1. Climate Action Lessons from the ESD compliance cycle and its flexibility mechanisms: Current state of discussions Jürgen Salay European Commission, DG Climate Action 21 May 2015 The views expressed are purely those of the writer and may not in any circumstances be regarded as stating an official position of the European Commission.

2. Climate Action Today's presentation 1.Lessons learned 2.Consultations 3.Options

3. Climate Action Why are domestic flexibility mechanisms becoming more important after 2020? They enable cost-effectiveness and fairness by ensuring that higher income Member States for which domestic target achievement would be costly can achieve less costly reductions elsewhere in the EU. They make solidarity and fairness practical by channelling investment resources to lower income Member States which have higher cost-effective potentials. They provide an insurance against unforeseen deviation from projected emissions.

4. Climate Action AEA transfers: Lessons learned? Member States already have considerable flexibility in managing their AEAs and engage in transfers with each other Current AEA transfer system in ESD is based on voluntary agreements between Member States with limited reporting obligations on concluded transfers. No active role for Commission in facilitating transfers. Existing system has not been tested yet. Very little activity due to lower-than-expected demand and the fact that we are early in the compliance period. Situation will be different after 2020 > stronger demand for AEA purchases but will it be sufficient for facilitating trading and a liquid market?

5. Climate Action Summary of information submitted by Member States (end of 2014) Don't plan to sell or buy Intending to sell Intending to buy UndecidedDid not submit 8 MS10 MS3 MS6 MS2 MS

6. Climate Action Summary of information submitted by Member States (end of 2014) Indicated supply from potential sellers Indicated demand from potential buyers ~80 mln AEAs~10 mln AEAs

7. Climate Action Member States were cautious in identifying their needs to buy and sell AEAs, so the numbers in the previous tables are preliminary Member States currently not planning to use the AEA transfers reserve the right to make use of this flexibility at a later stage The amount of AEAs currently indicated as available for sale is well below the surplus of AEAs over the ESD compliance period calculated on the basis of current projections Summary of submitted information

8. Climate Action 1.Lessons learned 2.Consultations 3.Options

9. Climate Action Consultations with stakeholders Public consultation launched 25 March 2015, ends 18 June 2015 Consultation with Member States experts 28 April in Climate Change Committee Working Group 2 Analysis of different options in Commission impact assessment during 2015

10. Climate Action Summary of consultation 28 April 25 MS participated Flexibility instruments should be simple, transparent and easy to use for Member States Stronger incentives needed Consensus on proposed objectives & criteria >> Several options favoured, most MS open to different options, no clear "favourite option" Some MS argued for mandatory transfers under certain conditions, most MS for voluntary ones

11. Climate Action Consultation 28 April: Consensus on criteria for AEA transfers  Cost-effectiveness  Market information (price and conditions)  Liquidity  Additional and certain investments for sellers  Environmental integrity  Transparency

12. Climate Action Options 1.Auctioning 2.Project-based solutions 3.Clearing house or trading platform 4.Increased limit for ex-ante transfers (now 5%) Most MS were open to combinations of options

13. Climate Action AEA transfers: Things to consider Mandatory or voluntary solutions National level or EU-wide level rules or/and platforms Any additional support systems needed MS need to plan ahead and allocate necessary budgets in time to allow timely engagement on transfer markets Trade-off between flexibility instruments and compliance system (more flexibility might demand stricter rules for compliance).

14. Climate Action ESD: Annual compliance cycle 1.GHG inventory data submitted by Member States (15 January) 2.Annual review of submitted inventory data (first half yr) 3.Commission Decision publishing the reviewed inventory data and setting ESD emissions for the reported year 4.Use of flexibilities to close any compliance gap in the Union Registry during a period of 4 months 5. Automatic compliance check (end of year)