In October 2014, the European Council endorsed an objective of cutting at least 40 % domestic greenhouse gas (GHG) emission in 2030 compared with 1990 levels. The EU emissions trading system (EU ETS) is the cornerstone of Europe's ambitious climate policy, covering around 40 % of GHG emissions in the EU.

On 15 July 2015 the European Commission submitted a legislative proposal to revise the EU ETS (COM(2015)0337) for 2021-2030 period. The proposal envisages achieving a 43 % reduction in GHG emissions by 2030 in comparison with 2005 levels, in the sectors covered by the ETS. To this end, it proposes:

• a new annual emissions reduction rate – a linear reduction factor (LRF) of 2.2 % (compared to 1.74 % currently);
• to allocate 57 % of emission allowances to auctioning and distribute the remaining 43 % free of charge;
• to distribute 10 % of ETS auctioned allowances to those Member States with the lowest GDP per capita for the purpose of solidarity and growth;
• to addresses the problem of the relocation of production outside the EU – carbon leakage – by introducing two categories of energy-intensive industries most exposed to that risk; sectors or sub-sectors fulfilling specific criteria of carbon leakage exposure will receive free allowances corresponding to all or part of their emissions;
• a mandatory earmarking of revenues from the sale of 450 million allowances for an innovation fund in order to further extend support for low-carbon innovative technologies;
• a possibility for Member States to use a share of carbon auctioning for assistance to developing countries for climate adaptation and mitigation;
• creation of a modernisation fund, which will be worth 2 % of ETS allowances; it will promote the renewal of the energy infrastructure and support the reduction of GHG emissions in Member States with GDP per capita under 60 % of the EU average.

In the European Parliament two committees shared the competence for adopting a position on the proposal (Rule 54 on associated committee of the European Parliament Rules of Procedure). The Committee on the Environment, Public Health and Food Safety (ENVI) was the committee responsible, but issues relating to carbon leakage and the innovation and modernisation funds fell within the competence of the Committee on Industry, Research and Energy (ITRE), which was an associated committee on this file.

The ITRE committee adopted its opinion on 13 October 2016. On 15 December 2016, the ENVI committee adopted its report. On 15 February 2017, the European Parliament adopted its first reading position. Key points of the position are:

• the linear reduction factor after 2021 shall be at 2.2 %, however the rate ‘shall be kept under review with a view to increasing it to 2.4 % by 2024 at the earliest’;
• 800 millions of allowances shall be taken out from the Market Stability Reserve as of 1 January 2021, this will remove two times more allowances from the market (24 %) than foreseen in the Commission proposal (12 %);
• more allowances (up to 5 % of the total) could be allocated for free to industry most exposed to the risk of carbon leakage if needed to avoid application of the cross sectoral correction factor;
• all revenues generated from the auctioning of allowances shall be earmarked for funding green-energy and other projects fighting climate change;
• a new chapter is proposed to tackle maritime CO2 emissions;
• aviation emissions should be tackled by allocating from 2021 to the aviation sector 10 % of allowances less compared to the 2014-2016 average; auctioning revenues from aviation will be used for climate action;
• the innovation fund shall be strengthened with 200 million additional emission allowances;
• a new Just Transition Fund, financed from 2 % of auctioning revenues, shall be created to address negative impacts on the labour market.

The Council adopted its general approach on 28 February 2017. The key points of its position are:

• the annual linear reduction factor should be 2.2 % (as proposed by the Commission);
• the share of allowances to be auctioned between 2021 and 2030 should remain at 57 % (as proposed the Commission); and the reduction should amount up to 2 % of the total quantity;
• the amount of allowances going into the Market Stability Reserve should increase until 31 December 2023, one year longer than proposed by Parliament; from 2024 the allowances held in the reserve above the total number of allowances auctioned during the previous year should be cancelled.

Interinstitutional negotiations between the Parliament, the Council and the Commission were concluded on 9 November 2017. The main elements of the informal trilogue agreement are:

• the linear reduction factor will be 2.2 % from 2021, as proposed by the Commission;
• each year from 2019 to 2023, 24 % of the cumulative surplus of allowances will go to the Market Stability Reserve; from 2023 the allowances held in the reserve above the total number of allowances auctioned during the previous year should be cancelled;
• conditional lowering of the auction share by 3 % of the total quantity if needed, to avoid application of the cross-sectoral correction factor (this is between the 5 % proposed by Parliament and 2 % proposed by Council);
• Member States may voluntarily cancel allowances to offset national climate and energy policies that reduce the demand;
• the modernisation fund will not be used to finance coal-fired generation (as demanded by Parliament), with the exception of plants used for district heating in the two poorest Member States, provided that they offset by using an equivalent amount of free allocation for the modernisation of the energy sector for non-coal investments.

The Parliament approved the text in plenary session on 6 February 2018, followed by formal approval by EU Member States on 27 February 2018. The final act was signed on 14 March and published in the Official Journal on 19 March 2018. The Directive entered into force on 8 April 2018. Member States have to transpose it by 9 October 2019.

References:

• EP Legislative Observatory, Procedure file on revision of the EU ETS for period post 2020, 2015/0148 (COD)
• European Commission, Proposal for a directive to enhance cost-effective emission reductions and low-carbon investments, COM(2015)0337
• European Parliament, Environment committee report on the legislative proposal to revise the EU ETS for period post 2020, 2015/0148(COD)
• Council, General approach on the Proposal for a Directive to enhance cost-effective emission reductions and low-carbon investments (First reading), 28 February 2017, 6841/17
• European Commission, EU Emissions Trading System: landmark agreement between Parliament and Council delivers on EU's commitment to turn Paris Agreement into reality, Press release, 9 November 2017
• European Parliament, CO2: plans to cut emission allowances and fund low-carbon innovation agreed, Press release, 9 November 2017
• Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814

Further reading:

• European Parliament, EPRS, Post-2020 reform of the EU Emissions Trading System, Briefing, November 2017
• European Parliament, EPRS, EU Emissions Trading System (EU-ETS): cost-effective emission reductions and low-carbon investments, Initial Appraisal of a European Commission Impact Assessment, September 2015
• European Parliament, EPRS, Implementation Appraisal: Climate Action. Greenhouse Gas Emissions and the EU Emissions Trading System, Briefing, September 2015

Author: Gregor Erbach, Members' Research Service, legislative-train@europarl.europa.eu

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