a the monitoring plan;
- the monitoring plan is submitted to the national competent authorities together with the operating permit;
- the approved monitoring plan must be used by the operator to monitor CO2 emissions during the year;
- operators report on their emissions once a year through the submission of a verified emissions report;
- on the basis of this report, an operator must surrender an equivalent number of emission allowances, every year by 30 April;
- any regulated entity who does not surrender sufficient allowances by 30 April of each year to cover its emissions during the preceding year is liable for the payment of an excess emissions penalty;
- the excess emissions penalty is at present 100 euros for each tonne of carbon dioxide equivalent emitted for which the operator has not surrendered allowances;
- payment of the excess emissions penalty do not release the operator from the obligation to surrender an amount of allowances equal to those excess emissions when surrendering allowances in relation to the following calendar year.
As regards to Registry, the new ETS would in principle be implemented and operated through the Union Registry.
Monitoring, reporting and verification (MRV)
The extension of an emissions trading system to new sectors will require the design and the establishment of a new monitoring, reporting and verification (MRV) system, which accurate, reliable and cost-effective. According to the European Commission, in view of a possible future integration of the new ETS with the current EU ETS, it makes sense to design the MRV system along the same lines as the one existing for the current EU ETS.
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LinksAs a starting point, the new MRV system would need to comply with the principles of transparency, accuracy, consistency, comparability and completeness (as also stated in the current EU MRV framework. The MRV system will be important for the proper functioning and credibility of the new ETS, but also to collect adequate information for the re-assessment of the cap.
Under the EU ETS, the procedure of monitoring, reporting and verification consists of the following: EU ETS operators are required to have an approved monitoring plan for monitoring and reporting annual emissions (this plan is part of the permit to operate). Further, every year, operators must submit an emissions report, the data for a given year must be verified by an accredited verifier by 31 March of the following year. Based on verified emissions, operators must surrender the equivalent number of allowances by 30 April of that year, in the absence of which they face penalties (penalties will also be applied in case of errors or incompleteness in the emission reports).
Under an upstream ETS, the regulated entities (which are not the emitters themselves as in the current EU ETS) must also be able to monitor and report, per type of fuel, the fuel volumes put on the market. They must know, in particular, to the extent necessary, the end use of the fuel to determine whether the fuel volumes put on the market are captured within the scope of the new ETS. However, emissions will determined indirectly via fuel quantities put on the market, hence monitoring and reporting rules could be simpler than those applying to the current sectors. In the new sectors, only sales of largely standardised fuels for combustion purposes would be monitored. The new MRV system would also share some similarities with the MRV applicable to aviation both in terms of costs and obligations.
Assesment of impacts
An extension of emission trading to road transport and buildings is estimated to increase by more than 100% the number of regulated entities under the current EU ETS framework. However, it is also expected that the complexity of the MRV rules for the new regulated entities will be lower, as only sales and distribution of largely standardized fuels for combustion purposes would be monitored. This corresponds to only one activity, but it is a new kind of parameter that, as the European Commission underlines in its impact assessment document, the competent authorities need to consider when delivering their administrative tasks and activities.
The said document also mentions that just over half of respondents were in disagreement with the inclusion of emissions from buildings or road transport in the current ETS (this is in contrast, for example, with the maritime sector, where the stakeholders were generally in agreement with the proposed inclusion in the current ETS. Those opposing it had concerns relating to impacts on the competitiveness of the current ETS sectors by including sectors with high abatement costs and/or different price elasticities. Concerns regarding the increased administrative burden from overlapping policies were also mentioned. The main problem to address will be, however, the impact of rising heating or transport prices on consumers, especially for low-income households.
The widespread effect will be that the ETS inclusion would increase the price of every additional kilometre driven.
Finally, considering under the new emissions trading system a new type of allowances will be issued, an entire spectrum of other questions arises, in particular regarding:
- potential parallels to existing EUAs and EUAAs,
- admission of financial institutions to the new cap-and-trade system,
- qualification of the new emission allowances as financial instruments under MiFID II,
- VAT taxation.
The European Commission impact assessment documents for the Fit for 55 legislative package are not definitive as regards the aforementioned dilemmas, however, some accents are already present. They allow for drawing some conclusions based on strong balance of probabilities. Hence, assuming the new trading system becomes reality, as planned, the following features of the emissions trading system for road transport and buildings can be expected:
- as per the very nature of a cap-and-trade system, emission allowances will be tradable;
- trading will not be limited to the regulated entities (i.e., those that have compliance obligations under the new system) but opened up also to other persons, both as regards primary trading at auctions and secondary trading), in particular financial intermediaries;
- new emission allowances will be classified as financial instruments under financial market legislation, in particular MiFID II Directive.
All the above assumptions follow from the main logical imperative that the possibility of a future linking of the new system with the existing EU ETS makes sense to design both constructive features along the same lines as for the existing ETS. Opening-up of the new trading system (including primary trading at auctions and secondary trading) also to financial institutions is necessary in order to ensure a proper price discovery process and sufficient liquidity in the market.
Also, entities with compliance obligations under the new system need possibilities to hedge against price fluctuations, and will therefore need access to financial products that allow such hedging. Classification of emission allowances as financial instrument under financial market legislation is, in turn, necessary to ensure a safe and efficient trading environment and robust oversight regime for the new type of allowances.
To conclude, it is highly probable that the new emissions trading system will be set up under the umbrella of Directive 2003/87/EC, which will involve one more important consequence: the application of the VAT reverse charge mechanism to transfers of the new type of allowance.
Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757, COM(2021) 551 final, 2021/0211 (COD), Recitals 43 - 51, 55 - 59, Article 1(21) adding Chapter IVa
(43) The Communication of the Commission on Stepping up Europe’s 2030 climate ambition, underlined the particular challenge to reduce the emissions in the sectors of road transport and buildings. Therefore, the Commission announced that a further expansion of emissions trading could include emissions from road transport and buildings. Emissions trading for these two new sectors would be established through separate but adjacent emissions trading. This would avoid any disturbance of the well- functioning emissions trading in the sectors of stationary installations and aviation. The new system is accompanied by complementary policies and measures safeguarding against undue price impacts, shaping expectations of market participants and aiming for a carbon price signal for the whole economy. Previous experience has shown that the development of the new market requires setting up an efficient monitoring, reporting and verification system. In view of ensuring synergies and coherence with the existing Union infrastructure for the EU ETS covering the emissions from stationary installations and aviation, it is appropriate to set up emissions trading for the road transport and buildings sectors via an amendment to Directive 2003/87/ЕC.
(44) In order to establish the necessary implementation framework and to provide a reasonable timeframe for reaching the 2030 target, emissions trading in the two new sectors should start in 2025. During the first year, the regulated entities should be required to hold a greenhouse gas emissions permit and to report their emissions for the years 2024 and 2025. The issuance of allowances and compliance obligations for these entities should be applicable as from 2026. This sequencing will allow starting emissions trading in the sectors in an orderly and efficient manner. It would also allow the EU funding and Member State measures to be in place to ensure a socially fair introduction of the EU emissions trading into the two sectors so as to mitigate the impact of the carbon price on vulnerable households and transport users.
(45) Due to the very large number of small emitters in the sectors of buildings and road transport, it is not possible to establish the point of regulation at the level of entities directly emitting greenhouse gases, as is the case for stationary installations and aviation. Therefore, for reasons of technical feasibility and administrative efficiency, it is more appropriate to establish the point of regulation further upstream in the supply chain. The act that triggers the compliance obligation under the new emissions trading should be the release for consumption of fuels which are used for combustion in the sectors of buildings and road transport, including for combustion in road transport of greenhouse gases for geological storage. To avoid double coverage, the release for consumption of fuels which are used in other activities under Annex I to Directive 2003/87/EC should not be covered.
(46) The regulated entities in the two new sectors and the point of regulation should be defined in line with the system of excise duty established by Council Directive (EU) 2020/26225, with the necessary adaptations, as that Directive already sets a robust control system for all quantities of fuels released for consumption for the purposes of paying excise duties. End-users of fuels in those sectors should not be subject to obligations under Directive 2003/87/EC.
(47) The regulated entities falling within the scope of the emissions trading in the sectors of buildings and road transport should be subject to similar greenhouse gas emissions permit requirements as the operators of stationary installations. It is necessary to establish rules on permit applications, conditions for permit issuance, content, and review, and any changes related to the regulated entity. In order for the new system to start in an orderly manner, Member States should ensure that regulated entities falling within the scope of the new emissions trading have a valid permit as of the start of the system in 2025.
(48) The total quantity of allowances for the new emissions trading should follow a linear trajectory to reach the 2030 emissions reduction target, taking into account the cost- efficient contribution of buildings and road transport of 43 % emission reductions by 2030 compared to 2005. The total quantity of allowances should be established for the first time in 2026, to follow a trajectory starting in 2024 from the value of the 2024 emissions limits (1 109 304 000 CO2t), calculated in accordance with Article 4(2) of Regulation (EU) 2018/842 of the European Parliament and of the Council26 on the basis of the reference emissions for these sectors for the period from 2016 to 2018. Accordingly, the linear reduction factor should be set at 5,15 %. From 2028, the total quantity of allowances should be set on the basis of the average reported emissions for the years 2024, 2025 and 2026, and should decrease by the same absolute annual reduction as set from 2024, which corresponds to a 5,43 % linear reduction factor compared to the comparable 2025 value of the above defined trajectory. If those emissions are significantly higher than this trajectory value and if this divergence is not due to small-scale differences in emission measurement methodologies, the linear reduction factor should be adjusted to reach the required emissions reduction in 2030.
(49) The auctioning of allowances is the simplest and the most economically efficient method for allocating emission allowances, which also avoids windfall profits. Both the buildings and road transport sectors are under relatively small or non-existent competitive pressure from outside the Union and are not exposed to a risk of carbon leakage. Therefore, allowances for buildings and road transport should only be allocated via auctioning without there being any free allocation.
(50) In order to ensure a smooth start to emissions trading in the buildings and road transport sectors and taking into account the need of the regulated entities to hedge or buy ahead allowances to mitigate their price and liquidity risk, a higher amount of allowances should be auctioned early on. In 2026, the auction volumes should therefore be 30 % higher than the total quantity of allowances for 2026. This amount would be sufficient to provide liquidity, both if emissions decrease in line with reduction needs, and in the event emission reductions only materialise progressively. The detailed rules for this front-loading of auction volume are to be established in a delegated act related to auctioning, adopted pursuant to Article 10(4) of Directive 2003/87/EC.
(51) The distribution rules on auction shares are highly relevant for any auction revenues that would accrue to the Member States, especially in view of the need to strengthen the ability of the Member States to address the social impacts of a carbon price signal in the buildings and road transport sectors. Notwithstanding the fact that the two sectors have very different characteristics, it is appropriate to set a common distribution rule similar to the one applicable to stationary installations. The main part of allowances should be distributed among all Member States on the basis of the average distribution of the emissions in the sectors covered during the period from 2016 to 2018.
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(55) Regulated entities covered by the buildings and road transport emissions trading should surrender allowances for their verified emissions corresponding to the quantities of fuels they have released for consumption. They should surrender allowances for the first time for their verified emissions in 2026. In order to minimise the administrative burden, a number of rules applicable to the existing emissions trading system for stationary installations and aviation should be made applicable to emissions trading for buildings and road transport, with the necessary adaptations. This includes, in particular, rules on transfer, surrender and cancellation of allowances, as well as the rules on the validity of allowances, penalties, competent authorities and reporting obligations of Member States.
(56) For emissions trading in the buildings and road transport sectors to be effective, it should be possible to monitor emissions with high certainty and at reasonable cost. Emissions should be attributed to regulated entities on the basis of fuel quantities released for consumption and combined with an emission factor. Regulated entities should be able to reliably and accurately identify and differentiate the sectors in which the fuels are released for consumption, as well as the final users of the fuels, in order to avoid undesirable effects, such as double burden. To have sufficient data to establish the total number of allowances for the period from 2028 to 2030, the regulated entities holding a permit at the start of the system in 2025 should report their associated historical emissions for 2024.
(57) It is appropriate to introduce measures to address the potential risk of excessive price increases, which, if particularly high at the start of the buildings and road transport emissions trading, may undermine the readiness of households and individuals to invest in reducing their greenhouse gas emissions. These measures should complement the safeguards provided by the Market Stability Reserve established by Decision (EU) 2015/1814 of the European Parliament and of the Council31 and that became operational in 2019. While the market will continue to determine the carbon price, safeguard measures will be triggered by rules-based automatism, whereby allowances will be released from the Market Stability Reserve only if concrete triggering conditions based on the increase in the average allowance price are met. This additional mechanism should also be highly reactive, in order to address excessive volatility due to factors other than changed market fundamentals. The measures should be adapted to different levels of excessive price increase, which will result in different degrees of the intervention. The triggering conditions should be closely monitored by the Commission and the measures should be adopted by the Commission as a matter of urgency when the conditions are met. This is without prejudice to any accompanying measures that Member States may adopt to address adverse social impacts.
(58) The application of emissions trading in the buildings and road transport sectors should be monitored by the Commission, including the degree of price convergence with the existing ETS, and, if necessary, a review should be proposed to the European Parliament and the Council to improve the effectiveness, administration and practical application of emissions trading for those sectors on the basis of acquired knowledge as well as increased price convergence. The Commission should be required to submit the first report on those matters by 1 January 2028.
(59) In order to ensure uniform conditions for the implementation of Articles 3gd(3), 12(3b) and 14(1) of Directive 2003/87/EC, implementing powers should be conferred on the Commission. To ensure synergies with the existing regulatory framework, the conferral of implementing powers in Articles 14 and 15 of that Directive should be extended to cover the sectors of road transport and buildings. Those implementing powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council.
Article 1(21)
The following Chapter IVa is inserted after Article 30:
“CHAPTER IVa
EMISSIONS TRADING SYSTEM FOR BUILDINGS AND ROAD TRANSPORT
Article 30a
Scope
The provisions of this Chapter shall apply to emissions, greenhouse gas emission permits, issue and surrender of allowances, monitoring, reporting and verification in respect of the activity referred to in Annex III. This Chapter shall not apply to any emissions covered by Chapters II, IIa and III.
Article 30b
Greenhouse emissions permits
1. Member States shall ensure that, from 1 January 2025, no regulated entity carries out the activity referred to in Annex III unless that regulated entity holds a permit issued by a competent authority in accordance with paragraphs 2 and 3.
2. An application to the competent authority by the regulated entity pursuant to paragraph 1 for a greenhouse gas emissions permit under this Chapter shall include, at least, a description of:
(a) the regulated entity;
(b) the type of fuels it releases for consumption and which are used for combustion in the buildings and road transport sectors as defined in Annex III and the means through which it releases those fuels for consumption;
c) the end use(s) of the fuels released for consumption for the activity referred to in Annex III;
(d) the measures planned to monitor and report emissions, in accordance with the acts referred to in Articles 14 and 30f;
(e) a non-technical summary of the information under points (a) to (d).
3. The competent authority shall issue a greenhouse gas emissions permit granting authorisation to the regulated entity referred to in paragraph 1 for the activity referred to in Annex III, if it is satisfied that the entity is capable of monitoring and reporting emissions corresponding to the quantities of fuels released for consumption pursuant to Annex III.
4. Greenhouse gas emissions permits shall contain, at least, the following:
(f) the name and address of the regulated entity;
(g) a description of the means by which the regulated entity releases the fuels for consumption in the sectors covered by this Chapter;
(h) a list of the fuels the regulated entity releases for consumption in the sectors covered by this Chapter;
(i) a monitoring plan that fulfils the requirements established by the acts referred to in Article 14.;
(j) reporting requirements established by the acts referred to in Article 14;
(k) an obligation to surrender allowances, issued under this Chapter, equal to the total emissions in each calendar year, as verified in accordance with Article 15, within four months following the end of that year.
5. Member States may allow the regulated entities to update monitoring plans without changing the permit. Regulated entities shall submit any updated monitoring plans to the competent authority for approval.
6. The regulated entity shall inform the competent authority of any planned changes to the nature of its activity or to the fuels it releases for consumption, which may require updating the greenhouse gas emissions permit. Where appropriate, the competent authority shall update the permit in accordance with the acts referred to in Article 14. Where there is a change in the identity of the regulated entity covered by this Chapter, the competent authority shall update the permit to include the name and address of the new regulated entity.
Article 30c
Total quantity of allowances
1. The Union-wide quantity of allowances issued under this Chapter each year from 2026 shall decrease in a linear manner beginning in 2024. The 2024 value shall be defined as the 2024 emissions limits, calculated on the basis of the reference emissions under Article 4(2) of Regulation (EU) 2018/842 of the European Parliament and of the Council for the sectors covered by this Chapter and applying the linear reduction trajectory for all emissions within the scope of that Regulation. The quantity shall decrease each year after 2024 by a linear reduction factor of 5,15 %. By 1 January 2024, the Commission shall publish the Union-wide quantity of allowances for the year 2026.
2. The Union-wide quantity of allowances issued under this Chapter each year from 2028 shall decrease in a linear manner beginning from 2025 on the basis of the average emissions reported under this Chapter for the years 2024 to 2026. The quantity of allowances shall decrease by a linear reduction factor of 5,43 %, except if the conditions of point 1 of Annex IIIa apply, in which case, the quantity shall decrease with a linear reduction factor adjusted in accordance with the rules set out in point 2 of Annex IIIa. By 30 June 2027, the Commission shall publish the Union- wide quantity of allowances for the year 2028 and, if required, the adjusted linear reduction factor.
Article 30d
Auctioning of allowances for the activity referred to in Annex III
1. From 2026, allowances covered by this Chapter shall be auctioned, unless they are placed in the Market Stability Reserve established by Decision (EU) 2015/1814. The allowances covered by this Chapter shall be auctioned separately from the allowances covered by Chapters II, IIa and III.
2. The auctioning of the allowances under this Chapter shall start in 2026 with a volume corresponding to 130 % of the auction volumes for 2026 established on the basis of the Union-wide quantity of allowances for that year and the respective auction shares and volumes pursuant to paragraph 3, 5 and 6. The additional volumes to be auctioned shall only be used for surrendering allowances pursuant to Article 30e(2) and be deducted from the auction volumes for the period from 2028 to 2030. The conditions for these early auctions shall be set in accordance with paragraph 7 and Article 10(4).
In 2026, 600 million allowances covered by this Chapter are created as holdings in the Market Stability Reserve pursuant to Article 1a(3) of Decision (EU) 2015/1814.
3. 150 million allowances issued under this Chapter shall be auctioned and all revenues from these auctions made available for the Innovation Fund established under Article 10a(8). Article 10a(8) shall apply to the allowances referred to in this paragraph.
4. The total quantity of allowances covered by this Chapter after deducting the quantities set out in paragraph 3, shall be auctioned by the Member States and distributed amongst them in shares that are identical to the share of reference emissions under Article 4(2) of Regulation (EU) 2018/842 for the sectors covered by this Chapter for the average of the period from 2016 to 2018, of the Member State concerned.
5. Member States shall determine the use of revenues generated from the auctioning of allowances referred to in paragraph 4, except for the revenues established as own resources in accordance with Article 311(3) TFEU and entered in the Union budget. Member States shall use their revenues for one or more of the activities referred to in Article 10(3) or for one or more of the following:
(a) measures intended to contribute to the decarbonisation of heating and cooling of buildings or to the reduction of the energy needs of buildings, including the integration of renewable energies and related measures according to Articles 7(11), 12 and 20 of Directive 2012/27/EU [references to be updated with the revised Directive], as well as measures to provide financial support for low- income households in worst-performing buildings;
(b) measures intended to accelerate the uptake of zero-emission vehicles or to provide financial support for the deployment of fully interoperable refuelling and recharging infrastructure for zero-emission vehicles or measures to encourage a shift to public forms of transport and improve multimodality, or to provide financial support in order to address social aspects concerning low and middle-income transport users.
Member States shall use a part of their auction revenues generated in accordance with this Article to address social aspects of the emission trading under this Chapter with a specific emphasis on vulnerable households, vulnerable micro-enterprises and vulnerable transport users as defined under Regulation (EU) 20.../nn [Social Climate Fund Regulation]. Where a Member State submits to the Commission a [Social Climate Plan] pursuant to that Regulation, the Member State shall use those revenues inter alia to finance that plan.
Member States shall be deemed to have fulfilled the provisions of this paragraph if they have in place and implement fiscal or financial support policies or regulatory policies, which leverage financial support, established for the purposes set out in the first subparagraph and which have a value equivalent to the revenues generated from the auctioning of allowances referred to in this Chapter.
Member States shall inform the Commission as to the use of revenues and the actions taken pursuant to this paragraph by including this information in their reports submitted under Regulation (EU) 2018/1999 of the European Parliament and of the Council.
6. Articles 10(4) and 10(5) shall apply to the allowances issued under this Chapter.
Article 30c
Transfer, surrender and cancellation of allowances
1. Article 12 shall apply to the emissions, regulated entities and allowances covered by this Chapter with the exception of Article 12, paragraphs (2a), (3), (3a), paragraph (4), third and fourth sentence, and paragraph (5). For this purpose:
(a) any reference to emissions shall be read as if it were a reference to the emissions covered by this Chapter;
(b) any reference to operators of installations shall be read as if it were a reference to the regulated entities covered by this Chapter;
(c) any reference to allowances shall be read as if it were a reference to the allowances covered by this Chapter.
2. From 1 January 2027, Member States shall ensure that, by 30 April each year, the regulated entity surrenders a number of allowances covered by this Chapter, that is equal to the total emissions, corresponding to the quantity of fuels released for consumption pursuant to Annex III, during the preceding calendar year as verified in accordance with Articles 15 and 30f, and that those allowances are subsequently cancelled.
Article 30f
Monitoring, reporting, verification of emissions and accreditation
1. Articles 14 and 15 shall apply to the emissions, regulated entities and allowances covered by this Chapter. For this purpose:
(a) any reference to emissions shall be read as if it were a reference to the emissions covered by this Chapter;
(b) any reference to activity listed in Annex I shall be read as if it were a reference to the activity referred to in Annex III;
(c) any reference to operators shall be read as if it were a reference to the regulated entities covered by this Chapter;
(d) any reference to allowances shall be read as if it were a reference to the allowances covered by this Chapter.
2. Member States shall ensure that each regulated entity monitors for each calendar year as from 2025 the emissions corresponding to the quantities of fuels released for consumption pursuant to Annex III. They shall also ensure that each regulated entity reports these emissions to the competent authority in the following year, starting in 2026, in accordance with the acts referred to in Article 14(1).
3. Member States shall ensure that each regulated entity holding a permit in accordance with Article 30b on 1 January 2025 report their historical emissions for year 2024 by 30 March 2025.
4. Member States shall ensure that the regulated entities are able to identify and document reliably and accurately per type of fuel, the precise volumes of fuel released for consumption which are used for combustion in the buildings and road transport sectors as identified in Annex III, and the final use of the fuels released for consumption by the regulated entities. The Member States shall take appropriate measures to avoid any risk of double counting of emissions covered under this Chapter and the emissions under Chapters II, IIa and III. Detailed rules for avoiding double counting shall be adopted in accordance with Article 14(1).
5. The principles for monitoring and reporting of emissions covered by this Chapter are set out in Part C of Annex IV.
6. The criteria for the verification of emissions covered by this Chapter are set out in Part C of Annex V.
Article 30g
Administration
Articles 13, 15a, Article 16(1), (2), (3), (4) and (12), Articles 17, 18, 19, 20, 21, 22, 22a, 23 and 29 shall apply to the emissions, regulated entities and allowances covered by this Chapter. For this purpose:
(a) any reference to emissions shall be read as if it were a reference to emissions covered by this Chapter;
(b) any reference to operator shall be read as if it were a reference to regulated entities covered by this Chapter;
(c) any reference to allowances shall be read as if it were a reference to the allowances covered by this Chapter.
Article 30h
Measures in the event of excessive price increase
1. Where, for more than three consecutive months, the average price of allowance in the auctions carried out in accordance with the act adopted under Article 10(4) is more than twice the average price of allowance during the six preceding consecutive months in the auctions for the allowances covered by this Chapter, the Commission shall, as a matter of urgency, adopt a decision to release 50 million allowances covered by this Chapter from the Market Stability Reserve in accordance with Article 1a(7) of Decision (EU) 2015/1814.
2. Where, for more than three consecutive months, the average price of allowance in the auctions carried out in accordance with the act adopted under Article 10(4) is more than three times the average price of allowance during the six preceding consecutive months in the auctions for the allowances covered by this Chapter, the Commission shall, as a matter of urgency, adopt a decision to release 150 million allowances covered by this Chapter from the Market Stability Reserve in accordance with Article 1a(7) of Decision (EU) 2015/1814.
Article 30i
Review of this Chapter
By 1 January 2028, the Commission shall report to the European Parliament and to the Council on the implementation of the provisions of this Chapter with regard to their effectiveness, administration and practical application, including on the application of the rules under Decision (EU) 2015/1814 and use of allowances of this Chapter to meet compliance obligations of the compliance entities covered by Chapters II, IIa and III. Where appropriate, the Commission shall accompany this report with a proposal to the European Parliament and to the Council to amend this Chapter. By 31 October 2031 the Commission should assess the feasibility of integrating the sectors covered by Annex III in the Emissions Trading System covering the sectors listed in annex 1 of Directive 2003/87/EC.’’;
(22) Annexes I, IIb, IV and V to Directive 2003/87/EC are amended in accordance with Annex I to this Directive, and Annexes III, IIIa and IIIb are inserted in Directive 2003/87/EC as set out in Annex I to this Directive.
ANNEX IIIa
ADJUSTMENT OF LINEAR REDUCTION FACTOR IN ACCORDANCE WITH ARTICLE 30c(2)
1. If the average emissions reported under Chapter IVa for the years 2024 to 2026 are more than 2% higher compared to the value of the 2025 quantity defined in accordance with Article 30c(1), and if these differences are not due to the difference of less than 5% between the emissions reported under Chapter IVa and the inventory data of 2025 Union greenhouse gas emissions from UNFCCC source categories for the sectors covered under Chapter IVa, the linear reduction factor shall be calculated by adjusting the linear reduction factor referred to in Article 30c(1).
The adjusted linear reduction factor in accordance with point 1 shall be determined as follows:
[LRFadj = 100%* ( ( MRV[2024-2026] – ( MRV[2024-2026] + ( (ESR[2024] - 6*LRF2024*ESR2024) - MRV[2024-2026]) / 5) ) / MRV[2024-2026] ), where, LRFadj is the adjusted linear reduction factor;
MRV[2024-2026] is the average of verified emissions under Chapter IVa for the years 2024 to 2026;
ESR[2024] is the value of 2024 emissions defined in accordance with Article 30c(1) for the sectors covered under Chapter IVa;
LRF(2024) is the linear reduction factor referred to in Article 30c(1).]
Annex IV to Directive 2003/87/EC is amended as follows:
…
the following Part C is added:
“PART C — Monitoring and reporting of emissions corresponding to the activity referred to in Annex III
Monitoring of emissions
Emissions shall be monitored by calculation.
Calculation
Emissions shall be calculated using the following formula:
Fuel released for consumption × emission factor
Fuel released for consumption shall include the quantity of fuel released for consumption by the regulated entity.
Default IPCC emission factors, taken from the 2006 IPCC Inventory Guidelines or subsequent updates of these Guidelines, shall be used unless fuel-specific emission factors identified by independent accredited laboratories using accepted analytical methods are more accurate.
A separate calculation shall be made for each regulated entity, and for each fuel.
Reporting of emissions
Each regulated entity shall include the following information in its report:
A. Data identifying the regulated entity, including:
— name of the regulated entity;
— its address, including postcode and country;
— type of the fuels it releases for consumption and its activities through which it releases the fuels for consumption, including the technology used;
— address, telephone, fax and email details for a contact person; and
— name of the owner of the regulated entity, and of any parent company.
B. For each type of fuel released for consumption and which is used for combustion in the buildings and road transport sectors as defined in Annex III, for which emissions are calculated:
— quantity of fuel released for consumption;
— emission factors;
— total emissions;
— end use(s) of the fuel released for consumption; and
— uncertainty. Member States shall take measures to coordinate reporting requirements with any existing reporting requirements in order to minimise the reporting burden on businesses.”;
(4) in Annex V to Directive 2003/87/EC, the following Part C is added:
“PART C — Verification of emissions corresponding to the activity referred to in Annex III
General Principles
1. Emissions corresponding to the activity referred to in Annex III shall be subject to verification.
2. The verification process shall include consideration of the report pursuant to Article 14(3) and of monitoring during the preceding year. It shall address the reliability, credibility and accuracy of monitoring systems and the reported data and information relating to emissions, and in particular:
(a) the reported fuels released for consumption and related calculations;
(b) the choice and the employment of emission factors; (c) the calculations leading to the determination of the overall emissions.
3. Reported emissions may only be validated if reliable and credible data and information allow the emissions to be determined with a high degree of certainty. A high degree of certainty requires the regulated entity to show that:
(a) the reported data is free of inconsistencies;
(b) the collection of the data has been carried out in accordance with the applicable scientific standards; and
(c) the relevant records of the regulated entity are complete and consistent.
4. The verifier shall be given access to all sites and information in relation to the subject of the verification.
5. The verifier shall take into account whether the regulated entity is registered under the Union Eco-Management and Audit Scheme (EMAS).
Methodology
Strategic analysis
6. The verification shall be based on a strategic analysis of all the quantities of fuels released for consumption by the regulated entity. This requires the verifier to have an overview of all the activities through which the regulated entity is releasing the fuels for consumption and their significance for emissions.
Process analysis
7. The verification of the information submitted shall, where appropriate, be carried out on the site of the regulated entity. The verifier shall use spot-checks to determine the reliability of the reported data and information.
Risk analysis
8. The verifier shall submit all the means through which the fuels are released for consumption by the regulated entity to an evaluation with regard to the reliability of the data on the overall emissions of the regulated entity.
9. On the basis of this analysis the verifier shall explicitly identify any element with a high risk of error and other aspects of the monitoring and reporting procedure which are likely to contribute to errors in the determination of the overall emissions. This especially involves the calculations necessary to determine the level of the emissions from individual sources. Particular attention shall be given to those elements with a high risk of error and the abovementioned aspects of the monitoring procedure.
10. The verifier shall take into consideration any effective risk control methods applied by the regulated entity with a view to minimising the degree of uncertainty.
Report
11. The verifier shall prepare a report on the validation process stating whether the report pursuant to Article 14(3) is satisfactory. This report shall specify all issues relevant to the work carried out. A statement that the report pursuant to Article 14(3) is satisfactory may be made if, in the opinion of the verifier, the total emissions are not materially misstated.
Minimum competency requirement for the verifier
12. The verifier shall be independent of the regulated entity, carry out his or her activities in a sound and objective professional manner, and understand:
(a) the provisions of this Directive, as well as relevant standards and guidance adopted by the Commission pursuant to Article 14(1);
(b) the legislative, regulatory, and administrative requirements relevant to the activities being verified; and
(c) the generation of all information related to all the means through which the fuels are released for consumption by the regulated entity, in particular, relating to the collection, measurement, calculation and reporting of data.”.
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