The key indications for the European Union post-2020 low carbon framework are set out in the European Council Conclusions of 23/24 October 2014 (EUCO 169/14).
GHG emissions reduction target
The European Council endorsed a binding EU target of an at least 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990.
To that end:
- the target will be delivered collectively by the EU in the most cost-effective manner possible, with the reductions in the EU ETS (European Union Emission Trading System) and non-ETS sectors amounting to 43% and 30% by 2030 compared to 2005, respectively;
- all Member States will participate in this effort, balancing considerations of fairness and solidarity.
European Council conclusions of October 2014 acknowledge a well-functioning, reformed Emissions Trading System (ETS) with an instrument to stabilise the market will be the main European instrument to achieve the above-mentioned target.
The annual factor to reduce the cap on the maximum permitted emissions will be changed from 1.74% to 2.2% from 2021 onwards.
Free allocation will not expire; existing measures will continue after 2020 to prevent the risk of carbon leakage due to climate policy, as long as no comparable efforts are undertaken in other major economies, with the objective of providing appropriate levels of support for sectors at risk of losing international competitiveness.
Installations on the carbon-leakage list would receive up to 100 % of the required allowances for free, others would get up to 30 %.
Free allocation would be decided for a period of five years, compared to eight years at present.
The decision by the European Council to preserve the free allocation regime beyond 2020 can be assessed as a strategic one, but it can be also expected this decision will be kept under review in the coming decade (see Communication from the Commission to the European Parliament and the Council, The Road from Paris: assessing the implications of the Paris Agreement and accompanying the proposal for a Council decision on the signing, on behalf of the European Union, of the Paris agreement adopted under the United Nations Framework Convention on Climate Change, 2.3.2016 COM(2016) 110 final, p. 7).
The benchmarks for free allocations will be periodically reviewed in line with technological progress in the respective industry sectors. Both direct and indirect carbon costs will be taken into account, in line with the EU state aid rules so as to ensure a level-playing field. In order to maintain international competitiveness, the most efficient installations in these sectors should not face undue carbon costs leading to carbon leakage.
Future allocations will ensure better alignment with changing production levels in different sectors. At the same time, incentives for industry to innovate will be fully preserved and administrative complexity will not be increased. The consideration to ensure affordable energy prices and avoid windfall profits will be taken into account. Member States with a GDP per capita below 60% of the EU average may opt to continue to give free allowances to the energy sector up to 2030.
The maximum amount handed out for free after 2020 is intended to be no more than 40% of the allowances allocated for auctioning to the Member States using this option. The current modalities, including transparency, are intended to be improved to ensure that the funds are used to promote real investments modernising the energy sector, while avoiding distortions of the internal energy market.
European Commission proposed that allocation decisions beyond 2020 are made for a period of 5 years (“Detailed questions and answers on the proposal to revise the EU emissions trading system (EU ETS)“ of 15 July 2015, p. 3).
In phase 3 (2013-2020) the allocation decisions have been made for 8 years. This shorter period allows the use of more recent production data.
The system will also be more flexible in taking into account production decreases or increases during the trading period. In phase 3 installations could only receive more free allowances, if production increases were the result of adding capacity of an installation. Beyond 2020 free allowances would also be provided for increases of production without adding capacity. This is particularly beneficial for growing installations and sectors which have idle capacity as a result of the prolonged economic crisis.
Existing NER300 facility will be renewed, including for carbon capture and storage and renewables, with the scope extended to low carbon innovation in industrial sectors and the initial endowment increased to 400 million allowances (NER400). Investment projects in all Member States, including small-scale projects, will be eligible.
A new reserve of 2% of the EU ETS allowances will be set aside to address particularly high additional investment needs in low income Member States (GDP per capita1 below 60% of the EU average). It will have the following characteristics:
– the proceeds from the reserve will be used to improve energy efficiency and to modernise the energy systems of these Member States, so as to provide their citizens with cleaner, secure and affordable energy;
– the use of the funds will be fully transparent;
– allowances from the reserve will be auctioned according to the same principles and modalities as for other allowances;
– the reserve will serve to establish a fund which will be managed by the beneficiary Member States, with the involvement of the EIB in the selection of projects. Simplified arrangements for small-scale projects will be ensured. Until 31 December 2030 the distribution of funds will be based on the combination of a 50% share of verified emissions and a 50% share of GDP criteria, but the basis on which projects are selected will be reviewed by the end of 2024.
For the purposes of solidarity, growth and interconnections, 10% of the EU ETS allowances to be auctioned by the Member States will be distributed among those countries whose GDP per capita did not exceed 90% of the EU average (in 2013).
The rest of allowances will be distributed among all Member States on the basis of verified emissions, without reducing the share of allowances to be auctioned.
The basic EU ETS architecture will remain in place after 2020, while individual elements will be improved in line with the agreement reached by EU leaders in October 2014 (“Questions and answers on the proposal to revise the EU emissions trading system (EU ETS)“ of 15 July 2015, p. 2).
The system will be more flexible by better taking into account production increases or decreases and adjusting the amount of free allocation accordingly. A specific number of free allowances will be set aside for new and growing installations.
The Commission proposes to move 250 million unallocated allowances from the MSR to a 'new entrants' reserve' that can provide free allocation for new market entrants and growing companies.
Free allocation would be decided on the basis of benchmarks, based on the 10 % most efficient installations.
Benchmark values would be updated twice during phase 4 (for the periods 2021-2025 and 2026-2030), in order to take account of technological advances. Current values are determined based on data from 2007-2008 and would not reflect the state of technology after 2020.
The benchmarks would be tightened by 1 % per year by default, in order to account for expected emission reductions through technological progress.
For industries with lower potential for reducing emissions, the benchmarks would be reduced by only 0.5 % per year, and for industries with more potential by 1.5 %.
According to the Commission, these changes reduce the chance that a correction factor would need to be applied.
Provisions for carbon leakage
The new criteria for establishing the carbon leakage list would be a combination of emissions intensity and trade intensity.
As a result, around 50 industrial sectors would be on the carbon-leakage list, down from 177 at present.
Analysts estimate that sectors on the carbon leakage list would still account for over 90 % of EU industrial emissions, down from 97 % currently.
The aforementioned Detailed questions and answers on the proposal to revise the EU emissions trading system (EU ETS) of 15 July 2015 (p. 5) elaborate in more detail on the auctioning issue. The European Council agreed that the share of allowances to be auctioned under the EU ETS post-2020 should not be reduced. The EU ETS Directive will fix the auction share at the level of 57 %. The auction share comprises allowances auctioned by Member States. This includes the regular auction volume, including the 10 % auction volume re-distributed for solidarity purposes, as well as allowances auctioned for the Modernisation Fund.
In phase 3 the auction share was only known with much delay after a number of technical implementing steps have been taken. The European Commission argues, fixing the auction share in legislation has considerable positive impacts on transparency, predictability and the functioning of the carbon market. It will enhance planning certainty of investment decisions and transparency for market participants inside and outside the system, as well as for the wider public. It will render the EU ETS simpler and more transparent.
The rules for auctioning remain largely unaffected by the proposed revisions.
Allowances from the current trading period will be valid beyond 2020. The fourth trading period will run from 2021 to 2030 (the aforementioned Detailed questions and answers, p. 8).
Member States are encouraged to use auction revenue to provide compensation in line with state aid rules.
Compensation for indirect carbon costs
Indirect costs for electricity consumers arise when the cost for electricity producers' emissions is passed on to consumers through electricity prices.
Member States are encouraged to compensate such indirect costs for sectors exposed to carbon leakage, subject to state aid rules.
However, there would be no obligation and no harmonisation, and thus the legal situation would remain unchanged.
The methodology to set the national reduction targets for the non-ETS sectors, with all the elements as applied in the Effort Sharing Decision for 2020, will be continued until 2030, with efforts distributed on the basis of relative GDP per capita. All Member States will contribute to the overall EU reduction in 2030 with the targets spanning from 0% to -40% compared to 2005.
Targets for the Member States with a GDP per capita above the EU average will be relatively adjusted to reflect cost-effectiveness in a fair and balanced manner.
The European Council conclusions of October 2014 envisioned a new flexibility in achieving targets - for Member States with national reduction targets significantly above both the EU average and their cost effective reduction potential as well as for Member States that did not have free allocation for industrial installations in 2013 - through a limited, one-off, reduction of the ETS allowances, to be decided before 2020, while preserving predictability and environmental integrity.
However, the said one-off flexibility between ETS and non-ETS foreseen in the European Council conclusions of October 2014 has not been included in the European Commission's proposal of 15 July 2015.
The aforementioned Detailed questions and answers explain this flexibility will be analysed in the course of developing the proposal to set national reduction targets for the non-ETS sectors in a fair and balanced manner.
It is important to reduce greenhouse gas emissions and risks related to fossil fuel dependency in the transport sector.
The European Council therefore invited the Commission to further examine instruments and measures for a comprehensive and technology neutral approach for the promotion of emissions reduction and energy efficiency in transport, for electric transportation and for renewable energy sources in transport also after 2020.
The European Council called for a rapid adoption of the Directive laying down calculation methods and reporting requirements pursuant to Directive 98/70/EC of the European Parliament and of the Council relating to the quality of petrol and diesel fuels.
It also recalled that under existing legislation a Member State can opt to include the transport sector within the framework of the ETS.
The multiple objectives of the agriculture and land use sector, with their lower mitigation potential, are acknowledged, as well as the need to ensure coherence between the EU's food security and climate change objectives.
The European Council invited the European Commission to examine the best means of encouraging the sustainable intensification of food production, while optimising the sector's contribution to greenhouse gas mitigation and sequestration, including through afforestation.
Policy on how to include Land Use, Land Use Change and Forestry into the 2030 greenhouse gas mitigation framework will be established as soon as technical conditions allow and in any case before 2020.
An EU target of at least 27% is set for the share of renewable energy consumed in the EU in 2030.
What is particularly noteworthy, this target will be binding at the EU level (and not at the level of Member States what is the rule untill 2020).
The uniform 27 % EU objective will be fulfilled through Member States contributions without preventing Member States from setting their own more ambitious national targets and supporting them, in line with the state aid guidelines, as well as taking into account their degree of integration in the internal energy market.
It is also acknowledged, the integration of rising levels of intermittent renewable energy requires a more interconnected internal energy market as well as appropriate back up, which should be coordinated as necessary at regional level.
Although the above European Council's document does not explicitly mention what that "back up" arrangements would be, existing practice is the reserve and emergency fossil-fuelled power plants are being safeguarded by appropriately designed capacity markets.
An indicative target at the EU level of at least 27% is set for improving energy efficiency in 2030 compared to projections of future energy consumption based on the current criteria.
It will be delivered in a cost-effective manner and it will fully respect the effectiveness of the ETS-system in contributing to the overall climate goals.
This will be reviewed by 2020, having in mind an EU level of 30%.
The Commission will propose priority sectors in which significant energy-efficiency gains can be reaped, and ways to address them at EU level, with the EU and the Member States focusing their regulatory and financial efforts on these sectors.
These targets will be achieved while fully respecting the Member States' freedom to determine their energy mix.
Targets will not be translated into nationally binding targets. Individual Member States are free to set their own higher national targets.
According to the European Parliament Briefing “EU Legislation in Progress, Post-2020 reform of the EU Emissions Trading System” of November 2017 interinstitutional trilogue negotiations between the Parliament, the Council and the Commission have been carried out between April and November 2017.
The main elements of the trilogue agreement were:
- the linear reduction factor will be 2.2 % from 2021, as proposed by the European Commission;
- each year from 2019 to 2023, 24 % of the cumulative surplus of allowances will go to the Market Stability Reserve; from 2023 the allowances held in the reserve above the total number auctioned during the previous year will be cancelled;
- conditional lowering of the auction share by 3 % of the total quantity if needed, to avoid applying the cross-sectoral correction factor (this is between the 5 % proposed by Parliament and 2 % proposed by Council);
- the EU Member States may voluntarily cancel allowances to offset national climate and energy policies that lead to a reduction of their electricity generation capacity;
- the modernisation fund will not be used to finance coal-fired generation (as demanded by Parliament), with the exception of plants used for district heating in the two poorest Member States (Bulgaria and Romania), provided that they offset by using an equivalent amount of free allocation for the modernisation of the energy sector for investments not involving solid fossil fuels.
The agreed text was endorsed by Coreper on 22 November, and was voted in the ENVI committee on 28 November 2017.
The Parliament approved the text in plenary session on 6 February 2018, followed by formal approval by EU Member States in the Council on 27 February 2018.
The final text of the Directive was signed on 14 March and published in the EU Official Journal on 19 March 2018 (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).
The Directive entered into force on 8 April 2018 and the EU Member States have to transpose it by 9 October 2019.
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
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, 15.7.2015, COM(2015) 337 final, 2015/148 (COD)
Annexes to the 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, 15.7.2015, COM(2015) 337 final, 2015/148 (COD)
Communication from the Commission to the European Parliament and the Council, The Road from Paris: assessing the implications of the Paris Agreement and accompanying the proposal for a Council decision on the signing, on behalf of the European Union, of the Paris agreement adopted under the United Nations Framework Convention on Climate Change, 2.3.2016 COM(2016) 110 final, p. 7
Questions and answers on the proposal to revise the EU emissions trading system (EU ETS) of 15 July 2015, p. 2
Detailed questions and answers on the proposal to revise the EU emissions trading system (EU ETS) of 15 July 2015, p. 3
European Council Conclusions of 23/24 October 2014 (EUCO 169/14)
Briefing, EU Legislation in Progress, November 2017, Post-2020 reform of the EU Emissions Trading System
Briefing EU Legislation in Progress, March 2016, Post-2020 reform of the EU Emissions Trading System
Study on the impacts on low carbon actions and investments of the installations falling under the EU Emissions Trading System (EU ETS), European Commission, February 2015
The European Commission's website on the 2030 framework for climate and energy policies
The European Comission's website on the EU ETS revision for phase 4 (2021-2030)