The revision of the EU Emissions Trading System for phase 4 and the implementation process Stakeholder Meeting on the Preliminary Carbon Leakage List for phase 4 of the EU Emissions Trading System 16 May 2018 DG CLIMA.B

EU ETS revision process

EU ETS revision process European Council conclusions on the Climate and Energy Framework for 2030 of October 2014 Commission proposal adopted on 15 July 2015 Trilogues from April to 8 November 2017 EP plenary vote on revised EU ETS agreement on 6 February 2018 followed by Council's agreement on 27 February 2018 Published in Official Journal on 19 March 2018 Directive (EU) 2018/410 (2018/L 76/3) Entry into force on 8 April 2018

Main elements of the trilogue agreement

The triangle of interrelated issues Free allocation and carbon leakage Low-carbon funds EU ETS strengthening The triangle of interrelated issues Strengthening of the EU ETS: Increase the linear reduction factor (LRF) to 2.2% per year; Measures related to the Market Stability Reserve; Voluntary cancallation of allowances and a Review Clause in view of implementation of Paris Agreement Low Carbon Funding: Innovation fund with 400 M allowances to support innovation in renewables, Carbon Capture and Storage as well as breakthrough technologies in industries in all MS. Modernisation Fund: 308 M allowances (2% of the total) to Support modernisation and just transition of energy systems in 10 low income Member States and Art. 10c derogation (optional): (not more than 36% of the allowances to be auctioned by the MS over the period, this value can be increased to 54% of the allowances to be auctioned by the MS for the allowances are used for the purposes of solidarity, growth and interconnections). M allowances to support modernisation of energy sector through free allocation to the power sector in 10 low income MS. Free allocation and carbon leakage: I will go into more details in the next slides.

Free allocation / carbon leakage

Free allocation / carbon leakage - Overview Overarching aim: prevention of a correction factor Free allocation 'buffer‘ of up to 3% may be taken from auctioning volume Benchmark update to preserve ambition level More focused carbon leakage rules Indirect cost compensation continued Better alignment with production changes and New Entrants Reserve Free allocation "buffer": A 3% share of the auctioning volume can be used, if needed to increase the supply of allowances to allocate for free to avoid CSCF. The Directive continues to allow for Indirect cost compensation to sectors which are exposed to a significant risk of carbon leakage because of costs related to GHG emissions passes on in electricity prices. Compensation is subject to State Aid rules. Dedicated Guidelines will be reviewed. New Entrants Reserve: Left-overs from NER in phase 3 plus 150M allowances? MGA: Left-overs from phase 3 plus 200 million allowances from MSR (source: Revised ETS Directive, Article 10a 7)

Structure of the EU ETS in Phase 4 (15.5 billion allowances) Free allocation to industry: 43% Auctioning by Member States: 57% minus Innovation Fund, Modernisation Fund and Free allocation buffer of 3%. Can you calculate this? Total number of allowances: 15.5 billion allowances (source: from title and slide, in line with own calcualtion from data below) Free allocation: Around 6.3 billion allowances will be allocated for free to companies over the period 2021-2030 (source: DG CLIMA Website, 43% of total allowances discounting 325 million allowances for innovation fund). Innovation Fund: 400 million allowances (325 from free allocation and 75 million from auctioning) (source: Revised ETS Directive, art 10a. 8). Modernisation Fund: 308 million allowances (source: Revised ETS Directive, Article 10, 2% of total allowances) Free allocation buffer: 462 million allowances (source: Revised ETS Directive, recital 8, 3% of total allowances) Auctioning: 8 billion allowances (source: own calculation from previous data). * Allowances dedicated for auctioning that may be converted

Free allocation 'buffer' Some 450 million allowances (3% of cap) is allocated as a potential 'buffer' to increase the amount available for free allocation, if needed, to avoid cross sectoral correction factor Two allocation phases (2021-2025 and 2026-2030) 'Buffer' available for entire decade; clarity on extent needed in 2025 If not needed, allowances used to top-up low- carbon funding mechanisms and returned to auction volume

More focused carbon leakage rules Binary approach to carbon leakage Sectors exposed to significant carbon leakage risk: 100% free allocation; less exposed sectors: 30 % phased-out after 2026 until 2030 Carbon leakage list valid for 10 years Principle: quantitative assessment based on trade intensity multiplied with emission intensity (threshold: 0,2) Qualitative and disaggregated assessment possible (second level assessment) for sectors between 0,15 and 0,2 and a limited number of sub-sectors (Prodcom) Current carbon leakage list prolonged until 2020

More focused carbon leakage rules Commission Notice on the preliminary carbon leakage list 2021-2030 was published in the Official Journal on 8 May 2018 (2018/C 162/01): 44 sectors qualify directly for the 2021-2030 Carbon Leakage List; 12 sectors and 16 sub-sectors/products are eligible to apply for further assessments (based on criteria set in the revised EU ETS Directive (EU) 2018/410, Article 10b paragraphs 2 and 3).

Implementation

Free Allocation implementation measures 2021-2030 5 legal acts identified by the revised ETS Directive relate to the free allocation rules: Delegated act on the Carbon Leakage List 2021-2030 Delegated act on general free allocation rules Implementing act on the benchmark values 2021-2025 Implementing act on adjustments to allocation due to production level changes NIMs Decision 2021-2025

ETS implementation measures 2021-2030 A better slide exists with the deadline for data collection and delegated / implementing acts mentioned instead of EC Decision. MGA: Updated.

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