Effort Sharing Regulation (ESR)
- Category: European Union Carbon Market Glossary
Decision 406/2009/EC on the efort of Member States to reduce their greenhouse gas emissions to meet the Community's greenhouse gas emission reduction commitments up to 2020 (Effort Sharing Decision, ESD) set greenhouse gas emission reduction targets for each European Union Member State for the sectors not covered by the EU Emissions Trading System.
Its scope covered some 55 % of total greenhouse gas emissions in the EU and included greenhouse gas emissions from sources such as CO2 emissions from road transport, heating of buildings, small-scale industry and so-called non-CO2 emissions from agriculture and waste. The Effort Sharing Decision did not include emissions or removals from land use, land-use change and forestry (LULUCF).
Each Member State had an emission reduction or limitation commitment for 2020 under this Decision which varied between -20% and +20% as compared to its 2005 GHG emissions. Based on economic capacity, countries with higher GDP per capita than the EU average had reduction targets, while emissions were allowed to increase (subject to limits) for countries with lower GDP per capita.
Taken together, these commitments corresponded to an EU-wide reduction in 2020 of around 10% compared to 2005 for the sectors covered by the Effort Sharing Decision. The objective of the Effort Sharing Decision was to achieve its contribution to the EU's overall 20% reduction target in 2020 and to promote reductions of greenhouse gas emissions (GHG) within its scope in a cost-effective manner. In addition to the 2020 targets, the Effort Sharing Decision established binding annual GHG emission limits — so-called annual emission allocations (AEAs) — for all Member States for the period 2013–2020 with annual reporting obligations and compliance checks.
In order to provide for ﬂexibility for Member States in implementing their commitments and as a means to enhance the overall cost-eﬀectiveness of reaching the EU-wide 2020 target, the Eﬀort Sharing Decision (ESD) provides a number of so-called ﬂexibility mechanisms thatcan be used in the period 2013-2020 to comply with their annual targets. Should the greenhouse gas emissions exceed the annual emissionallocations (AEAs) for the relevant year Member States are allowed to borrow 5% of their AEAs from the next year, buy AEAs from otherMember States or use international project credit rights in order to ﬁll any deﬁcit for compliance. Should a Member State reduce its emissionsby more than needed, thus exceeding its target for a given year, it can bank the surplus AEAs for use until 2020 or transfer it to other MemberStates. It is also possible for a Member State to transfer to other Member States up to 5% of its AEAs for a given year before compliance havebeen checked for that year. Member States are obliged to report on concluded agreements of AEA transfers among each other, but areotherwise free to decide on whether and how to engage in such transfers. As of early 2015, there were no known concluded agreements ofAEA transfers between any Member States.
For the 2030 perspective the European Council has expressed its desire that "the availability and use of existing ﬂexibility instruments within thenon-ETS sectors will be signiﬁcantly enhanced in order to ensure cost-eﬀectiveness of the collective EU eﬀort and convergence of emissionsper capita by 2030." Flexibility instruments should be simple, transparent and easy to manage for Member States. The intention thatinternational project credits will not be allowed in the ESD after 2020 means that a stronger emphasis on the two existing internal ﬂexibilitymechanisms will be needed:
1) Banking and borrowing of AEAs during the compliance period
As explained above, Member States already have ﬂexibility in managing the use of their AEAs over the whole commitment period to cover anyAEA shortage in speciﬁc years. Diﬀerent levels of borrowing than the current 5% limit could be envisaged for the period after 2020 to helpMember States achieve their annual targets by managing their own AEAs, bearing in mind that a higher level of borrowing early in thecommitment period could increase the risk of individual Member States not meeting their targets later in the period.
2) Transfers of AEAs between Member States
There are several possible ways to stimulate AEA transfers among Member States. These include creating a more transparent market for AEAtransfers, being less restrictive in how much Member States can transfer among each other before the compliance checks, and more directmeasures to enhance availability of AEAs, such as project-based mechanisms or auctioning of a number of AEAs.
Market transparency could be enhanced by requiring Member States to report more openly and frequently on AEA transactions and prices orby encouraging transfers to pass through certain trading platforms.
The current 5% limit for AEA transfers before the compliance check could be increased, however, it should be noted that increasing this limitcould also increase the risk of individual Member States not meeting their targets later in the commitment period 2021-2030.
Diﬀerent kinds of project-based mechanisms for cost-eﬃcient compliance within the ESD could be considered. Such an approach couldattract targeted investments in ESD sectors prioritised by the host Member State and ensure more certainty that AEAs will become availablefor transfers by potentially allowing private sector initiatives. However, a veriﬁcation and certiﬁcation system would need to be established toguarantee the environmental integrity and validity of the credits which would entail upfront administrative costs.Auctioning of a certain percentage of AEAs could ensure that an annual supply of AEAs becomes available for MS to acquire.
For all above aspects, alternative solutions might also be possible.
Source: Consultation Questionnaire on the preparation of a legislative proposal on the effort of Member States to reduce their greenhouse gas emissions to meet the European Union's greenhouse gas emission reduction commitment in a 2030 perspective
Monitoring, reporting and compliance
The Eﬀort Sharing Decision (ESD) and the Monitoring Mechanism Regulation (Regulation (EU) No 525/2013, MMR) have established an annual reporting and compliance cycle requiring an annual review of Member States' greenhouse gas inventories to ensure that compliance with the ESD is assessed in a credible, consistent, transparent and timely manner. The reviewed inventory data are used to check Member States' compliance with their annual emission limits. If a Member State's emissions exceed its annual emission allocation even when the ﬂexibilities are taken into account, it will need to take corrective action in addition to the likelihood of the Commission launching regular infringement procedures.
The corrective action includes a penalty of 1.08 times the Member State's excess annual emissions adjusted for the following year and temporary suspension of its right to transfer AEAs to other Member States. Regulation of the European Parliament and of the Council on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 contributing to climate action to meet commitments under the Paris Agreement and amending Regulation (EU) No 525/2013, 26 April 2018, 2016/0231 (COD), PE-CONS 3/18. The ﬁrst annual inventory review was carried out in 2015 and applied to the EU Member States' inventories for the year 2013.
Setting national targets for GHG emissions not covered by the EU Emissions Trading System for the period 2020 - 2030
The legislative process of setting national targets for GHG emissions not covered by the EU Emissions Trading System had been initiated by the European Commission in July 2016. At the European Council meeting in October 2014, EU leaders expressed their wish to continue the Effort Sharing Decision approach for the period 2021-2030, with the aim to reduce emissions in the non-ETS sectors by 2030 by 30% compared to 2005 as the contribution in implementing the overall economy-wide emission reduction target of at least 40% in 2030 as compared to 1990 (see the European Council Conclusions of 23/24 October 2014 (EUCO 169/14).
The October 2014 European Council also declared that "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." The European Council also expressed its wish that the applicable target range be as follows: "All Member States will contribute to the overall EU reduction in 2030 with the targets spanning from 0% to -40% compared to 2005."
The legislative procedure has been finalised with the adoption of the Regulation (EU) 2018/842 of the European Parliament and of the Council of 30 May 2018 on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 contributing to climate action to meet commitments under the Paris Agreement and amending Regulation (EU) No 525/2013 (Effort Sharing Regulation - ESR). The Regulation’s aim is to ensure that the EU's target of reducing its greenhouse gas emissions by 30% in 2030 compared to 2005 levels in the effort-sharing sectors is achieved (this covers buildings, agriculture (non-CO2 emissions), waste management and transport (excluding aviation and international shipping). The Regulation entered into force on 9 July 2018.
According to the European Commission Communication of 17 September 2020 “Stepping up Europe’s 2030 climate ambition Investing in a climate-neutral future for the benefit of our people (COM/2020/562 final) the Commission “will give consideration to different options in light of an expansion of emissions trading to all fossil fuel use”, however, introducing emissions trading for a significant share of the existing Effort Sharing Regulation sectors and eventually folding agricultural non-CO2 emissions into the land use sector would have consequences for this Regulation.
If, on one hand, the scope of the Regulation were to be maintained creating overlap between the sectors covered by the EU ETS and the Effort Sharing Regulation, this would provide an incentive for Member States to take subsidiary action strengthening the regulatory framework for sectors such as buildings and road transport.
If, on the other hand, the scope were to be reduced, and in case of a full transition to an EU ETS covering all fossil fuel combustion emissions, the Regulation would predominantly cover non-CO2 emissions. Its role and purpose would be further reduced in case of a move of agriculture non-CO2 emissions towards an agriculture and land use sector.
If all other objectives of the Regulation were sufficiently targeted by other legislative instruments, the Regulation could even be repealed as a whole in the future.
Considering the need to maintain strong incentives and accountability for Member States to ensure action at national level, the Commission will use the upcoming impact assessment for both the review of the Emissions Trading System and the Effort Sharing Regulation to further consult the public on the role of the Effort Sharing Regulation and the related Governance Regulation. At the same time, Member States have different capabilities to reduce greenhouse gas emissions.
On 17 March 2023 the Council adopted, as an integral part of the Fit for 55 package, a new regulation on effort sharing sector - Regulation (EU) of the European Parliament and of the Council amending Regulation (EU) 2018/842 on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 contributing to climate action to meet commitments under the Paris Agreement, and Regulation (EU) 2018/1999.
The new regulation sets an EU-level greenhouse gas emission reduction target of 40% by 2030, compared to 2005, for the sectors that it covers. While under the revised directive on the EU Emissions Trading System (EU ETS), emissions trading will also apply to international maritime transport as well as buildings, road transport and additional industrial sectors, the scope of the ESR is maintained (road and domestic maritime transport, buildings, agriculture, waste and small industries).
The revised regulation assigns each Member State an increased national target and adjusts the way member states can use existing flexibilities to meet their targets.