EU ETS linear reduction factor (LRF)
- Category: European Union Carbon Market Glossary
The application of the Linear Reduction Factor (LRF) in the third trading period (2013 - 2020) of the European Union Emission Trading Scheme (EU ETS) consisted in the rule that in 2014 and in each subsequent year till 2020, the total quantity of allowances (cap) determined for 2013 on the basis of Article 9 and 9a of Directive 2003/87/EC decreased linearly by 1,74 % of the amount of allowances in 2010.
This decrease rate in absolute terms meant the number of allowances were reduced annually by a determined number of 38 264 246 allowances.
A separate non-declining cap applied to the aviation sector until 2020 (5% below the average annual emissions in the years 2004-2006).
As from 2021, a linear reduction factor applies for the first time to the aviation sector, reducing the cap on aviation emissions by 2.2% annually.
The linear reduction factor was decided in the context of the overall 20% reduction target and resulted in a 21% reduction compared to the EU ETS emissions in 2005.
Under the EU ETS free allocation architecture, the EU Member States have to take Linear Reduction Factor into account when deciding on the final annual amounts of allocation of emission permits to electricity generators for their heat production.
Article 3(u) of the EU ETS Directive defined an installation as 'electricity generator' if "on or after 1 January 2005, it had produced electricity for sale to third parties, and in which no activity listed in Annex I (of the EU ETS Directive) is carried out other than the combustion of fuels".
The LRF also applied to the free allocation of all phase 3 new entrants.
EU ETS cap 2013 - 2020
2 084 301 856
2 046 037 610
2 007 773 364
1 969 509 118
1 931 244 873
1 892 980 627
1 854 716 381
1 816 452 135
Apart from the Linear Reduction Factor, other elements taken into account by the EU Member States in the process of determination for the final annual amount of emission allowances allocated free of charge for each year over the period from 2013 to 2020 are the NIMs (National Implementation Measures - i.e. the instruments that substituted for the national allocation plans), and the cross-sectoral correction factor.
Legal instruments that must be abided by in this processs are Directive 2003/87/EC, Decision 2011/278/EU and other relevant provisions of Union law.
Pursuant to the European Commision's Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments of 15 July 2015 (COM(2015) 337 final) 2015/148 (COD), the Linear Reduction Factor was proposed to be changed to 2.2% from 2021 onwards (Article 1(3)).
It was intended to ensure that the overall quantity of allowances ('cap') will decline at an increased annual pace resulting in an overall emission reduction of sectors under the EU ETS of 43% by 2030.
Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814 finally implemented this proposal in Article 1(12).
It is the opinion of the European Court of Justice that “due to the fact that the total quantity of allowances available in the ETS falls on the basis of annual linear reduction factor, it is intrinsic to the logic of such factor that the price of allowances will gradually increase as time goes on” (judgment of 21 June 2018, Republic of Poland v European Parliament and Council of the European Union, Case C-5/16).
Article 9 of the Directive 2003/87/EC
Community-wide quantity of allowances
The Community-wide quantity of allowances issued each year starting in 2013 shall decrease in a linear manner beginning from the mid-point of the period from 2008 to 2012. The quantity shall decrease by a linear factor of 1,74 % compared to the average annual total quantity of allowances issued by Member States in accordance with the Commission Decisions on their national allocation plans for the period from 2008 to 2012. The Community-wide quantity of allowances will be increased as a result of Croatia's accession only by the quantity of allowances that Croatia shall auction pursuant to Article 10(1).
The Commission shall, by 30 June 2010, publish the absolute Community-wide quantity of allowances for 2013, based on the total quantities of allowances issued or to be issued by the Member States in accordance with the Commission Decisions on their national allocation plans for the period from 2008 to 2012.
The Commission shall review the linear factor and submit a proposal, where appropriate, to the European Parliament and to the Council as from 2020, with a view to the adoption of a decision by 2025.
Article 1(12) of the Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814
Directive 2003/87/EC is amended as follows:
In Article 9, the second and third paragraphs are replaced by the following:
"Starting in 2021, the linear factor shall be 2.2%."