MEP Peter Liese (EPP, Germany), the European Parliament’s rapporteur on the proposed revision of the EU Emissions Trading System (ETS), foresees a number of significant amendments to the European Commission’s text in his draft report obtained by EUROPE on Wednesday 12 January.
ETS2
Mr Liese wants to broaden the scope of the new ETS proposed by the Commission (ETS2 - see EUROPE 12762/1). Instead of applying to building heating and road transport, it would cover all fuels.
It would also be operational from 2024, one year earlier than in the Commission’s proposal, for commercial operations.
For fuels used for private road transport and for heating residential buildings, the rapporteur suggests introducing a possibility of exemption. Member States could thus request, by 31 July 2024 at the latest, that ETS2 only apply starting the 1 January 2027 for these non-commercial activities.
However, they should be able to demonstrate that they are able to differentiate the monitoring, reporting and verification of greenhouse gas (GHG) emissions from these activities from other activities covered by the ETS2 and that this exemption will not prevent them from meeting their 2030 climate targets set out in the EU Effort Sharing Regulation (2018/842) (also currently under review - see EUROPE 12762/2).
In addition, Member States making use of this derogation would not benefit from the ‘Social Climate Fund’ (see EUROPE 12852/19) until the 1 January 2026.
The ETS2 emissions ceiling would be set from 2025, the starting year for auctioning allowances, as opposed to 2026 in the Commission’s proposal. Mr Liese retains the linear reduction factor suggested by the Commission - determining the annual quota reduction after 2024 - of 5.15%.
The MEP also proposes to establish a correction mechanism to avoid double counting of emissions covered by the ETS2 and those covered by the current ETS. The Commission would thus be empowered to adopt delegated acts to set an additional quantity of allowances to be issued for each year from 2025 onwards, in order to compensate for allowances surrendered in case of double counting.
In order to minimise the potential negative socio-economic consequences of the ETS2, the rapporteur recommends that the Commission should be able to adopt delegated acts concerning the compensation of indirect costs resulting from this new carbon market.
The draft report also provides for ETS2 entities to monitor, for each calendar year from 2025 onwards, the share of costs passed on to the final consumer for the quantities of fuels released for consumption. The Commission would then be required to present an annual public report on these costs.
‘Social Climate Fund’
Regarding the ‘Social Climate Fund’ (which is the subject of a legislative proposal separate from, but linked to, the ETS revision), Mr Liese wants to ensure that the size of the fund is directly linked to the revenues from the auctioning of ETS2 allowances.
While the Commission’s proposal foresees that this fund will be endowed with more or less 25% of these revenues over the period 2026-2032, the rapporteur wants to see 25% of the total quantity of allowances covered by the ETS2 auctioned and the corresponding revenues allocated to the ‘Social Climate Fund’.
These revenues should, in his view, be “external assigned revenues”. The ‘Social Climate Fund’ would thus be managed outside the EU budget, like the ‘Innovation Fund and the ‘Modernisation Fund’.
Revision of the current ETS
In addition to ETS2, the draft report also deals with the revision of the current ETS.
Mr Liese thus proposes to apply the ETS to emissions from municipal waste incineration plants.
However, the inclusion of this sector in the ETS should only take place from the 1 January 2028 in order to give the Commission time to consider how to avoid “large-scale deviation of waste from municipal waste incineration installations towards landfills in the Union, and exports to third countries”. The institution would be required to report on this by 31 December 2025.
A ‘Carbon Leakage Protection Reserve’
The draft report also addresses the future ‘Carbon Border Adjustment Mechanism’ (CBAM).
In parallel with the introduction of the CBAM, the Commission intends to remove free allowances from the ETS for sectors covered by the CBAM by applying a 10% annual reduction from 2026 to 2036.
Unlike the Parliament’s rapporteur on CBAM, Mohammed Chahim (S&D, Netherlands) (see EUROPE 12862/3), Mr Liese maintains this approach.
Nevertheless, he says that the phasing out of free allowances “should be kept under review in the light of the entry into force and actual effectiveness of the CBAM”.
He therefore advocates the creation of a “temporary CBAM reserve” into which the allowances resulting from the reduction of the free allocation would be placed for each year of the 2026-2035 period.
This would be “linked to a rolling review mechanism”.
By 28 February 2026 (and annually thereafter), the Commission should provide a report assessing whether the CBAM has been effectively implemented in a way that achieves a level of protection against carbon leakage equivalent to that of the free allocation system.
If the evaluation is positive, the allowances placed in the reserve would be made available to the “Innovation Fund’. If not, they would be reassigned to the installations.
The rapporteur also wants to introduce a bonus-malus system for free allowances.
Installations with emissions above the sector’s benchmarks would be sanctioned by reducing the amount of free allocation of allowances from 2026 onwards. Conversely, installations with emissions below these values would receive additional free allowances.
The amount of free allowances would vary depending on the implementation of a “climate neutrality plan” that operators covered by the ETS would be required to establish.
In addition, the MEP recommends ending the transitional free allowance for the electricity sector.
Maritime sector
On ship emissions, Mr Liese wants to bring forward the date for full application of the ETS to the maritime sector by one year, from 2026 to 2025, and to raise the percentages for the amount of emission allowances to be surrendered.
According to his draft report, shipping companies would be required to surrender: allowances corresponding to 33.3% of reported verified emissions for 2023 (as opposed to 20% in the Commission’s proposal), 66.6% of emissions for 2024 (as opposed to 40%) and 100% of emissions for 2025 (as opposed to 70%) and each subsequent year.
While he does not propose to directly change the scope envisaged by the Commission, he does introduce amendments to strengthen it.
In its proposal, the Commission plans to include the maritime sector in the ETS by covering, among other things, 50% of the emissions from all voyages starting or ending outside the European Economic Area (EEA).
The rapporteur therefore proposes that the institution and the Member States promote cooperation with third countries to extend the scope to more maritime journeys and work on international cooperation to eventually cover 100% of extra-EEA journeys.
In the absence of sufficient progress in reducing ship emissions at the level of the International Maritime Organization (IMO), the Commission “should consider the extension of the scope of the EU ETS for shipping to 100%” by presenting a new legislative proposal, the rapporteur also says.
The Commission would also be required to report (accompanied, if appropriate, by a legislative proposal) by 31 December 2026 on the climate impact of GHG emissions other than CO2 and CH4 for vessels travelling within the EEA and those arriving in or departing from a port in a Member State.
‘Ocean Fund’
Also new is the creation of an ‘Ocean Fund’ to support projects and investments in improving the energy efficiency of ships and ports, innovative technologies and infrastructure to decarbonise maritime transport.
This fund would be financed by at least 75% of the revenues generated by the auctioning of allowances for maritime transport activities under the ETS as well as by the revenues from the penalties provided for in the future ‘FuelEU Maritime’ regulation.
It would have a similar governance structure to that of the ‘Innovation Fund’.
While the Commission proposes to increase the ‘Modernisation Fund’ by auctioning an additional 2.5% of allowances, Mr Liese proposes to reduce this percentage to 1.25%.
These new funds would benefit the territories most affected by the energy transition.
The ‘Innovation Fund’ would be increased by auctioning an additional 1.25% of allowances.
Mr Liese’s draft report will be made public on 15 January. The deadline for tabling of amendments is 16 February.
See the draft report: https://bit.ly/3niAQy2 (Original version in French by Damien Genicot)