The EC is seeking feedback on its roadmap for the next EU Emissions Trading System revision.

By Paul A. Davies, Lars Kjølbye, Elisabetta Righini, and Guendalina Catti De Gasperi

The European Commission (EC) has launched an initiative for the revision of EU-wide rules for the free allocation of emission allowances under the EU Emissions Trading System (EU ETS). Under the initiative released on March 20, 2018, the new rules would be applicable in the fourth trading period of the EU ETS (2021-2030). In particular, the initiative will:

As a first step, the EC has published a roadmap (Roadmap) describing the scope, purpose, and timing of the revision, and the main features of its consultation strategy. Stakeholders can provide their feedback on the Roadmap until April 17, 2018.

This initiative represents one of the steps in implementing the recently adopted Directive (EU) 2018/410 (the revised EU ETS Directive). The revised EU ETS Directive amends Directive 2003/87/EC establishing the EU ETS, in order to implement the fourth trading period (2021-2030). The revised EU ETS Directive will enter into force on April 8, 2018, and Member States shall transpose its provisions into national law by 9 October 2019.

The Revised EU ETS Directive

In the fourth trading period, auctioning will remain the default method for allocating emission allowances to companies, and the single EU-wide cap on emission allowances will be reduced each year by a linear factor of 2.2%, compared to the current linear factor of 1.74%.

Based on the revised EU ETS Directive, around 6.3 billion emission allowances likely will be allocated for free during the fourth trading period, compared to around 750 million free allowances granted to installations in 2017. The share of free allowances under the revised EU ETS Directive will represent 43% of the EU-wide cap.

The revised ETS Directive also includes a number of key new provisions to:

  • Safeguard the competitiveness of European industries
  • Avoid transferring greenhouse gas emissions via the relocation of production activities and jobs outside the EU, in countries with lower CO2 prices or lesser CO2 constraints (carbon leakage)

Sectors and sub-sectors deemed to be exposed to a risk of carbon leakage will continue to receive emission allowances free of charge. However, the free allocation system has been revised to focus on energy intensive industries at highest risk of carbon leakage.

State Aid Implications

Under the revised EU ETS Directive, Member States may continue to grant operating aid to compensate indirect emission costs (i.e., EU ETS allowance costs that are passed on to energy intensive industries in the form of electricity prices). Such compensation is subject to EU state aid rules. In particular, the EU ETS Guidelines provide specific eligibility and compatibility criteria applicable only to this form of aid. The revised EU ETS Directive enhances the rules on transparency and reporting related to this Member State aid.

The Roadmap — Free Allocation of Emission Allowances

Under the revised EU ETS Directive the EC is empowered to adopt:

  • A delegated act detailing and implementing the changes to the free allocation rules provided under the revised Directive
  • Implementing acts defining the provisions for the adjustments of the amount of free allowances allocated to installations whose operations have increased or decreased

This has resulted in the launch of the Roadmap, which in turn will lead to a proposal for a delegated act on free allocation rules, and a proposal for an implementing act on free allocation adjustments due to changes in production levels.

Market participants would be well advised to provide feedback on the Roadmap, and to stay focused on the EC’s next steps.