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Proposal to reform EU’s CO2 emissions trading system

On 15 July 2015 the European Commission published a proposal to amend the current Emissions Trading System Directive (2003/87/EC).

The proposal is part of the EU’s work on achieving a stable energy union and elaborating its future climate policy. The purpose of the reform of the system of allowances for emission of CO2 is to significantly reduce greenhouse gas emissions. Under the proposal, by 2030 CO2 emissions in the member states would be cut by at least 40% from the baseline level of 1990.

Under the proposal, the main assumptions of dividing allowances for emission of greenhouse gases would remain unchanged, i.e. sale of 57% of them at auction and distribution of the remaining 43% free of charge. But the Commission’s goal is to move to a full auction system by 2027.

In the guidelines for the proposal, the total number of CO2 emission allowances would fall by 2.2% annually from 2021 (in 2013–2020 the limit on allocation of allowances for emissions by power plants and other permanent installations is being cut by 1.74% each year). As is currently the case, the income from auction of allowances would continue to provide the member states with funds they can use for various purposes, such as renewable energy programmes, increasing energy efficiency, or support for developing countries in their shift to a low-emissions economy.

However, the mechanism for free allocation of allowances by the governments of the member states would change. Allocation of free allowances would focus on the sectors most in danger of moving their production outside the EU—known as “carbon leakage.” Enterprises from sectors classified in the group at high risk of carbon leakage would receive free emission allowances.

The main criterion in allocating free allowances will be benchmarks specifying the standard efficiency in a given sector, for example defining the quantity of CO2 emitted in production of a tonne of steel. According to the proposal, 100% free allowances for CO2 emissions would be received only by entities whose efficiency complies with the benchmark determined using best available technology.

Currently there are 52 benchmarks functioning in the EU, based on data from 2008. It is assumed that every industrial sector makes technological progress every year which should result in a decrease in CO2 emissions. Therefore it is also proposed that each benchmark be revised annually to improve efficiency by 1%. Additionally, in awarding free emission allowances to specific facilities, their production figures and indirect costs of CO2 emissions would also be taken into consideration.

Another important assumption of the proposal to amend the directive is creation of a Modernisation Fund to be used by the 10 EU member states whose per capital GDP is below 60% of the EU average from 2013. Poland would be one of the beneficiaries, receiving 43.41% of the money in the fund. Run by representatives of the member states, the European Commission and the European Investment Bank, the fund is designed to assist the poorest member states in modernising their energy system and encourage growth in investments leading to a reduction in energy use.

The investments that should receive financial support from the fund would be nominated directly by the member states, and then the European Investment Bank would issue an opinion on them. Poland is concerned that if this system of evaluation is enacted, not all of the projects it would like to see carried would receive funding. (If the European Investment Bank recommended denial of funding for a project, it could receive funding only if the project managed to win 2/3 of the votes of the member states, with the country in question not having a vote.) The blacklist of projects that might not be backed by the European Investment Bank could include, for example, investments in any way connected with the use of coal as a fuel.

An Innovation Fund would also be created to support groundbreaking investments in renewable energy sources, carbon capture and storage, and innovations in energy-intensive sectors of industry. From 2021, about 400 million emission allowances would be reserved for this purpose, worth about EUR 10 billion at the time of sale. The fund would begin operating before 2021 in order to award support for industry projects using 50 million unallocated allowances from 2013–2020.

The proposal to amend the Emissions Trading System Directive presented by the European Commission sets the direction for realisation of the goals of the EU’s climate policy. But it is argued that the proposal is not restrictive or transparent enough. A good example is the failure to clarify the issue of diversification of the energy mix, which is important from Poland’s point of view.

The Commission’s proposal has been submitted to the European Parliament and the Council for adoption. The European Economic and Social Committee and the Committee of the Regions will also issue opinions on the proposal. Because climate issues stir deep divisions within the EU, the version of the amendment that is finally adopted may differ from the Commission’s proposal.

Karol Czuryszkiewicz, Energy Law Practice, Wardyński & Partners