A further step was taken on Wednesday 22 November towards adopting the European directive to make the EU emissions trading scheme (ETS) more effective. The ETS is the main market instrument available to the EU for reducing its greenhouse gas emissions at the lowest cost and achieve its Paris Agreement target (a 40% reduction by 2030 compared with 1990) while maintaining the competitiveness of European industry.
On Wednesday 22 November, the 28-member state ambassadors to the EU (of the committee of permanent representatives or Coreper) endorsed the provisional inter-institutional agreement reached 19 November on ETS reform for the period 2021-2030 (see EUROPE 11901).
At COP 23 in Bonn, the EU announced the hard-fought reform negotiated by Parliament and the Estonian Presidency, assisted by the Commission, as a sign of its commitment to the Paris Agreement. The detailed arrangements of the reform still had to be consolidated and published. That has now been done.
“The EU is delivering on its Paris promises”, the president in office of the Environment Council of the EU, Siim Kissler, was pleased to state in a press release published the same day.
The cap on the total volume of emissions will be reduced annually by 2.2% (linear reduction factor or LRF). The number of allowances to be placed in the market stability reserve (MSR) will be temporarily doubled until the end of 2023. A new mechanism limiting the validity of allowances in the MSR above a certain level to one year will become operational in 2023.
The provisions of the new ETS directive will be kept under regular review, including carbon leakage rules (relocation) and the LRF.
To protect industry against the risk of carbon leakage and avoid the application of a cross-sectoral correction factor (CSCF) which could penalise the best performing energy-intensive companies, the new directive contains the following provisions:
- the share of allowances to be auctioned will be 57%, with a conditional lowering of the auction share by 3% if the CSCF is to be applied;
- free allocation rules are to be better aligned with the production levels of companies and the benchmarks used to determine free allocation will be updated;
- the sectors at the highest risk of relocating their production outside the EU will receive full free allocation while sectors less exposed to carbon leakage will receive one of 30%; a gradual phase-out of that free allocation for the less exposed sectors will start after 2026, with the exception of the district heating sector;
- up to 200 million allowances will be returned to the MSR if not used during the period 2021-2030;
- member states can continue to provide compensation for indirect carbon costs in line with state aid rules.
To encourage innovation and investment in the low-carbon transition, the NER (new entrants’ reserve) 300 will be built up initially with the receipts from the auction of 400 million allowances – possibly increased by up to 50 million allowances if the cross-sectoral correction factor is not triggered. Solidarity funds (innovation and modernisation funds) will help the less well-off EU states modernise their energy sector (see EUROPE 11901). (Original version in French by Aminata Niang)