EU ETS Directive
- Category: EU ETS
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a system for greenhouse gas emission allowance trading within the Union (EU ETS Directive) establishes the European Union system for greenhouse gas emission allowance trading (EU ETS) in order to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner.
The scope of EU ETS Directive has been broadened from 1 January 2013 onwards so as to include, inter alia, emissions from the production of aluminium and from certain sectors of the chemicals industry. To that end, Annex I to Directive 2003/87, which lists the categories of activities which fall within the scope of the EU ETS was amended by the Directive 2009/29. The EU ETS legal framework for the fourth trading period as from 2020 has been outlined by 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 above European Commission's Proposal was a first piece of legislation implementing the 2030 Climate and Energy package agreed by the European Council in October 2014. Pursuant to Article 3(1) 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, the EU Member States were required to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 9 October 2019 (deadline for transposition).
The EU ETS Directive earlier modifications were introduced to accommodate the backloading of emission allowances (see box) as well as the Market Stability Reserve.
The absence of legal mechanism accommodating the 2003/87/EC Directive's arrangements to market fluctuations occurred fundamental from practical perspective in the third phase of the EU ETS.
It is noteworthy that in the context of the so-called back-loading of emission allowances of the third phase a proposition has been put to add in the first subparagraph of Article 10(4) of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading the following sentence:
"The Commission shall, where appropriate, adapt the timetable for each period so as to ensure an orderly functioning of the market."
The said wording was contained in the European Commission’s Proposal of 25 July 2012 for a Decision of the European Parliament and of the Council amending Directive 2003/87/EC clarifying provisions on the timing of auctions of greenhouse gas allowances. This amendment has been considered against the background of the simultaneous change of the auction time profile for phase 3 allowances done by amending the Auctioning Regulation. The European Parliament upheld on 14 March 2013 by a slight majority a non-binding recommendation for regulators to intervene in the balance of the supply and demand set by the earlier rules of the Directive (see point 91 of the European Parliament resolution of 14 March 2013 on the Energy roadmap 2050, a future with energy (2012/2103(INI)).
Compliance with the EU ETS Directive is ensured by wide array of instruments. Firstly, the EU ETS Directive provides for an excess emissions penalty in the form of €100 (indexed) for each tonne of CO2 emitted for which no allowance has been surrendered in due time. Other sanctions include the prohibition on the selling of allowances as long as the installations are non-compliant with the system requirements and the publication of names of non-compliant operators.
Other penalties applicable to infringements in implementation of EU ETS are according to national provisions set by the concerned country. However, these penalties were so far rather rarely applied.
The EU ETS has a very high compliance rate: each year around 99% of the emissions are covered by the required number of allowances on time. For 2014, the application of 'excess emissions penalty' was reported for a low number of cases (ca. 0.1% of installations) in 6 Member States (DE, ES, PL, PT, RO, UK). The prohibition on the selling of allowances as long as the installations are non-compliant with the system requirements has been applied in 2014 by twenty-two EU Member States. The publication of names of non-compliant operators has been applied in 2014 by 11 EU Member States.
Report of 23 November 2017 from the Commission to the European Parliament and to the Council on the functioning of the European carbon market (COM(2017) 693 final) contains the following remarks on the compliance with the EU ETS Directive in 2016:
1. less than 1% of the installations reporting emissions for 2016 did not surrender allowances covering all their emissions by the deadline of 30 April 2017 (these installations were typically small and accounted for approximately 0.4% of EU ETS emissions);
2. in the aviation sector the level of compliance was also very high: aircraft operators responsible for more than 99 % of EU ETS aviation emissions complied;
3. for 2016, the application of excess emissions penalty was reported for only 14 installations by four countries (BG 1, PL 1, RO 6 and UK 6);
4. for aviation, excess emission penalties were reported for 48 aircraft operators (BE 1, DE 4, ES 4 and UK 39);
5. the most common offences reported for 2016 were operation without a permit (21 cases), failure to report capacity changes (14 cases), failure to submit verified annual emission reports by the due deadline (9 cases), failure to comply with permit conditions (6 cases) and failure to hold a duly approved monitoring plan (5 cases);
6. other cases included the annual emission report being non-compliant with the requirements of the MRR, failure to surrender a sufficient number of allowances by 30 April and failure to submit improvement reports.
Fit for 55
In December 2019 the European Commission announced its plans to develop a new set of measures, the “European Green Deal”, which, as regards the scope of the EU ETS Directive, includes “a possible extension of European emissions trading to new sectors”.
The Communication from the Commission of 11 December 2019 (COM/2019/640 final), reads in this regard:
“By summer 2020, the Commission will present an impact assessed plan to increase the EU’s greenhouse gas emission reductions target for 2030 to at least 50% and towards 55% compared with 1990 levels in a responsible way. To deliver these additional greenhouse gas emissions reductions, the Commission will, by June 2021, review and propose to revise where necessary, all relevant climate-related policy instruments. This will comprise the Emissions Trading System, including a possible extension of European emissions trading to new sectors”.
This announcement materialised in the European Commission Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC and Decision (EU) 2015/1814 to strengthen the EU Emissions Trading System and extend it in line with the Union’s increased climate ambition for 2030 (as appeared on the media on 2 July 2021). The said document proposed to extend the existing EU ETS (previously encompassing the electricity sector and energy consuming industries plus intra-EU flights), to cover maritime emissions (with the consequent application of rules on auctioning, transfer and surrender of allowances, penalties for non-compliance, etc.).
The heating and transport fuels, according to the proposal, were intended to be subject to a separate self-standing emission trading system as of 2025.
The general objectives of the European Commission Proposal of 14 July 2021 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)) were to “revise the ETS Directive in a manner commensurate with the 2030 climate ambition to reach at least 55 % net greenhouse gas emission reductions by 2030 below 1990 levels and with a gradual and balanced trajectory towards climate neutrality by 2050, in a cost-effective and coherent way while taking into account the need for a just transition and the need for all sectors to contribute to the EU’s climate efforts” (the ETS legislation was revised in 2018 to deliver a 43 % reduction in EU ETS emissions by 2030 compared to 2005, coherent with an EU economy-wide emissions reduction target of at least 40 % by 2030 compared to 1990).
The specific objectives of the Fit for 55 Package in the area of EU ETS were:
- to strengthen the Innovation Fund as a stepped-up effort to rapidly scale-up low carbon technologies to the market enabling the EU to reach its emission reductions target;
- to strengthen the Modernisation Fund to speed-up the modernisation of the energy systems in lower income Member States;
- to ensure that the maritime transport sector contributes cost-effectively to the emission reductions needed in line with EU targets and Paris Agreement commitments by notably covering at least intra-EEA maritime transport emissions;
- to ensure the relevant contribution of the sectors of road transport and buildings to the new greenhouse gas emissions reduction target;
- to increase the linear reduction factor (LRF) to 4,2 % from the year following the entry into force of the Directive amending the ETS Directive, the increased linear reduction factor is to be combined with a one-off downward adjustment of the cap so that the new linear reduction factor has the same effect as if it would have applied from 2021.
On 18 December 2022 the Council and Parliament reached provisional deal on ETS installations under Fit for 55. In particular, this political agreement on the revision of the EU ETS included adjustments to its compliance calendar. The deadline for competent authorities to grant free allocation was planned to be postponed from 28 February to 30 June, and the deadline to surrender allowances from 30 April to 30 September.
On 25 April 2023 the Council adopted key pieces of legislation delivering on 2030 climate targets and on 16 May 2023 the Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system has been published in the EU Official Journal.
New rules introduced in Directive 2023/959, include the extension of the scope of the existing EU ETS (ETS 1) to maritime transport and the introduction of a new and separate emissions trading system for buildings, road transport and additional sectors (ETS 2). With the new Chapter IVa of Directive 2003/87/EC, a new ETS 2 is established as an upstream separate system from ETS 1.
Allowances for buildings, road transport and industrial facilities under the ETS 2 will only be allocated via auctioning.
The revised Directive 2003/87/EC includes a phase-out of free allocation for aviation in 2024 and 2025. The phase-out will be complemented by a corresponding increase in the auctioning volume while, from 2026 onwards, most allowances for aviation will be auctioned.