The European Commission is considering establishing a new stand-alone emissions trading scheme (ETS) covering greenhouse gas (GHG) emissions from buildings and road transport from 2025, according to a draft revision of the EU ETS Directive (2003/87), obtained by EUROPE on Wednesday 30 June.
According to the draft document, this carbon market will be “separate but adjacent” to the current ETS—which covers emissions from industry and aircraft flights between airports in the European Economic Area—in order to avoid “any disturbance” to the latter.
While providing for a “review clause”, the Commission does not rule out a “possible merger” of the two systems. However, this “should be assessed only after a few years of the functioning of the new emissions trading”, the draft states.
This idea of an adjacent ETS had already been raised several times in recent weeks, notably at the end of April by the cabinet of Frans Timmermans (see EUROPE 12702/8), the Commission’s executive vice-president in charge of the European Green Deal.
In the hope of allaying fears that this would entail too great a cost for the most vulnerable households (see EUROPE 12748/35, 12723/32), he had also mentioned the possibility of the Commission proposing the creation of a new fund to compensate for any negative social effects (see EUROPE 12737/14). However, the draft text does not mention this.
Operation
As regards the operation of the new system, entities covered by it will have to hold a GHG emission permit in the first year and report their emissions for the years 2024 and 2025. The issuance of allowances and compliance obligations for these entities will only apply from 2026.
It is also from this date that an emission allowance cap will be set “based on data collected under the Effort Sharing Regulation [2018/842] and ambition level and decrease to reach emission reductions of XX% in 2030 compared to 2005 for the sectors of buildings and road transport".
Noting that it is not possible to set the point of regulation at the level of direct GHG emitters due to the high number of small emitters in the buildings and road transport sectors (households and drivers), the regulated entities will be further up the supply chain. The Commission considers that the release for consumption of fuels used for combustion in the buildings and road transport sectors should be the activity regulated by the new system.
As with the current ETS, the Commission will define a corresponding linear reduction factor—a percentage determining the amount of allowances whose cap will decrease each year—and will set up a reserve of allowances (‘market stability reserve’) to increase the resilience of the scheme to large shocks.
However, the Commission does not foresee any free allocation of emission allowances under the new scheme, the draft highlights.
In order to “stimulate the green transition”, 150 million allowances issued under the ETS for road transport and buildings will be made available to the ‘Innovation Fund’.
Inclusion of the maritime sector
In addition, the Commission intends to extend the current ETS to maritime transport, as has been announced on several occasions. According to the draft, the scheme would apply to emissions from ships within the EU and from international shipping to the EU, as well as to emissions occurring at berth in an EU port, starting in 2023.
In order to ensure a “smooth transition”, the obligation for shipping companies to surrender allowances would only be introduced gradually. Between 2023 and 2025, these countries will only have to surrender allowances for part of their emissions (20% in 2023, 45% in 2024 and 70% in 2025), seeking to achieve 100% from 2026.
Since fewer allowances will be surrendered during the transitional period, the amount of allowances not surrendered should be cancelled, the draft also states.
If a shipping company has not surrendered allowances for two or more consecutive reporting periods, the Commission proposes to be able to ban ships under the responsibility of that company from entering an EU port.
It should be noted that the draft document also includes a “review clause” to take into account possible developments at the level of the International Maritime Organization regarding the adoption of carbon pricing measures for ships on a global scale.
Increase in the linear reduction factor
In order to ensure that the overall quantity of allowances (the cap) will decrease at an increased annual rate, the Commission reportedly intends to increase the linear reduction factor from the year following the entry into force of the ETS review.
However, the draft does not specify what this new percentage will be.
This would be accompanied by a one-off reduction in the emissions cap.
Free quotas
Another significant proposal in the draft is the end of free allowances for sectors covered by the future EU Carbon Border Adjustment Mechanism to combat carbon leakage (see EUROPE 12733/9).
For the others, free allocation will be conditional on decarbonisation efforts to encourage the adoption of low-carbon technologies, the document says.
Market stability reserve
The draft also provides that above 400 million allowances in the ‘market stability reserve’ (MSR), allowances held in the MSR will be invalidated from 2023.
Use of funds
Regarding the use of revenues from the ETS, the text states that “Member States must use all the revenues for climate-related purposes, including to support low-income households’ sustainable renovation”.
In addition, it plans to increase the size of the Modernisation Fund—intended to help Member States whose GDP per capita is below a certain threshold—through the auctioning of a further 2% of the ceiling. However, the GDP/capita threshold is not specified.
In order to align the Modernisation Fund with the EU’s new climate objectives, the Commission should also propose to remove support for investments related to all fossil fuels, instead of just solid fossil fuels.
The Commission would also increase the size of the Innovation Fund and extend its scope to provide support for projects in the form of price-competitive tenders, such as ‘carbon contracts for difference’.
The final version of the proposed revision of the ETS is expected to be revealed on 14 July, as part of the presentation of the ‘Fit for 55’ legislative package.
See the draft: https://bit.ly/3wbwNoS (Original version in French by Damien Genicot)