Proposal to revise the EU emissions trading system (EU ETS)

15 July 2015
by eub2 -- last modified 16 July 2015

The European Commission presented on 15 July proposals to deliver a new deal for energy consumers, to launch a redesign of the European electricity market, to update energy efficiency labelling and to revise the EU Emissions Trading System.

1. Why has the Commission proposed today a revision of EU ETS?

The European Commission has presented a legislative proposal to revise the EU Emissions Trading System (ETS) in line with the 2030 climate and energy policy framework agreed by the EU leaders in October 2014. The proposal is an integral part of the work on achieving a resilient Energy Union with a forward-looking climate policy – a top political priority of the Juncker Commission, launched in February 2015.

This is the first step in delivering on the EU's target to reduce greenhouse gas emissions by at least 40% domestically by 2030 as part of its contribution to the new global climate deal due to be adopted in Paris this December. This proposal sends a strong message to the international community at a critical moment when other major players such as G7 and China have also shown their firm determination.

The EU ETS is the largest carbon market in the world. Today's proposal aims to ensure that the EU ETS – the cornerstone of EU climate policy – remains the most efficient way to cut emissions in the decade to come. It can thereby build on the experiences by companies and public authorities from the first decade of its implementation. The EU ETS should continue to inspire other international partners, such as China, to use carbon pricing as a cost-effective driver for a gradual but sustainable decarbonisation of their economies for the benefit of future generations.

Ambitious climate action creates businesses opportunities and opens up new markets for low-carbon technologies. Today's proposal confirms that climate action and competitiveness go hand in hand. The revised EU ETS will provide stronger incentives for innovation and continue to ensure that European industries remain competitive on international markets. Additional funds from the EU ETS are provided for low-carbon innovation – for the first time also for energy-intensive industry – and for the modernisation of the energy systems in lower-income Member States. This will further stimulate the uptake of renewables and other low-carbon and energy-efficient technologies which are, alongside decarbonisation, further key objectives of the Energy Union.

Finally, a revised EU ETS – based on the recently agreed Market Stability Reserve – will reinforce the functioning of the internal energy market and provide better long-term price signals for investments. Today's EU ETS proposal will therefore contribute to a better functioning European wide electricity market which is the best means to ensure that electricity can be delivered to private consumers and industries in the most cost-efficient way.

2. How will the revision benefit EU citizens, industry and Member States?

The proposed revision delivers multiple environmental and economic benefits. It will help tackle climate change by increasing the pace of EU efforts to cut greenhouse gas emissions. Cutting emissions also reduces air pollution, to the benefit of citizens' health. Moreover, it makes Europe less dependent on imported fossil fuels.

This proposal advocates for a stronger, better functioning EU ETS that helps putting the EU on track towards a low-carbon economy. It brings significant opportunities for business and industry to develop and profit from new technologies and markets, supports innovation and helps create new opportunities for jobs and growth. The proposal also supports the low-carbon transition by providing more funds to address investment needs in lower-income Member States.

At the same time, the Commission recognises that there may be risks for some businesses exposed to international competition, as long as no comparable climate efforts are undertaken in other major economies. That's why the proposal also includes safeguards for the international competitiveness of EU energy intensive industries. Important focus is given to reducing administrative burdens. Under the proposal, Member States will continue to be able to exclude small emitters from the EU ETS, including small and medium-sized enterprises with low emissions, as long as they are subject to equivalent measures.

3. How does the EU ETS revision contribute to international climate efforts?

EU emissions reductions will be an important contribution to the international effort to limit the global average temperature increase to below 2°C compared to pre-industrial levels.

The economy-wide 'at least 40%' target illustrates the EU’s continued commitment to securing an ambitious global climate deal with legally binding commitments from all Parties in Paris this December. Today's proposal continues this effort by presenting the first of the main steps in delivering on this ambitious emissions reduction target.

The decisions to be adopted in Paris are expected to mobilise climate finance, technology transfer and capacity building for eligible parties, particularly those with the fewest capabilities. Public sector climate finance will continue to play an important role in mobilising resources after 2020. In anticipation of these decisions, today's proposal calls on Member States to use a share of their EU ETS auction revenues to finance climate action in countries outside the EU, including for actions to adapt to the impacts of climate change. It will be on Member States to devote part of these revenues from the emissions trading scheme to support climate mitigation actions in third countries, including development countries.

4. How will the ETS revision affect the total amount of allowances?

The overall quantity of allowances will decline by 2.2% every year starting from 2021.

Since 2013, the main method of distributing EU ETS allowances has been through auctioning by Member States. Over the current trading period (2013 to 2020), 57% of the total amount of allowances will be auctioned, while the remaining allowances are available for free allocation. The share of allowances to be auctioned will remain the same after 2020. The revenues from auctioning provide Member States with funding that can be used for different actions, such as renewable energy programmes. They can also be directed to social policy measures to support a 'just and fair transition' towards a low-carbon economy for companies, their workers and consumers, in addition to supporting international climate action efforts in third countries including developing countries.

5. How will the system of free allocation be improved after 2020?

As the total number of allowances is limited and declining, the system of free allocation needs to be revised in order to distribute the available allowances in the most effective and efficient way. The proposed changes aim to minimise the need for a correction factor and to ensure predictability for companies.

The allocation of free allowances will be focused on the sectors at highest risk of relocating their production outside the EU.

The basic architecture will remain in place after 2020, while individual elements will be improved in line with the agreement reached by EU leaders in October 2014:

• Benchmark values will be updated to capture technological progress in the different sectors. Current values are determined based on data from 2007-2008 and would not reflect the state of technology after 2020.
• Production data - the system will be more flexible by better taking into account production increases or decreases and adjusting the amount of free allocation accordingly. A specific number of free allowances will be set aside for new and growing installations.
• Carbon leakage – as currently, beyond 2020 all major industrial sectors will be considered at risk of carbon leakage.
• Indirect carbon costs - Member States are encouraged to use auction revenue to provide compensation in line with state aid rules.

6. How will the EU ETS support low-carbon innovation?

An Innovation Fund will be set up to support first-of-a-kind investments in renewable energy, carbon capture and storage (CCS) and low-carbon innovation in energy intensive industry.

Some 400 million allowances − representing up to around EUR 10 billion when sold − will be reserved from 2021 onwards for this purpose. In addition, a further 50 million of the unallocated allowances from 2013-2020 will be set aside to enable the Innovation Fund to start before 2021 and include projects to support breakthrough technologies in industry.

The Innovation Fund builds on the success of the existing funding programme to support low-carbon innovation using the proceeds from 300 million allowances during 2013-2020 (the so-called NER 300).

7. What are the objectives of the Modernisation Fund?

The aim of the Modernisation Fund is to support lower income Member States in meeting the high investment needs relating to energy efficiency and the modernisation of their energy systems.

Between 2021 and 2030, 2% of the allowances, some 310 million allowances in total, will be set aside to establish the fund. All Member States will contribute to the fund, which will benefit 10 Member States with a GDP per capita of less than 60% of the EU average (in 2013). The countries eligible to receive support are: Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.

The ETS Directive should establish a governance structure for the Modernisation Fund involving Member States, the European Investment Bank, and the Commission.

8. How does the EU ETS revision affect the Market Stability Reserve?

The recent agreement on the Market Stability Reserve (MSR) enables unallocated allowances to be transferred to the MSR in 2020. Under this rule, analysts estimate that some 550 to 700 million allowances may be transferred into the MSR in 2020. Following a request by the Parliament and Council to consider the use of unallocated allowances after 2020, the Commission proposes to use 250 million unallocated allowances from 2013-2020 to establish a reserve for new and growing installations.

9. Was there a public consultation on this proposal?

Member States, industry representatives, NGOs, research and academic institutions, trade unions and citizens were involved at various stages in the development of this proposal. Extensive stakeholder consultations were carried out in 2014 on various technical aspects of the EU ETS. The Commission received more than 500 contributions which have been taken into account in preparing this proposal.

Following these consultations and the analysis of EU climate policy targets for 2030, the Commission carried out an impact assessment of the EU ETS revision which is also published today (see Documentation).

10. What are the next steps?

The legislative proposal has been submitted to the European Parliament and to the Council for adoption as well as to the Economic and Social Committee and the Committee of the Regions for opinion. The Commission will work with these institutions to see this legislation through. Citizens and stakeholders can give their views on this proposal over the next eight weeks. These will be fed into the legislative debate and presented to the European Parliament and Council.