COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the document DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757

EN EN
EUROPEAN
COMMISSION
Brussels, 14.7.2021
SWD(2021) 601 final
PART 4/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Directive 2003/87/EC establishing a system for greenhouse gas emission
allowance trading within the Union, Decision (EU) 2015/1814 concerning the
establishment and operation of a market stability reserve for the Union greenhouse gas
emission trading scheme and Regulation (EU) 2015/757
{COM(2021) 551 final} - {SEC(2021) 551 final} - {SWD(2021) 557 final} -
{SWD(2021) 602 final}
Europaudvalget 2021
KOM (2021) 0551 - SWD-dokument
Offentligt
Table of contents
LIST OF FIGURES ........................................................................................................................................ 3
LIST OF TABLES.......................................................................................................................................... 4
ANNEX 9: DETAILED ANALYSIS ON THE FRAMEWORK TO ADDRESS THE RISK OF
CARBON LEAKAGE .......................................................................................................................... 6
25 ANALYSIS OF THE IMPACTS OF RAISING THE AUCTIONING SHARE TO 70%.................... 6
Environmental impacts associated with an increased auction share .................7
25.1
Economic effects associated with an increased auction share...........................7
25.2
26 EVIDENCE ON EXISTENCE OF CARBON LEAKAGE.................................................................. 9
27 FREE ALLOCATION FORMULA...................................................................................................... 9
28 CARBON LEAKAGE LIST............................................................................................................... 11
29 DESIGN ELEMENT TO MAKE FREE ALLOCATION CONDITIONAL ON
DECARBONISATION EFFORTS..................................................................................................... 13
30 DESIGN ELEMENT TO BROADEN THE SCOPE OF FREE ALLOCATION............................... 14
31 INDIRECT COST COMPENSATION............................................................................................... 18
Introduction .....................................................................................................18
31.1
Target for maximum indirect cost compensation............................................19
31.2
Further harmonisation of indirect cost compensation .....................................20
31.3
Phase-out of indirect cost compensation .........................................................21
31.4
Conclusion.......................................................................................................22
31.5
ANNEX 10: DETAILED ANALYSIS ON THE ECONOMIC AND SOCIAL IMPACTS OF THE
MARITIME INITIATIVE .................................................................................................................. 23
32 IMPACTS OF THE DIFFERENT MARITIME GEOGRAPHICAL SCOPES.................................. 23
33 IMPACTS ON THE EU INTERNAL MARKET............................................................................... 25
Impacts on competition between shipping operators ......................................25
33.1
Impacts on modal shift ....................................................................................26
33.2
Impacts on the price of a selection of ten commodities ..................................28
33.3
Impacts on EU countries and regions heavily dependent on shipping............29
33.4
Economic impacts on imports/exports and sectors heavily dependent
33.5
on shipping and ports.......................................................................................36
34 CUMULATIVE REVENUES GENERATED OVER THE PERIOD 2020-2050.............................. 41
35 IMPACTS ON INNOVATION, POTENTIAL TO STIMULATE THE UPTAKE OF
ALTERNATIVE FUELS AND INNOVATIVE TECHNOLOGIES ................................................. 41
36 IMPACTS AT GLOBAL LEVEL ...................................................................................................... 42
Impacts on trade ..............................................................................................42
36.1
Impact on global climate actions.....................................................................43
36.2
Impacts on LDC and SIDS..............................................................................45
36.3
37 SOCIAL IMPACTS............................................................................................................................ 47
Impacts on employment ..................................................................................47
37.1
Impact on vulnerable households ....................................................................48
37.2
2
38 CASE STUDIES EXPLORING THE POTENTIAL RISK OF CARBON LEAKAGE
LINKED TO THE MARITIME POLICY OPTIONS......................................................................... 49
Methodology....................................................................................................50
38.1
Modal shift case study.....................................................................................50
38.2
Transhipment case study .................................................................................52
38.3
Evasive port call case study.............................................................................54
38.4
ANNEX 11: DETAILED ANALYSIS ON THE INNOVATION FUND.................................................... 58
39 TYPES OF PROJECTS THAT CAN BE SUPPORTED BY THE INNOVATION FUND............... 58
40 LEVEL OF SUPPORT FOR PROJECTS UNDER THE INNOVATION FUND ............................. 59
41 CARBON CONTRACT FOR DIFFERENCE.................................................................................... 61
Problem definition and rationale .....................................................................62
41.1
41.1.1 GHG emissions of energy-intensive sectors............................................... 62
Why additional policy instruments for early deployment? .............................62
41.2
Carbon Contracts for difference (CCfD’s)......................................................65
41.3
ANNEX 12 MODERNISATION FUND ..................................................................................................... 67
42 OVERALL CONTEXT ...................................................................................................................... 67
43 INVESTMENTS TO BE SUPPORTED............................................................................................. 68
Priority investments.........................................................................................68
43.1
Non-Priority investments.................................................................................69
43.2
44 GOVERNANCE ................................................................................................................................. 69
ANNEX 13: AUCTIONING REVENUES AND DISTRIBUTIONAL ISSUES BETWEEN
MEMBER STATES............................................................................................................................ 71
45 OVERVIEW OF POSSIBLE ETS REVENUES ................................................................................ 71
46 MEMBER STATE DISTRIBUTIONAL IMPACTS OF STRENGTHENING THE
EXISTING ETS.................................................................................................................................. 73
47 MEMBER STATE DISTRIBUTIONAL IMPACTS OF A NEW ETS FOR BUILDINGS
AND ROAD TRANSPORT OR ALL FOSSIL FUELS..................................................................... 78
48 MEMBER STATE DISTRIBUTIONAL IMPACTS OF AVIATION AND MARITIME
ETS ..................................................................................................................................................... 85
ANNEX 14: 2030 CLIMATE TARGET PLAN POLICY CONCLUSIONS .............................................. 88
49 2030 CLIMATE TARGET PLAN POLICY CONCLUSIONS.......................................................... 88
3
LIST OF FIGURES
Figure 77: Share of CO2 emissions covered for different geographical scope based on
past EU maritime transport MRV data (EEA including EU28)........................ 23
Figure 78: Share of CO2 emissions covered for different geographical scope and
different ship type.............................................................................................. 24
Figure 79: CO2 emissions related to intra EEA and extra EEA voyages per average
voyage distance and ship size (dwt).................................................................. 24
Figure 80: CO2 emissions per origin of companies for different geographical scopes.... 25
Figure 81: Proportion of gross weight of goods handled in key EU 27 ports by
Member States in 2019...................................................................................... 30
Figure 82: Extra-EU trade (imports and exports) by sea as a proportion of total extra-
EU trade in 2019, measured in € ....................................................................... 32
Figure 83: Sectoral analysis of transportation and storage value added and
employment in the EU-27 in 2017 (% share of sectoral total).......................... 33
Figure 84: Distribution of reported ice class in the EU maritime transport MRV
regulation (Inner-circle 2018, Outer-circle 2019) ............................................. 34
Figure 85: Passengers embarked and disembarked in all port ......................................... 35
Figure 86: Number of passengers embarked and disembarked per inhabitant, in 2019... 36
Figure 87: Impact on a) EU 27 GDP and b) GDP components in 2030 and 2050 as a
result of the measure compared to the baseline................................................. 37
Figure 88: Evolution in the production of fuels for the maritime sector.......................... 39
Figure 89: Impacts on the production of affected sectors as a result of the measure
compared to the baseline in 2030 and 2050 in the EU 27................................. 40
Figure 90: Impacts on the employment of fuel suppliers as a result of the measure
compared to the baseline in 2030 and 2050 in the EU 27................................. 47
Figure 91: Impacts on the employment of non-energy sectors as a result of the
measure compared to the baseline in 2030 and 2050 in the EU 27................... 48
Figure 92: Barcelona – Civitavecchia route ..................................................................... 51
Figure 93: Main transhipment hubs worldwide: container volumes transhipped, 2011 .. 53
Figure 94: Share of specific sectors of total ETS emissions – EU-28 (based on the
average emissions over the period 2016-19)..................................................... 62
Figure 95: Breakeven cost estimates................................................................................ 63
Figure 96: Marginal abatement costs of new technologies .............................................. 64
Figure 97: Illustration of the policy mechanism of the Carbon Contract for Difference. 66
4
LIST OF TABLES
Table 54: Impacts of a 70% auction share on free allocation for different cap trajectory
options ................................................................................................................. 8
Table 55: Total auction volumes under different cap scenarios comparing a 57% and a
70% auction share (in millions, for the period 2021-2030.................................. 8
Table 56. Carbon leakage indicators of selected sectors at risk of carbon leakage.......... 11
Table 57: Indirect cost compensation by Member State .................................................. 19
Table 58: Share of the global maritime fleet by type of vessel and size category ........... 26
Table 59: Cumulative additional total revenues generated 2020 - 2050 by policy
options (billion Euro 2015) ............................................................................... 41
Table 60: Top global trade partners (in value) and share of imports and exports values
from and to the EU in 2019, including all freight transport modes................... 43
Table 61: Main LDC and SIDS importers from the EU................................................... 45
Table 62: Main LDC and SIDS exporters to the EU........................................................ 46
Table 63: Change in Welfare by Income Decile (EU-27 – Hicksian Equivalent
Variation – D1 is the lowest income decile) ..................................................... 49
Table 64: Total cost per trip for shipping operators......................................................... 51
Table 65: Percentage cost difference of transhipment operations in Algeciras under the
proposed policy options illustrated for two different distances from the port
of origin to the transhipment port...................................................................... 54
The analysis looked at the increase in cost for calls to Algeciras linked to the different
options. The results are showed in Table 56. According to feedback from key
stakeholders, the cost increase estimated in case of an open ETS by 2030
would not favour a shift in transhipment activities. However, the closed ETS
policy scenario (MAR2_MEXTRA50) would likely incentivise companies to
move their transhipment activities to Tanger Med............................................ 54
Table 67: Port evasion case: Algeciras- Tanger Med....................................................... 55
Table 68: Distance turning points across the proposed policy options for routes to the
port of Algeciras with potential evasive port calls in Tanger Med ................... 55
Table 69: Summary of risk of evasive port call for policy options in 2030..................... 57
Table 70: Size and distribution of the Modernisation Fund in terms of allowances........ 67
Table 71: Size and distribution of the Modernisation Fund in monetary terms............... 68
Table 72: Estimates of ETS auction revenues available for MS regular auctions, Own
Resources and MS solidarity/redistribution per ETS sector (in bn EUR)......... 72
Table 73: Verified emissions (“VE”) 2013 to 2019, projected emissions 2020 to 2030
and projected differences in emissions between the REF scenario (with
current ETS policy framework) and the MIX scenario per Member State–
scope is power and industry. ............................................................................. 75
Table 74: Existing ETS total solidarity allowances, in million allowances (including
10% redistribution and Modernisation Fund), and changes under the
different ETS strengthening options –for period 2021-30 ................................ 77
Table 75: Additional reduction in percentage points between 2025 and 2030 in the
transport and buildings sector together, per Member State, compared to the
Reference scenario ............................................................................................ 79
Table 76: Illustration of applying current ETS solidarity elements to the new ETS for
buildings and transport (EXT1)......................................................................... 82
5
Table 77: Illustration of applying different currently used distribution keys of
allowances for the new ETS (buildings plus transport) across Member States, 83
Table 78: Average rise in total household expenditures in the residential sector, as a
percentage of consumption per income group, average for Member States of
a certain income level, MIX and MIX-CP percentage point difference
compared to Reference...................................................................................... 85
Table 79: Key policy conclusions of the Climate Target Plan......................................... 89
6
Annex 9: Detailed analysis on the framework to address the
risk of carbon leakage
The total ETS cap is divided into a part that is auctioned and a part that is made available
to installations for free to address the risk of carbon leakage. For the period 2021-2030,
the total cap is set to be divided in a 57% auction share and a 43% free allocation share,
once the Innovation and Modernisation Funds as well as the free allocation buffer of 3%
are deducted from the cap.
Based on the results of the OPC, there was no agreement on how a strengthened ETS cap
should be divided between auctioning and free allocation. While some stakeholders,
including the majority of EU citizens and academic/research institutes and some NGOs,
argued for an increase in the auction share, many private sector respondents preferred the
continuation of the current auction share of 57%. Many respondents selected the option
“other” and provided individual replies, for instance asking to abolish free allocation
(NGOs) or stressing the risk of carbon leakage and the need to avoid the application of
the cross-sectoral correction factor (private sector).
25 ANALYSIS OF THE IMPACTS OF RAISING THE AUCTIONING SHARE TO 70%
The starting point of the ETS Directive is that in principle, all allowances should be
auctioned, and free allocation is granted transitionally1
. The rule is that everything that is
not allocated for free is ultimately auctioned. Providing a percentage figure for the
auction share increases transparency, predictability and the functioning of the carbon
market.
Increasing the auctioning share would increase revenues that can be used to invest in
climate-related purposes, but it would also reduce the number of allowances available for
free allocation and therefore reduce the protection against the risk of carbon leakage2
.
In this section we analyse the environmental and economic impacts of the discarded
option of increasing the auction share to 70% (increasing auction revenues and
1
Recital (8) ETS Directive: “The auctioning of allowances remains the general rule, with free allocation as
the exception. (…)”
2
In 2019, a total of 77% of the revenues were used, or are planned to be used, for climate and energy
purposes. https://ec.europa.eu/clima/sites/clima/files/strategies/progress/docs/com_2020_777_en.pdf,
page 16.
7
decreasing free allocation)3
from the year the revised cap strengthening takes effect, i.e.
2024 (AMB2a, AMB2b) or 2026 (AMB1; AMB3c) – AUS1.
Environmental impacts associated with an increased auction share
25.1
A change in the auction share may have an environmental impact, because it influences
both the ETS’s revenues and its compliance costs. An increase in the auctioning share
raises more revenue, which can be used for climate purposes that reduce emissions. It
also reduces the free allocation share, resulting in a stronger carbon price signal but also
increasing the likelihood of triggering the CSCF, resulting in additional carbon leakage
risk.
Economic effects associated with an increased auction share
25.2
Increasing the auction share means reducing the free allocation volume, which in turn has
impacts on the risk of carbon leakage.
To determine the final free allocation volume, the contribution to the Innovation Fund (in
the existing ETS, 325 million allowances over the 2021-30 period are sourced from free
allocation) needs to be taken into account just as the free allocation buffer of 3% of the
cap which is sourced from the auction volume and used in case the CSCF risks being
triggered.
An update of the auction share to 70% from 2024 or 20264
onwards while keeping all
other elements unchanged will reduce free allocation volumes and hence impact
competitiveness through an early triggering of the CSCF (Table 45). This effect is
significant: comparing Table 45 to Table 6 (main text), the CSCF may be triggered
between 1 and 3 years earlier and lead to a 25% to 36% lower free allocation budget
compared to the respective cap scenario without increase of the auction share.
3
To note that one way in which the auctioning share would be increased, but which we do not consider
here, is the introduction of a CBAM for a sector and the subsequent switch of that sector’s free
allocation share into allowances to be auctioned. Alternatively, a CBAM with the current auction share
(option 1) would act as increasing the availability of free allowances for the remaining sectors.
8
Table 54: Impacts of a 70% auction share on free allocation for different cap trajectory
options
Baseline AMB1
and
AUS1
AMB2a
and
AUS1
AMB2b
and AUS1
AMB2c
and
AUS1
AMB3c
and
AUS1
Total cap (2021-30) -
EU-27+EEA
13781 12 596 12 201 11 712 11 845 12 270
Auction share 57%
70% from 2024 for AMB2a, AMB2b and AMB2c;
and from 2026 for AMB1 and AMB3c
Free Allocation
(excluding
Innovation Fund)
5601 4419 3931 3785 3825 4322
Free allocation
buffer (3%)
413 378 366 351 355 368
Delta to baseline for
total free allocation
- -20% -29% -31% -30% -22%
Year when CSCF is
triggered
- 2028 2026 2026 2026 2028
Average CSCF for
the period 2026-30
100% 70% 52% 46% 47% 66%
On the other hand, an increased auctioning share will raise additional revenues and
reinforce incentives to reduce emissions. Table 46 below shows that the number of
allowances auctioned over the period 2021-2030 would roughly be between 600 million
and 1 billion higher with a 70% share compared to a 57% share (the difference depending
on the cap scenario, excluding MSR impacts).
Table 55: Total auction volumes under different cap scenarios comparing a 57% and a
70% auction share (in millions, for the period 2021-20305
Auction share Current Legislation AMB1AMB2aAMB2bAMB2cAMB3c
57% 7.091 6.475 6.269 6.015 6.084 6.305
70% 7.147 7.259 6.941 7.028 6.935
For the avoidance of doubt, this analysis does not take into account the increase of the
auctioning of the share that may be the consequence of implementing a CBAM for
5
Indicative cumulative figures for regular auctioning and 10% solidarity redistribution, i.e. funds and free
allocation buffer are not accounted.
9
selected sectors. The possible impact that ‘moving’ relatively large recipients such as the
iron and steel sectors and the cement sector from free allocation to CBAM has been
quantified in Section 6.1.2.2.5.
26 EVIDENCE ON EXISTENCE OF CARBON LEAKAGE
Literature on the ETS has found limited evidence of carbon leakage or a related loss of
competitiveness in the initial ETS phases. Joltreau and Sommerfeld (2019) estimate that
competitiveness impacts in the first two phases of the EU ETS were minimal. They argue
that large allowance over-allocation in the initial phases, combined with the ability to
pass costs onto consumers in some sectors are the cause for the lack of competitiveness
impacts6
. Branger, Quirion, and Chevallier (2016) estimate there is no evidence of carbon
leakage in steel and cement during Phases 1 and 2 of the EU ETS7
. Many other factors
like the cost of production capital, market access or the availability of labour are
important for production decisions. In most cases, carbon liabilities are likely only a
small component of the production and investment decision, meaning the risk of leakage
is low. The relatively low importance of energy costs for EU industries may also limit the
competitiveness impacts of the EU ETS. However, the EU ETS has provisions to protect
against carbon leakage risk, for example free allocation of allowances to EITE sectors
and state aid for indirect costs. This may also help to explain why there has been no
evidence of leakage to date. Additionally, EUA prices have been relatively low thus far,
so carbon costs have only played a small part in the production decision for periods
studied. In the long term, with increasing proliferation of carbon pricing globally, the
scope for transferring productive capacity closes; therefore, the risk of competitiveness
impacts and leakage is reduced. Free allocation to industries which can pass through
costs may lead to windfall profits for firms (assets rising more than liabilities).
27 FREE ALLOCATION FORMULA
The level of free allocation granted to an installation to address the risk of carbon leakage
is the result of a calculation:
6
Joltreau, E., & Sommerfeld, K. (2019). Why does emissions trading under the EU Emissions Trading
System (ETS) not affect firms’ competitiveness? Empirical findings from the literature. Climate policy,
19(4), 453-471.
7
Branger, F., Quirion, P., & Chevallier, J. (2016). Carbon leakage and competitiveness of cement and steel
industries under the EU ETS: much ado about nothing. The Energy Journal, 37(3).
10
Free allocation = Benchmark × Historical Activity Level × Carbon Leakage Exposure
Factor (CLEF) × Cross-Sectoral Correction Factor (CSCF)
The following main factors are taken into consideration:
 the benchmark applicable to the different products manufactured in the
installation and, when this is not possible, its energy inputs or process emissions.
Benchmarks have been used since 2013 and reflect in principle the average
emissions of the 10% best installations in the ETS for different sectors;
 the historical activity level of the installations, which is updated when the average
activity level of the two preceding years changes by more than 15%;
 the carbon leakage exposure factor (CLEF) that takes into consideration the
carbon leakage risk for the specific sector to which the installation belongs.
Currently, this factor can only take two values: 100% for sectors considered to be
at risk of carbon leakage, and 30% (reducing to 0% by 2030) for sectors not at
risk of carbon leakage, with the exception of district heating where it remains set
at 30% until 2030. In practice, the current impact of this factor is limited, as
around 94% of the emissions from industrial installations originate from sectors at
risk of carbon leakage;8
 the cross-sectoral correction factor (CSCF): if the free allocation demand exceeds
the amount available for free allocation that is determined by the ETS Directive9
,
free allocation is adjusted in a uniform manner by applying the CSCF, which
reduces the free allocation received by all installations. This was the case in
phase 3.
Free allocation is granted for direct emissions. However, in the case of some product
benchmarks, the exchangeability of fuel and electricity is taken into account (in order to
account for production processes where either fuel or electricity can be used to produce
8
European Court of Auditors, The EU’s Emissions Trading System: free allocation of allowances needed
better targeting, 2020.
9
The total amount available for free allocation depends on the ETS cap trajectory, the mandatory auction
share and the amount earmarked for the innovation fund.
11
heat or mechanical energy). In these cases, an additional factor is used which is the ratio
of the direct emissions to the total emissions10
.
28 CARBON LEAKAGE LIST
The impacts of the tiered approach were assessed using the carbon leakage indicators of
Table 47. These indicators were calculated for the carbon leakage list applicable for the
period from 2021 to 2030, based on data for the period from 2013 to 2015. The use of
more recent data, including of updated average emission factors for electricity production
would obviously lead to different results.
Table 56. Carbon leakage indicators of selected sectors at risk of carbon leakage
NACE
code
Sector
Carbon leakage
indicator (CLI)
19.10 Coke oven products 20.119
19.20 Refined petroleum products 3.222
23.51 Cement 2.455
20.15 Fertilisers and nitrogen compounds 2.418
24.10 Basic iron and steel and of ferro-alloys 2.121
20.13 Other inorganic basic chemicals 1.638
23.11 Flat glass 1.457
14.11 Leather clothes 1.147
23.31 Ceramic tiles and flags 1.049
20.14 Other organic basic chemicals 1.049
24.43 Lead, zinc and tin production 1.031
23.52 Lime and plaster 1.021
20.11 Industrial gases 1.021
17.11 Pulp 0.987
17.12 Paper and paperboard 0.836
23.13 Hollow glass 0.631
10.81 Sugar 0.630
20.17 Synthetic rubber in primary forms 0.604
20.12 Dyes and pigments 0.519
10.62 Starches and starch products 0.515
10
European Commission, Guidance Document N°2 on the harmonised free allocation methodology for the
EU ETS post 2020 - Guidance on determining the allocation at installation level, Version 15 February
2019.
12
24.51 Casting of iron 0.488
24.44 Copper 0.421
23.14 Glass fibres 0.417
23.20 Refractory products 0.412
20.60 Man-made fibres 0.412
20.16 Plastics in primary forms 0.312
24.45 Other non-ferrous metal production 0.280
24.31 Cold drawing of bars 0.259
24.20
Tubes, pipes, hollow profiles and related fittings,
of steel
0.229
23.19
Manufacture and processing of other glass,
including technical glassware
0.228
23.99 Other non-metallic mineral products n.e.c. 0.221
Source: European Commission, EU ETS phase 4 Preliminary Carbon Leakage List - Carbon Leakage
Indicator underlying data, 2018.
29 DESIGN ELEMENT TO MAKE FREE ALLOCATION CONDITIONAL ON
DECARBONISATION EFFORTS
The ETS Directive allows ETS countries to compensate sectors or subsectors at risk of
carbon leakage for incurred significant indirect costs due to electricity consumption. The
recently revised state aid rules for this indirect cost compensation introduced
conditionality provisions for granting this aid. A similar conditionality could be
introduced for free allocation covering direct carbon costs. By making free allocation
conditional on decarbonisation efforts, the specific objective of incentivising the uptake
of low-carbon technologies would be supported. This would in turn make industry more
resilient against the risk of carbon leakage in the future. Making free allocation
conditional on decarbonisation efforts would also be in line with the “Energy Efficiency
First” principle enshrined in Article 2(18) of the Governance Regulation11
.
The conditionality provisions in the state aid rules concern installations covered by the
obligation to conduct an energy audit under Article 8(4) of the Energy Efficiency
Directive. These installations need to spend a part of their compensation to implement
improvements under certain conditions. Several possibilities are given, of which one is
deemed to be the most relevant in the context of free allocation. The concerned
installations should demonstrate that they implement the recommendations made in the
framework of the energy audit, to the extent that the payback time for the relevant
investments does not exceed a certain number of years and that the costs of their
investments is proportionate. Energy efficiency investments with payback periods of up
to three years are generally considered to be economically profitable12
. Compared to that,
a conditionality with a longer payback of five years would provide stronger incentives
that are better aligned with the increased emission reduction ambition.
The introduction of conditionality is expected to have only a minor effect on the overall
framework for free allocation. If installations do not meet the criterion for conditionality,
they would see their free allocation reduced. This means that the likelihood or the extent
to which a CSCF would need to be applied would be reduced. In this sense, free
allocation would become more targeted as it would better protect sectors that are difficult
to decarbonise.
The conditionality would affect large installations that are required to carry out an energy
audit. The costs of implementing the recommendations of the energy audit would be
determined on a case-by-case basis by the auditors and will vary between the various
11
Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the
Governance of the Energy Union and Climate Action.
12
SWD(2020) 190 final.
14
sectors and installations. The conditionality would ensure that energy efficiency
investments are made where the payback periods are considered reasonable.
Furthermore, the condition that the costs should be proportionate provides some
flexibility during implementation.
The implementation of conditionality would add some complexity to the system, as MS
would need to ensure that the recommendations identified in the energy audits have been
put into practice. Nevertheless, the ETS already builds on third-party verification for the
annual reporting of emissions and activity levels. This system could be extended for
taking into consideration the conditionality of free allocation with a relatively low level
of effort, for instance by including information on the obligation to carry out audits in the
installation, the findings of the audits and the actions taken to implement them.
30 DESIGN ELEMENT TO BROADEN THE SCOPE OF FREE ALLOCATION
Under the current legislative framework, free allocation is granted up to 100% of the
relevant benchmark level. 52 product benchmarks and two fall-back benchmarks for heat
and fuels were defined for phase 3. The definitions of the processes and emissions
covered (system boundaries) are mostly based on the prevailing production routes at the
time when the benchmarks were set13
. Ongoing and future technological developments to
reduce GHG emissions might lead to situations where installations would partly or
completely lose their free allocation when decarbonising their production activities. As a
consequence, the free allocation regime could lead to unequal treatment of industrial
installations and effectively act as a barrier to the use of decarbonisation techniques.
The following potential barriers have been identified:
 Installations falling out of the scope of the ETS: This could for example happen
when installations partly replace their heat supply provided by combustion
through increased use of electricity and therefore fall below the thermal capacity
thresholds of 20 MW that apply for some activities listed in Annex I to the ETS
Directive. It could also happen when installations completely decarbonise and no
longer emit any GHGs.
 Installations falling out of the system boundary definitions of a benchmark: A few
benchmark definitions and boundaries refer to specific processes and fossil fuel
13
Commission Decision of 27 April 2011 determining transitional Union-wide rules for harmonised free
allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of the European
Parliament and of the Council.
15
inputs which might not encompass less carbon-intensive production routes. For
example, the product benchmark for hydrogen refers to steam reforming of
hydrocarbon feedstock, but the production of hydrogen through electrolysis of
water is not described.
 Benchmarks with exchangeability of fuel and electricity: For 14 of the 52 product
benchmarks, the consumption of electricity is taken into account in the
determination of the benchmark value. Therefore, the benchmark value is higher
compared to a situation where those indirect emissions would not have been
considered. However, for the purpose of free allocation, these benchmarks are
multiplied with a factor to ensure that emissions related to electricity consumption
are excluded. The factor is defined as the ratio between the direct emissions and
the total emissions, defined as the sum of direct and indirect emissions, attributed
to the sub-installation. This definition can disincentive GHG emissions
reductions. First, if an installation reduces its direct emissions through means
other than electrification and indirect emissions remain unchanged, free allocation
will decrease. Second, if an installation switches from fossil fuel to electricity as
heat source, free allocation will decrease unless it is a very carbon-intensive fossil
fuel such as coke or lignite that is replaced. This is because the factor that is used
for calculating the indirect emissions relates to electricity use. In some cases, such
installations could be eligible for indirect cost compensation, thereby mitigating
the risk of barriers to electrification. However, not all ETS countries grant
indirect cost compensation, not all benchmarks with exchangeability of fuel and
electricity correspond to sectors exposed to a genuine risk of carbon leakage due
to indirect emission costs, and the maximum aid intensity for indirect cost
compensation is generally limited to 75%.
The broadening of the scope of free allocation would provide additional incentives and/or
reduce barriers for installations to reduce GHG emissions, enabling the stronger emission
reductions required post-2030 by using low-carbon technologies to achieve climate
neutrality by 2050.
An example may illustrate this effect: A plant that decides to produce green hydrogen
from electricity instead of using the conventional natural gas-based process would, under
current rules, fall out of the ETS. The plant would thus not face carbon costs and it would
not get free allocation. In the case of a very efficient conventional fossil-fuel-based plant
that is already operating below the benchmark and can thus sell surplus allowances on
the market, these additional revenues would be lost. This would come on top of the
investment costs and the increased operating costs. Broadening the scope would
effectively prevent that those plants converting to low- or zero-carbon technologies are
facing competitive disadvantages. Once there are a few plants in a sector using low- or
zero-carbon technologies, the related benchmarks will also be further reduced during a
subsequent update. This would then provide further incentives for other plants to also
reduce their emissions.
Potential changes in the ETS Directive or relevant implementing legislation to broaden
the scope of free allocation in order to incentivise the use of low-carbon technologies
include:
16
 Avoid the use of thresholds expressed as total rated thermal inputs in Annex I to
the ETS Directive: Annex I could refer to production capacity thresholds for the
concerned activities (i.e. production or processing of ferrous and non-ferrous
metals, production of secondary aluminium, production of gypsum (products) and
production of carbon black). Furthermore, relevant activities that are currently
only covered by the activity ‘combustion of fuels in installations with a total rated
thermal input exceeding 20 MW’ could be explicitly listed, also adding
production capacity thresholds.
 Avoid that installations with partly or completely decarbonised processes fall out
of the ETS or cannot enter it: This would for example concern installations that
reduce their total rated thermal input below the aforementioned threshold values
or installations that do not have any GHG emissions due to complete
electrification or use of hydrogen as only fuel.
 Revise benchmark definitions in relevant implementing legislation: To align with
the principle of ‘one product, one benchmark’, relevant product benchmark
definitions could be redefined to remove references to specific feedstock or
production process so that they will include future low-carbon production routes.
The heat benchmark definition could be revised to include heat produced from
electricity.
 Abandon the concept of exchangeability of fuel and electricity in relevant
implementing legislation: The benchmark definitions would be revised and the
values updated in order to only take into account direct emissions. Using a
revised benchmark definition, an installation that partly electrifies would keep the
same amount of free allocation.
Regarding possible changes to benchmark-based allocation, stakeholder opinions were
divided whether additional product benchmarks or revised definitions of product
benchmarks should be introduced to incentivise innovation. While industry
representatives were more sceptical, other stakeholders were more positive (see
Annex 2).
If changes to the definitions of the activities covered by the ETS and to the boundaries
and definitions of the benchmarks used to attribute free allocation were introduced, this
could mean that more production would be eligible for free allocation. This is for
example relevant for installations producing hydrogen and ammonia which could benefit
17
from free allocation even if the hydrogen were produced via electrolysis using green
electricity. The production of these energy carriers is likely to increase in the future. The
hydrogen strategy sets the target of installing at least 6 GW of renewable hydrogen
electrolysers in the EU by 2024 and 40 GW of renewable hydrogen electrolysers by
2030.14
Each 1 GW of electrolyser capacity produces between 40 000 and 100 000 tonnes
of renewable hydrogen per year.15
With the current benchmark value for hydrogen
production of 6.84 EUAs/t, free allocation would thus be in the range of 1.6 to 4.1
million allowances in 2024 and in the range of 11 to 27 million allowances in 2030. On
the other hand, it is expected for many other sectors that low-carbon technologies rather
replace existing technologies and would thus not affect the overall framework for free
allocation. In essence, the impact depends on the extent to which low-carbon
technologies are used in the future.
If only direct emissions were to be considered for benchmark setting purposes, the
installations that electrify would have an even higher impact on the benchmark update
rates. This would push most benchmarks in which there is exchangeability of fuel and
electricity towards the maximum benchmark update rates (32% under current legislation)
therefore slightly reducing free allocation demand. On the other hand, the power sector is
decarbonising fast and this trend is expected to continue, therefore most of the
benchmarks considering the exchangeability of fuel and electricity should be updated at
high rates in any case.
In general, higher and earlier demand of innovative low-carbon technologies will likely
speed up their development and the process of reducing their costs. In the long run,
abatement costs for energy-intensive industry sectors will therefore likely decrease.
However, this positive economic impact on industry is expected to be rather limited until
2030.
The broadening of the scope of free allocation requires some changes to the ETS
Directive and related implementing legislation. Moreover, the number of installations
under the scope of the ETS could slightly increase resulting in a small increase of the
administrative burden.
Overall, it is expected that the impact of broadening the scope of free allocation on the
framework to address the risk of carbon leakage is rather limited. Nevertheless, the
likelihood or the impact of the CSCF could slightly increase. On the other hand,
14
COM(2020) 301 final.
15
https://www.hydrogen4climateaction.eu/2x40gw-initiative
18
installations using innovative technologies or electrifying would benefit from an
increased protection against the risk of carbon leakage.
The broadening of the scope would allow installations introducing innovative low-carbon
technologies to benefit (more) from free allocation. It can be expected that this would
speed up the uptake of such technologies triggering a positive and sustainable impact on
employment, i.e. for technology providers.
31 INDIRECT COST COMPENSATION
Introduction
31.1
Article 10a(6) of the ETS Directive provides that MS should adopt financial measures in
favour of sectors or subsectors which are exposed to a genuine risk of carbon leakage due
to significant indirect costs that are actually incurred from GHG emission costs passed on
in electricity prices. These financial measures need to be in accordance with State aid
rules and should not cause undue distortions of competition in the internal market. The
state aid guidelines for indirect cost compensation were revised in the period from 2018
to 2020 for their application in phase 4 of the ETS16
. Indirect cost compensation is based
on Union-wide benchmarks for electricity consumption per unit of production and on the
weighted averages of the CO2 intensity of electricity produced from fossil fuels in the
concerned geographic areas.
The revised state aid guidelines foresee to update the electricity consumption efficiency
benchmarks, the geographic areas, and the CO2 emission factors in 2025. By that time,
the Commission will also assess whether additional data is available that allow
improving the methodology used to calculate the CO2 emission factors. Finally,
following the review and possible revision of all climate-related policy instruments to
achieve the 2030 climate target (notably the ETS Directive) and the initiative for the
creation of a CBAM, the Commission will check whether any revision or adaptation of
the guidelines is necessary to ensure consistency with, and contribute to, the fulfilment of
the climate neutrality objective while respecting a level playing field.
Only 20% of the respondents in the OPC find that MS should maintain flexibility to grant
indirect cost compensation or not, subject to state aid control. 80% are in favour of some
form of change, but there is no clear majority for a preferred change. 50% of respondents
16
Communication from the Commission. Guidelines on certain State aid measures in the context of the
system of greenhouse gas emission allowance trading post-2021. OJ C 317, 25.9.2020, p. 5.
19
are in favour of further harmonisation of indirect cost compensation at EU level. The
large majority of these respondents originate from the private sector. Only four federal
authorities from MS replied to this question, out of which three were in favour of further
harmonisation, while one preferred that MS maintain flexibility. Approximately 25% of
respondents stress that the rapidly on-going decarbonisation of the electricity production
in the EU should lead to a phase-out of indirect cost compensation. The majority of these
respondents represent EU citizens and NGOs. Few respondents (5%) suggest binding
requirements so that MS granting compensation do not spend more than a fixed share of
their auctioning revenues.
Target for maximum indirect cost compensation
31.2
In accordance with the ETS Directive, MS shall seek to use no more than 25% of the
revenues generated from the auctioning of allowances for indirect cost compensation.
Each year, MS providing such financial measures are required to publish the total amount
of compensation provided per benefitting sector and subsector. The report shall also set
out the reasons if the compensation exceeds the target of 25% of the revenues generated
from the auctioning of allowances. Table 49 summarises the data published by MS on
indirect cost compensation.
Table 57: Indirect cost compensation by Member State
Member
State (1
)
Duration of
the scheme
Compensation
disbursed for indirect
costs incurred in the
preceding year
(in EUR million)
Number of
beneficiaries
(installations)
Percentage of auction
revenues spent on indirect
cost compensation
2017 2018 2019 2017 2018 2019 2017 2018 2019
DE 2013–2020 289 202 219 902 891 898 34.1 % 17.6 % 8.5 %
BE (FL) 2013–2020 46.7 31.7 35.9 107 106 107 43.6 %
27.3 % 11.4 %
BE (WL) 2017–2020 — (2
) 7.5 7.5 — (2
) 30 29 — (2
)
EL 2013–2020 12.4 16.8 16.8 52 50 50 8.4 % 8.5 % 3.2 %
ES 2013–2020 84 6 172.2 136 151 183 23 % 1.2 % 13.3 %
FI 2016–2020 38 26.7 29.1 55 58 61 40.0 % 28.2 % 11.6 %
FR 2015–2020 140 98.7 102.1 296 296 286 60.0 % 31.8 % 12.4 %
LT 2014–2020 1 0.24 0.3 1 1 1 4.8 % 0.8 % 0.3 %
LU 2017–2020 — (2
) 3.4 4.2 — (2
) 2 4 — (2
) 50 % 23.2 %
NL 2013–2020 53.5 36.9 40.3 92 96 92 37 % 19.5 % 8.0 %
SK 2014–2020 10 10 6 5 7 8 15.4 % 11.4 % 2.6 %
(1
) Poland and Romania started indirect cost compensation schemes for costs incurred from 2019 onwards.
(2
) The Walloon and the Luxembourgish compensation schemes were approved by the Commission in 2018 for costs incurred
from 2017 onwards.
20
Source: Carbon market reports for 201717
, 201818
and 201919
.
The total indirect cost compensation granted by the 10 EU MS in 2019 for costs incurred
in 2018 amounted to around EUR 633 million. That was almost EUR 200 million more
than the amount paid out in 2018. The notable increase compared to the previous year
can be explained, on the one hand, by the significant budget increase of Spain (from EUR
6 million in 2018 to EUR 172 million in 2019), and on the other hand by the slight
increase of the carbon price used to calculate the compensation
316
.
The indirect cost compensation granted by Norway in 2017, 2018 and 2019 amounted to
NOK 469 million, 513 million and 1.39 billion, respectively (equivalent to
EUR 50 million, 53 million and 141 million)20
.
Approximately half of the MS with an indirect cost compensation scheme in place
exceeded the 25 % target in 2017 and 2018, while no exceedance was reported in 2019.
Two main reasons were given by MS for exceeding the 25 % target:
 In some MS (e.g. France), the GHG intensity of the electricity produced is
relatively low which implies lower auctioning revenues. However, the same MS
might have a large cluster of electricity-intensive industries which are eligible for
indirect cost compensation.
 The carbon price used for indirect cost compensation was based on the year that
precedes the year whose carbon price was used to determine the auction revenues.
A decrease in the carbon price therefore led to an increase in the percentage of
auction revenues spent on indirect cost compensation.
Further harmonisation of indirect cost compensation
31.3
The main argument in favour of further harmonisation of indirect cost compensation at
EU level is to avoid potential market distortions, as some Members States provide
compensation while others do not. At the time of writing this document, 12 EU MS (i.e.
Belgium, Finland, France, Germany, Greece, Lithuania, Luxembourg, the Netherlands,
17
COM(2018) 842 final, 17.12.2018.
18
COM(2019) 557 final/2, 16.1.2020.
19
COM(2020) 740 final, 18.11.2020.
20
Consultation on the revision of the ETS Guidelines on certain State aid measures in the context of the
amended EU Emissions Trading Scheme 2021-2030 – response from the Norwegian Government.
21
Poland, Romania, Slovakia, and Spain) and Norway provide compensation for indirect
costs.
The option of a mandatory Union-wide compensation scheme, financed by using national
auctioning revenues, was assessed during the last revision of the ETS Directive. The
analysis indicated that more harmonised arrangements for indirect cost compensation had
benefits, but that care was needed to avoid red tape and lock-in of emission-intensive
production methods21
. Finally, the Commission proposal for a revised ETS Directive
retained the system that indirect cost compensation is granted at MS level22
. The
European Parliament and the Council agreed to this approach during co-decision.
The update of the state aid guidelines for indirect cost compensation for phase 4 of the
ETS included a number of modifications. Some of these changes aimed at reducing
potential market distortions, such as more targeted aid to fewer sectors, better calculation
of costs and updated CO2 emission factors.
Phase-out of indirect cost compensation
31.4
The GHG emission intensity of total electricity generation in the EU-27 was 45% lower
in 2018 than in 1990 (decreasing from 510 g CO2 equivalents/kWh to 281 g CO2
equivalents/kWh over the period). Since 2010, the decrease has been almost exclusively
because of the transition from fossil fuels to renewable fuels in electricity generation,
with carbon costs increasing in relevance especially since 201923
. The reduced carbon
intensity of electricity production should thus result in reduced indirect carbon costs.
However, for the purpose of calculating indirect cost compensation, only the price-setting
plants are taken into consideration, because it is the price-setting plants that determine
how much carbon costs are passed on. In the near future, it is expected that fossil-fuelled
power stations will continue to set the marginal electricity price for a significant part of
the hours. Even though fossil-fuelled power generation will likely shift from coal to gas,
carbon costs will thus continue to be passed through to consumers to a significant extent.
Moreover, these carbon costs will reflect increasing carbon prices due to the strengthened
cap. Therefore, indirect carbon costs, although potentially declining, can be considered
still relevant in the period from 2021 to 2030.
21
SWD(2015) 135 final.
22
COM(2015) 337 final.
23
European Environment Agency: Indicator assessment - Greenhouse gas emission intensity of electricity
generation in Europe, https://www.eea.europa.eu/data-and-maps/indicators/overview-of-the-electricity-
production-3/assessment, retrieved 30 April 2021.
22
Conclusion
31.5
The current and expected future trend of decarbonising electricity generation makes it
hard to justify additional measures for indirect cost compensation, but the expected
increased carbon price justifies continuing with the current approach of the ETS
Directive until 2030. The respective state aid guidelines were recently updated to adapt
them for phase 4 of the ETS, also with a view to reducing potential market distortions. In
any case, the guidelines are foreseen to be checked after the revision of the ETS
Directive and the establishment of a CBAM. Important elements of the guidelines will be
updated in 2025.
Annex 10: Detailed analysis on the economic and social
impacts of the maritime initiative
32 IMPACTS OF THE DIFFERENT MARITIME GEOGRAPHICAL SCOPES
The choice of the geographical scope is key as it directly influences the amount of CO2
emissions that would be covered by carbon pricing. The following graph illustrates that
the covered emissions can vary up to threefold depending on the selected geographical
scope.
Figure 77: Share of CO2 emissions covered for different geographical scope based on
past EU maritime transport MRV data (EEA including EU28)
Source: EMSA, 2019 data from THETIS-MRV
The two following graphs illustrate the impact of the geographical scope on market
actors. The first one shows that a measure focusing on emissions from intra-EEA
voyages (MINTRA) would typically cover most of the emissions from ro-pax ships (roll-
on/roll-off passenger vessels), passenger ships and ro-ro (roll-on/roll-off ferries carrying
cars and other wheeled cargo), as most of their voyages happen between ports located in
the EEA. On the contrary, it would only cover around a third of the emissions from
container ships and tankers, and around a quarter of the emissions from bulkers.
Addressing extra-EEA emissions would significantly increase the proportion of
emissions coming from the largest trading segments i.e. deep-sea shipping.
24
The second graph shows that, in general, intra-EEA voyages involve smaller ships on
shorter distances.
Figure 78: Share of CO2 emissions covered for different geographical scope and
different ship type
Source: EMSA, 2019 data from THETIS-MRV
Figure 79: CO2 emissions related to intra EEA and extra EEA voyages per average
voyage distance and ship size (dwt)
25
Source: 2019 EU MRV annual report on CO2 emissions from maritime transport
Finally, the graph below shows that independently from the selected geographical scope,
most of the CO2 emissions covered by carbon pricing would come from ships owned or
operated by an EEA based companies.
Figure 80: CO2 emissions per origin of companies for different geographical scopes
Source: EMSA, 2019 data from THETIS-MRV
33 IMPACTS ON THE EU INTERNAL MARKET
Impacts on competition between shipping operators
33.1
No maritime policy option is expected to put the EEA shipping operators in a
disadvantaged position compared to non EEA shipping operators. Indeed, as any policy
option will be flag-neutral, the policy will apply equally to all ships calling into EEA
ports. However, ships calling more often into EEA ports may have the advantage of
shorter pay-back periods when investing in GHG mitigation measures.
Moreover, as shown in previous analysis and as supported by some industry stakeholders
views, the use of a size threshold would not create a general distortion of trade
competition between short sea shipping and deep sea shipping activities as they are not
serving the same market (e.g. short sea shipping competes mainly with road transport).
However, as shown in the table below, exempting vessels below the threshold of 5.000
gross tonnage might advantage the ships right below that size limit in comparison to the
ones just above, particularly for general cargo ships and chemical tankers.
26
Table 58: Share of the global maritime fleet by type of vessel and size category
Vessel type Share of size by vessel type
Size category (GT) 100-400 400-5000 >5000
Oil Tankers 10.0% 39.9% 50.0%
Bulk Carriers 0.0% 0.0% 100.0%
Container ships 0.0% 6.6% 93.4%
Chemical Tankers 7.3% 36.9% 55.8%
Crude Tankers 0.0% 0.0% 100.0%
General Cargo 19.3% 72.1% 8.6%
LNG Carriers 0.0% 1.8% 98.2%
LPG Carriers 0.9% 45.5% 53.6%
Ro-Ro 3.8% 24.9% 71.3%
Cruise Ships 2.8% 24.5% 72.7%
Car Carriers 0.0% 2.8% 97.2%
Multi-purpose 0.0% 53.2% 46.8%
Ferries 38.7% 45.4% 15.9%
Refrigerated 0.0% 57.9% 42.1%
Dredgers 18.6% 52.8% 28.6%
Tugs 26.7% 66.3% 7.0%
Source: Ricardo analysis based on Clarksons24
fleet data
Impacts on modal shift
33.2
The increased cost of shipping resulting from carbon pricing could eventually cause a
shift from maritime transport to other modes of transport, provided that those are not
covered by similar measures or carbon pricing. Road transport under the MIX scenario
will be subject to a number of decarbonisation policies fostering the use of more
sustainable modes of transport. Risk of modal shift under MAR1 is therefore considered
inexistent and unlikely under MAR4. From an environmental point of view there is a
24
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27
radical difference in shifts to road transport (negative) or shift to electrical trains
(positive). The geographical scope is not expected to have much impact on modal shift,
as only the intra-EU voyages are likely to compete with other modes of transport.
This modal shift is confined to transport routes where alternatives via other modes exist.
If it does occur, it will most likely happen in unitised (e.g. containers, pallets, trucks)
short sea shipping, including roll-on roll-off ships and lift-on lift-off ships, which
represent a significant part of the CO2 emissions reported in the EU maritime transport
MRV system. For intercontinental shipping, other transport mode alternatives hardly
exist. Elasticity estimates of short sea bulk transport suggest that these are not very
sensitive to price, which is interpreted as being caused by little competition with other
modes of transport. To substitute a medium-size bulk carrier by road transport may
require hundreds of trucks. Small changes in overall cost are therefore not likely to make
bulk cargo-owners change to another mode. In 2015, the introduction of the Sulphur
Emission Control Area lead for instance to an increase of EUR 181/tonne of fuel without
having a significant impact on modal shift25
.
On routes where unitised cargo is transported and maritime transport competes with road
transport and rail, modal shift is also unlikely due to a range of climate and transport
policies applying to other modes of transport, such as CO2 standards, fuel tax, possible
ETS extension to road transport, speed and daily driving limits but also practical
obstacles such as congestion. On the maritime side, the relative low cost of freight
transport by sea or the influence of long-term contracts are noticeably likely to restrain
market actors from switching to other modes of transport. Also, EU investments in port
infrastructure incentivise a modal shift from road to waterborne transport. A study
estimates that the taxes paid by trucks in 2019 were much higher than for shipping under
the MAR1 and MAR4 options26
.
The likelihood of a modal shift to road or rail is thus linked to the cost of the option
chosen as well as the unlocking of existing rail cargo infrastructures. All policy options
will have an impact on fuel costs, and hence on the total costs associated with short-sea
shipping. A case study presented in this annex evaluates the increase of modal shift under
the assumption that no additional measures compared to the actual situation are taken for
road transport. A cross elasticity of 0.3127
is assumed for shifting cargo from short-sea
shipping to road. This will mean that for a 10% increase in total costs the share of road
transport is estimated to increase by 3.1%. Under those assumptions, it is estimated a
SECA Assessment: Impacts of 2015 SECA marine fuel sulphur limits (CE-Delft 2016)
25
26
https://www.transportenvironment.org/press/top-shipping-polluter-overtakes-power-plants-coal-shuts-
down
27
Indicator measuring the sensitivity of freight operators to changes in the cost of short-sea shipping as
calculated in a recent study, Comi and Polimeni (2020) which developed a modal choice model for Ro-
Ro competition with respect to road and rail transport in the Mediterranean basin.
28
4.9% increase in modal shift for MAR1. Modal shift is estimated to be higher for MAR2
and MAR3 (20%) as the carbon price will be higher than for MAR1 and MAR4.
However, as mentioned before these impacts will be lower as measures under the Green
Deal and Smart and Sustainable Mobility Strategy will incentivize a shift towards the
least carbon intensive modes of transport (rail, inland navigation and maritime transport).
The Smart and Sustainable Mobility Strategy has set for milestone to increase rail freight
transport by 50% in 2030 and waterborne transport by 25%. This will require
investments to address the scarcity of transhipment infrastructures and multimodal
terminals and a better integration of maritime transport in the entire logistic chain.
Impacts on the price of a selection of ten commodities
33.3
Section 6.2.2.4 outlines the impacts on commodity prices and international trade flows
for a selection of 10 commodities, which were selected for detailed analysis based on the
following criteria:
 The relevance of the commodity in terms of EU competitiveness, considering
factors such as the size of the sector in the EU, the share of exports and imports,
profit margins, transport costs, and the evolution of the seaborne trade balance of
the commodity. Competitiveness is defined at the EU-27 level, considering the
position of all MS as a trading bloc relative to the rest of the world, and
examining impacts at the aggregate level.
 The technical feasibility of the analysis, in terms of readily available data on
commodity prices, current trade flows, own price elasticities, cost pass-through
rates, initial demand and market shares of domestic and overseas producers.
The following commodities were selected: Crude oil, Refined petroleum products,
Natural gas, Iron ores, Iron and steel, Cereals, Perishable goods, Office and IT
equipment, Motor Vehicles, Organic chemicals.
The scale of the impacts from the policy measure, and the agent bearing these impacts
(producer, manufacturer, retailer or consumer) depends on the following factors:
 Cost pass-through. The extent to which a change in freight rate is passed on
from ship operators to their customers. For each commodity, three of the most
common trade routes with the EU are selected to illustrate the change in freight
rate for each commodity according to the geography of its trade. It is important to
note that the analysis assumes that freight rates change in response to the real
costs of shipping, with an aim to capture the upper bound of effects of an increase
in shipping costs. However, freight rates may not directly reflect costs of
shipping, especially given that contract structures in the maritime industry are
complex and may be agreed for long time periods in certain cases.
It is assumed that if freight rates increase, shipping operators absorb the
additional cost for commodities which are price elastic, but pass it on to their
29
customers for commodities which are unresponsive to price changes. Cost pass-
through also relates to the ability of producers, manufacturers and retailers to pass
costs through to the next link in the supply chain. This in turn depends on levels
of market concentration, demand price elasticity, and substitutability of inputs.
 Ad valorem – i.e. the percentage of the price of the commodity attributed to the
cost of shipping: higher ad valorem of freight rates will lead to greater changes in
the price of the commodity. As mentioned above, in order to reflect the variety of
freight rates across routes, multiple trade routes are selected for each commodity.
 The own-price elasticity of demand for the commodity. This reflects the
percentage change in consumer demand relative to the percent change in the price
of the commodity. High elasticities (with an absolute value close to or greater
than one) suggest a strong consumer response to the change in price, while low
elasticities (with an absolute value closer to zero) suggest only a very small
consumer response to the change in price.
 Armington elasticities - the ability to substitute imports with domestic products.
Armington elasticities compare the change in the price of an imported good with
the demand for the same good produced domestically. They therefore assess the
extent to which imported and domestic goods are substituted for each other, and
thereby the degree to which an increase in the cost of imports would make local
products more competitive. However, it is important to note that Armington
elasticities are difficult to estimate empirically, with few data or literature sources
available.
Impacts on EU countries and regions heavily dependent on shipping
33.4
The level of exposure to changes in shipping costs has been assessed based on a series of
indicators, which resulted in EU countries having been classified into three broad groups
as detailed below:
 Most exposed (countries with high levels of international trade, which are
heavily reliant on shipping) :
o Ireland, the Netherlands, Cyprus, Greece, Malta, Sweden.
 Exposed (Countries with high indicators for one of any of the following: high
levels of international trade compared to GDP and relying on sea transport for
more than half the volume of international trade, be it intra- or extra-EU or
Countries where international trade is mostly undertaken by sea) :
o Shipping most important for intra-EU trade: Finland, Estonia, Latvia,
Lithuania, Croatia.
o Shipping most important for extra-EU trade: Portugal, Spain, Italy, France,
Bulgaria, Germany, Belgium.
o Shipping important for all trade: Denmark, Romania.
 Least exposed (do not rely on maritime transport):
30
o Austria, Czech Republic, Hungary, Poland, Slovakia, Slovenia,
Luxembourg.
Exposure can manifest itself through a loss of competitiveness on the global market as a
result of more expensive exports, or through reduced competition and standard of living
as a result of more expensive imports. It can also be beneficial, should the policy result in
a drop in freight rate, although this is likely to be smaller as cost savings would be
retained by shipping operators.
To identify EU countries and regions most affected by changes in the shipping sector, a
number of key indicators have been used:
Freight activity
In 2019, 3.5 billion tonnes of goods were handled (loaded and unloaded) in the key EU-
27 ports (Eurostat, 2020a). The primary countries handling goods in the EU-27 are the
Netherlands (17%), Italy (14%) and Spain (11%), which together, comprise nearly half of
the total weight of goods handled in the EU-27.
Figure 81: Proportion of gross weight of goods handled in key EU 27 ports by Member
States in 2019
Source: Eurostat, 2020
31
Whilst the graph above conveys the spatial distribution of goods handled in the EU, it
does not communicate the importance of shipping to individual national and regional
economies.
International trade intensity
In 2019, the EU-27 exported €5.2 trillion and imported €5 trillion worth of products and
services. Intra-EU trade comprised 59% of exports and 61% of import. Germany
accounted for the most significant proportion of activity, comprising 23% of intra-EU
trade and 26% of extra-EU trade. This was followed by the Netherlands (11% intra-EU
trade, 14% extra-EU trade) and France (10% intra-EU trade, 11% extra-EU trade)
(Eurostat, 2020b).
In 2019, total exports and imports represented 49% and 46% of EU-27 Gross Domestic
Product (GDP), respectively. However, there are signification variations between MS,
and some national economies are less reliant upon trade than others. From the figure
below, it is clear that Luxembourg, Malta and Ireland are particularly reliant upon trade.
Extra-EU trade by sea
In the EU-27, extra-EU imports and exports transported by sea account for 51% of the
total value of traded goods (Eurostat, 2020d). This proportion is much higher for island
countries such as Malta and Cyprus, and Greece, as well as countries with significant
stretches of coastline, including Portugal, Spain and Italy. In these countries, extra-EU
imports and exports transported by sea account for over 50% of the total value of traded
goods. Although Ireland is an island economy, the value of shipped imports and exports
comprises 22% of total traded goods, due to the high value associated with goods which
are transported e.g. via air . This shows that even within island economies, some are
likely to be more impacted by a change in the cost of shipping than others. The high
value of goods transported via maritime transport to Spain and Portugal can be attributed
to their geographical location, as these countries are often the first ports of call in Europe
for ships travelling from North and South America, as well as from the west Coast of
Africa and South Africa. Extra-EU maritime trade is prominent in the EU’s outermost
regions, in particular in the regions located in the Caribbean Sea, which have a high
maritime transport connectivity with neighbouring third countries.
32
Figure 82: Extra-EU trade (imports and exports) by sea as a proportion of total extra-
EU trade in 2019, measured in €
Source: Eurostat, 2020
Intra-EU trade by sea
As with extra-EU trade, any substantial change in shipping costs will disproportionately
affect countries which rely on sea transport rather than other modes to transport in order
to import and export products and services within the EU. This is an important factor to
examine, as for all EU-27 countries (with the exception of Ireland), intra-EU trade is
greater than extra-EU trade (Eurostat, 2020b).
Top cargo port regions
Rotterdam, Antwerp and Hamburg have maintained their positions as Europe’s key ports
from 2009 to 2019. Of the key ports, seven were located in the Mediterranean (Algeciras,
Marseille, Valencia, Trieste, Peiraias, Barcelona and Genova), eight were located in the
North Sea region (Rotterdam, Antwerp, Hamburg, Amsterdam, Le Havre, Bremerhaven,
Dunkerque and Wilhelmshaven), three ports were located in the Baltic Sea (Göteborg,
Riga and Talinn), one in the Black Sea (Constanta), and one on the Atlantic coast (Sines).
It is important to note that although some regions are not represented in the top 20 ports,
this could be linked to the composition of their national port infrastructure. For example,
Denmark and Finland have a relatively high number of medium-sized ports, rather than a
lower number of larger ports.
33
Employment
Given the significance of maritime transport to these port regions, it is important to
consider the level of employment in the maritime sector. Employment in water transport
comprises the smallest segment of the transportation and storage sector in the EU-27, at
5% (next Figure). However, it is clear that the proportion of value added from the water
transport segment greatly exceeds the proportion of employment in the sector. In
addition, the water transport subsector recorded the highest wage-adjusted labour
productivity in 2017, with apparent labour productivity equivalent to 230% of average
personnel costs (Eurostat, 2020f).
Figure 83: Sectoral analysis of transportation and storage value added and employment
in the EU-27 in 2017 (% share of sectoral total)
Source: Eurostat, 2020
Specific climatic conditions
From the stakeholder consultation, the Swedish Shipowners Association indicated the
importance of accounting for the cost burdens faced by countries in/near the Arctic
region, particularly during the winter. They noted that it is important to cover measures
on how to mitigate any negative consequences derived from an EU ETS for ships
operating in winter conditions, for instance, in the Baltic Sea.
Similarly, the Confederation of Finnish Industries stated that Finland’s foreign trade
depends heavily on maritime transport, due to its geographic situation (80% of foreign
trade is associated with maritime transport). They noted that their maritime operators are
challenged by Arctic winter conditions, which add an additional cost burden. Given this,
they have some concerns that a cost increase in maritime transport associated with the
proposed policy options may result in carbon leakage in industrial sectors and transport
routes, as well as a transition to land transport where possible, due to the sensitivity of
the region to increasing maritime sector costs.
According to information transmitted by Finnish stakeholders, ice-strengthened ships
may consume 20% to 60% more fuel depending on their route when sailing in ice
covered waters in the Baltic Sea area, in comparison to sailing in the same area under
open water conditions. In addition, due to their hull form and propeller being less optimal
for operation in open water, ice-strengthened vessels may on average consume
34
approximately 2-5% more fuel in open water conditions than ships designed solely for
sailing in open water. Ice strengthening also reduces a ships capacity, meaning they are
capable of transporting less freight per voyage than a ship of similar size which has not
be ice-strengthened.28
However, data in the literature about the effect of ice class vessels
on energy consumption is limited, with diverging results.
Based on a recent analysis (Ricardo 2021), carbon pricing would result in minor
additional commodity prices for goods transported in ice-strengthened vessels, assuming
6 months of ice-navigation per year and a range of ad valorem transport costs between
1% and 15%. In this sense, the competitiveness of industry sectors reliant on maritime
transport in Nordic and Arctic regions is not expected to be significantly affected in
general terms.
According to data from the EU maritime transport MRV regulation, 17% of the
monitored ships voluntarily reported Ice Class in 2019, compared to 16% in 2018. More
than half of these ships have ice class IA, which means that they are capable of
navigating in difficult ice conditions, with the assistance of icebreakers when necessary.
Figure 84: Distribution of reported ice class in the EU maritime transport MRV
regulation (Inner-circle 2018, Outer-circle 2019)
Source: EMSA, data from the EU maritime transport MRV Regulation
28
Besides fuel consumption, shipping in Arctic regions requires additional investments in hull construction, specialised seafarers and
additional insurance to cover for risks associated with icebergs and ice sheets, resulting in higher capital, labour costs and
insurance costs than normal (Solakivi, Kiiski, & Ojala, 2018) (Solakivi, Kiiski, & Ojala, 2019). However, these additional costs
would not be affected by the carbon price and have not been considered.
35
In addition, the EU maritime transport MRV regulation gives the possibility to
companies to report on a voluntary basis the distance travelled and the time spent at sea
when navigating through ice. However, in 2018 and 2019, less than 0.01% of the
reported distance travelled was categorised as “distance travelled through ice”.
Sea passengers
In addition to freight ships, passenger ships (e.g. ferries and cruise ships) will also be
affected by all policy options under consideration. In 2019, 419 million passengers
embarked and disembarked in EU-27 ports. Italy and Greece are the focus of this
activity, together accounting for 38% of all passengers. This is followed by North Sea
countries (Denmark, Sweden and Germany), as well as Spain and Croatia. These figures
indicate the prominent role of these countries as sea passenger hubs in Europe, pointing
to the economic importance of passenger shipping to their economies.
Figure 85: Passengers embarked and disembarked in all port
Source: Eurostat, 2020
A number of countries in the Mediterranean region, as well as in the Baltic regions have
passenger transport linked to maritime tourism. Maritime tourism is the biggest maritime
sector in terms of gross value added and employment (European Commission, 2020).
The number of passengers per inhabitant is particularly high in Malta, Estonia, Croatia,
Denmark and Greece. This indicates that these countries are more reliant upon sea
36
passenger traffic activity than other MS. This is likely to be linked to tourism, as
maritime passenger travel is largely used by tourists. These MS, their maritime tourism
industries, and their maritime passengers (should costs be passed on) are likely to be
more sensitive to a change in the cost of maritime travel associated with the proposed
policy options, than other MS.
Figure 86: Number of passengers embarked and disembarked per inhabitant, in 2019
Source: Eurostat, 2020
Economic impacts on imports/exports and sectors heavily dependent on
33.5
shipping and ports
An increase in the maritime transportation costs associated with the payments of ETS
allowances or carbon taxes along with the cost of abatement measures (e.g. alternative
fuels) has different effects for upstream and downstream economic sectors in the EU.
The impact on downstream sectors is driven by the direct effect of increasing the
transportation costs of the final product and by the indirect effects of increasing the
production costs of intermediate inputs.
Overall, all policy options will have greater impacts on the primary (e.g. agriculture and
fishing) and secondary (e.g. manufacturing) sectors rather than the (tertiary) service
sector, as most shipping activity is for the transport of goods and raw materials. Aside
from services related to the shipping industry, the main service sector which may directly
benefit from measures is tourism through the changes in the cost of operating cruise ships
and ferries.
37
For the affected sectors, changes in commodity prices as a result of increased maritime
transport costs that are estimated to range between 0.2% to 0.8% in 2030 and even
changes up to 2% expected for 2050 are not expected to be noticeable by the consumer to
the extent so as to drive significant changes in their behaviour. Usually, these price
changes are within the expected price volatility of a commodity that is driven by non-
structural or permanent changes. In this study, to assess the potential macroeconomic
effect of carbon pricing measures, it is assumed that economic agents are fully informed,
and the outcome depends on behavioural features and technological and income
constraints. The response of EU firms and consumers to higher maritime transportation
costs has been quantified through the large scale applied CGE model GEM-E3. This
estimates the impact of changes in maritime transportation costs on EU Gross Domestic
Product (GDP), sectoral production and employment.
The overall net impact on the EU-27 Gross Domestic Product (GDP) as a result of
increased maritime transport costs is expected to be marginal (see figure below). In 2030
the GDP is expected to decrease by 0.0002%, while, in 2050 the drop would be larger at
0.002%. This would represent a loss of GDP in absolute terms in 2050 of around €1 bn.
Increasing transportation costs for goods exported to the EU acts in favour of EU
domestic production. As a result, imports into the EU would decrease as consumers
increase their demand for domestically produced goods. Exports would decrease both
due to higher maritime transportation costs and due to higher domestic production costs,
as more expensive imports would increase the production costs in the EU indirectly. The
shift to more expensive domestically produced and imported goods would increase
production costs and decrease households’ disposable incomes, which lowers private
consumption. The expected changes in imports (€2.2 bn loss in 2050) and exports (€2.4
bn loss in 2050) approximately cancel out each other, hence the overall impact on GDP is
even smaller. The results are in line with empirical findings regarding the responsiveness
of demand and economic growth to changes in freight rates (Michail, 2020).
It should be noted that the analysis does not take into account the positive impact to the
economy that any potential recycling of the ETS or carbon tax revenues would have.
Many studies have shown the benefits of ETS recycling schemes, which tend to generate
a double dividend.
Figure 87: Impact on a) EU 27 GDP and b) GDP components in 2030 and 2050 as a
result of the measure compared to the baseline
38
a)
b)
Source: GEM-E3, E3Modelling
The impact on sectoral production (sales by industry) is also generally rather small, but it
varies substantially across sectors. Sectors related to the fuel supply chain are expected to
reduce their production more than any other sector as carbon pricing drives fuel
substitution and energy efficiency improvements on the maritime sector and to a lesser
extent due to increasing transportation costs. Goods produced in the EU that are sold
within the EU market are favoured by the imposition of a carbon price on maritime GHG
emissions as this essentially increases the transportation costs for imported goods leading
to higher substitution towards EU production. As the energy intensive industries of the
EU are already under the EU ETS and have assimilated the carbon price in their cost
structure, the additional cost from transportation increases their overall costs only
39
marginally (i.e. the change in relative prices is larger for imported goods that do not
reflect any carbon pricing in the costs structures). In particular the pulp & paper,
chemicals and iron & steel sectors that operate under the EU ETS would gain a
comparative advantage if the transportation costs of competing imported goods rise. The
exports of these goods would not be affected as much because the ETS carbon price has
already been assimilated in their cost structures and the additional effect from maritime
emissions carbon pricing is relatively small.
For downstream products, like motor vehicles and perishable goods, the indirect increase
in their production costs would lead to lower EU domestic demand. In 2030 the impact
on production is expected from the modelling to be virtually zero. In all sectors, very
small reductions in all sectors are observed as changes in prices are not sizeable enough
to lead to any substitutions and hence they mostly incur additional costs. It should be
noted however that while the above discussion focuses on some key mechanisms and
trends in production, the absolute impact is negligible.
Figure 88: Evolution in the production of fuels for the maritime sector
Source: GEM-E3, E3Modelling
40
Figure 89: Impacts on the production of affected sectors as a result of the measure
compared to the baseline in 2030 and 2050 in the EU 27
Source: GEM-E3, E3Modelling
Ports play an essential role in reducing GHG emissions from shipping and many ports in
the EU have already developed specific programmes to reduce their carbon footprint
(ESPO, 2020). At the same time, the competitiveness of some EU ports vis-à-vis non-EU
neighbouring ports may be affected by the introduction of the measure.
As per their response to the Inception Impact Assessment, the European ports
organisation ESPO expects that transhipment ports, especially Mediterranean ports and
ports in the North Sea would be most impacted by the introduction of the measure.
Mediterranean transhipment ports (e.g. Algeciras, Valencia) face the competition of ports
in North Africa, which would not be subject to the carbon pricing measure. From their
side, ports in the North Sea undertaking transhipment operations (e.g. Rotterdam,
Antwerp) may increasingly face competition from British ports after UK’s withdrawal
from the EU as these are no longer subject to the measure. As described in detail in the
transhipment case study for Algeciras, transhipment operations are very cost-sensitive
and largely depend on the commercial policies of ports in competition (i.e. port fees),
available capacity and economies of scale of transhipment operations.
The extension of the measure to extra-EU journeys is expected to cause a higher impact
on the competitiveness of EU transhipment ports as international routes calling at EU
ports for transhipment operations would be more severely affected and may opt to switch
to neighbouring non-EU ports for their large scale transhipment operations.
As regards shipbuilding, although the EU’s market share in terms of volumes has
declined over the years, the EU has succeeded in retaining a position by building more
complex ships with a relatively higher value added, while the production of more
41
standard mass production ships moved to other countries, especially in Asia. The EU also
has a relatively strong position in the ship repair market and in the marine equipment
sector which supplies ship construction.
At the European level, it still remains an important source of jobs and economic activity
in the regions where it does take place. The main concentrations of large ship yards are in
Germany, Croatia and Romania, followed by Finland and Spain.
A measure to address GHG emissions of ships will lead to an increase of demand of
retrofitting, as well as of high value marine equipment. Therefore, any policy option
should lead to net benefits for regions and sectors dependent on shipbuilding. The highest
net benefits would be provided by policy options with the highest in-sector emission
reduction required.
34 CUMULATIVE REVENUES GENERATED OVER THE PERIOD 2020-2050
For the period 2020-2050, cumulative additional revenues for public authorities are
estimated in the table below. Despite higher carbon prices in the long-term, the carbon
costs and therefore the revenues would tend to decrease over the years due to lower CO2
emissions.
Table 59: Cumulative additional total revenues generated 2020 - 2050 by policy options
(billion Euro 2015)
POLICY OPTIONS
ETS/ tax revenues
in the period
2020-2050 (billion
EUR 2015)
MAR1 –MINTRA 37 b EUR
MAR1 _MEXTRA50 74 b EUR
MAR1-MEXTRA100 111 b EUR
MAR2 or MAR3 -
MINTRA
124 b EUR
MAR4_-MEXTRA50 74 b EUR
Source: PRIMES Maritime module
35 IMPACTS ON INNOVATION, POTENTIAL TO STIMULATE THE UPTAKE OF
ALTERNATIVE FUELS AND INNOVATIVE TECHNOLOGIES
The uptake of innovative technologies and sustainable alternative fuels is key to enable
the transition towards a zero-emission waterborne transport, as recognised by the vast
majority of stakeholders from the sector.
42
In general, carbon pricing can contribute to innovation by making innovative solutions
more cost-effective compared to conventional technologies and by using possible
revenues to finance dedicated research and innovation activities.
In this context, it is expected that all policy options would drive innovation in energy
efficiency technologies and support the deployment of solutions such as hybridisation,
wind assistance propulsion, air lubrication or waste heat recovery as their marginal
abatement cost would become negative on the short-to mid-term29
. In addition, all policy
options would further accelerate the uptake of renewable and low-carbon fuel, in
particular MAR2 and MAR3.
All policy options would also trigger a significant amount of revenues that could
contribute to support innovation, in particular through the Innovation Fund for the ETS
options.
The ability of all policy options to trigger innovation is illustrated in the model by an
acceleration of hydrogen and electric ships by 2050 compared to the baseline.
36 IMPACTS AT GLOBAL LEVEL
Impacts on trade
36.1
The implementation of a maritime carbon pricing measure at EU level on maritime
transport emissions may have an impact on trade flows with third countries. However it
is only expected to impact commodities with very low weight to value ratio (i.e.
commodities with high weight and low value). The table below presents the top global
trade partners, their proportion of trade with the EU and the value to weight ratio of their
main trade flows. The majority of the main global trade partners have a significant share
of their export and import trade flows with the EU, but only those where the main export
products have a low value to weight ratio (i.e. Russia, China, India) may be affected.
29
According to the 4th
IMO GHG Study, the marginal abatement cost of these solutions are estimated
between 6 to 105 USD/tonne CO2
43
Table 60: Top global trade partners (in value) and share of imports and exports values
from and to the EU in 2019, including all freight transport modes
Imports Exports
Trade partner
% Imports
from EU 2019
Value to weight
ratio of main
imports from EU
% Exports to
EU 2019
Value to
weight ratio of
main exports
to EU
China 13% High 15% Medium-high
United States of
America
18% High 16% High
Japan 11% High 10% High
United Kingdom 49% High 46% High
Hong Kong 5% High 7% High
Korea, Republic
of
10% High 9% High
Mexico 10% High 4% High
Canada 11% High 5% High
India 9% High 15% Medium-high
Singapore 10% High 8% High
Russian
Federation
9% High 42% Low
Source: Ricardo analysis based on UNCTAD trade data
Typically, maritime routes, especially container traffic, are organised in multiple port
calls, which means that even if the measure is only applied to intra-EEA journeys, trade
flows with third countries could be potentially affected by the EU measure if there are
more than one port call in the EEA. However, the impact on third countries will be very
limited. The inclusion of extra-EEA journeys in the scope of the measure would increase
the possible impacts on trade flows with third countries in case carbon pricing leads to a
substantial increase in international transport costs.
Impact on global climate actions.
36.2
While the IMO often needs up to seven years or more between the decision to develop a
new mandatory IMO instrument and its entry into force (Kachi, Mooldijk, & Warnecke,
2019), the adoption of EU measures could potentially impact the IMO discussions on
mid and long term measures to address GHG emissions. The position of IMO Members
could change in two different ways:
44
 Support the adoption of a global market-based measure: The EU adoption of a
regional carbon pricing scheme could accelerate the adoption of candidate measures
of the IMO Initial Strategy and, particularly, a global market-based measure led by
the IMO. This is because the existence of a feasible regional carbon pricing
mechanism may improve the situation of those who want to price shipping
emissions, while simultaneously reducing the pay-offs for those that are against the
measure (Dominioni, Heine, & Martinez Romera, 2018). The example of the
aviation sector demonstrates that adoption of regional measures such as inclusion of
aviation in the EU ETS accelerated global agreements such as the adoption of
CORSIA by ICAO in 2016. Similarly, the adoption of the maritime transport EU
MRV Regulation has accelerated the implementation of an equivalent fuel
consumption reporting scheme at global level, the IMO DCS.
 Refrain from implementing a global market-based measure and support the
development of multiple regional market-based measures: The introduction of
carbon pricing measures in the EU for the maritime sector could discourage some
third countries to push for global measures and it could encourage others to establish
their own regional measure. However, there are numerous examples of EU
initiatives leading to the adoption of IMO measures rather than multiple regional
measures and the risk of having a patchwork of uncoordinated regional regulations
would also be discouraged by the maritime transport industry. The European
Commission also aims to advance discussions on market-based instruments as a
medium-term measure at IMO, as explained in the Sustainable and Smart Mobility
Strategy30
.
A general principle from economic contract theory is that for negotiations based on
unanimity, parties will prevent the achievement if the pay-off is lower in the agreement
than in the current status quo (Dominioni, Heine, & Martinez Romera, 2018). The
supporting study from RICARDO compared the pay-off of supporting a global measure
or pursuing a separate regional measure under the status quo and under the EU action for
the following clusters of countries: main global trading partners, oil exporters,
neighbouring countries and developing countries. This political economy analysis
suggests that most of the analysed clusters are more likely to agree on a global market-
based measure once the regional measure at EU level is implemented. The only
exemption being neighbouring countries, which may benefit from potential spill overs of
the regional approach. The incentives to achieve an international agreement are greater
30
COM(2020) 789 - Sustainable and Smart Mobility Strategy – putting European transport on track for
the future.
45
the larger the GHG emissions coverage of the EU measure (Dominioni, Heine, &
Martinez Romera, 2018).
If a global market-based measure is adopted after the European one, there are a number
of scenarios on how they could interact (this was also considered for aviation31
). The EU
could decide to amend its measure upon implementation of the global measure to avoid
double regulation. The European Commission for instance proposed to amend the EU
maritime transport MRV regulation to align it with the data collection system developed
by the IMO where appropriate. The two measures could cover different scopes. For
instance, the IMO measure could be applied at global level but exempt the emissions
covered under the EU system. Other linking approaches could be envisaged. In the case
of a cap-and-trade scheme, which has obvious similarities with the ETS, emissions
allowances could be possibly made fully fungible or there could be limited fungibility
(e.g. up to a certain amount or only one-way). In the case of an emissions tax or levy, the
link would be harder. Still, the instruments could be coordinated, e.g. by exempting EU
related emissions from all or part of the global emissions tax, by using free allowances or
by aligning the rate of the global emissions tax with the allowance price in the EU ETS.
Impacts on LDC and SIDS
36.3
Overall, the EU amounts to 11% of the value of imports into SIDS and LDCs. Imports
into SIDS and LDCs from Europe tend to be for oil products, food or machinery. The
table below shows the top ten LDCs and SIDS in terms of import share from the EU.
Cabo Verde and São Tomé and Principe, which are designated as SIDS, have a large
dependency on European imports, with more than 60% of their imports coming from the
EU. Countries designated as LDC and mostly located in Africa have also more than one
third of their imports with origin in the EU and may also be affected by the measure.
Table 61: Main LDC and SIDS importers from the EU
Country SIDS/LDC status % Share of imports from the EU
Cabo Verde SIDS 76%
São Tomé and Principe SIDS and LDC 60%
Guinea-Bissau SIDS and LDC 47%
Senegal LDC 40%
Central African Republic LDC 40%
Chad LDC 37%
Niger LDC 36%
31
SWD(2017) 31
46
Cuba SIDS 33%
Togo LDC 33%
Guinea LDC 33%
Source: UNCTAD trade data 2019
A similar behaviour is found for exports, with 12% of overall exports from SIDS and
LDCs being shipped to the EU-27. As shown in the next table, some LDCs and SIDS
have a significant share of their exports to the EU, which means that their exports could
be affected if the increased cost of shipping leads to lower demand levels in the EU or
where they are being priced out in comparison to other exporters with lower shipping
costs (e.g. closer to the EU market). Cabo Verde and São Tomé and Principe have also a
large dependency with the EU in terms of exports, which makes them particularly
vulnerable to changes in shipping costs to and from the EU. Open registry states like the
Marshall Islands, Liberia and the Bahamas are also among the top exporters to the EU.
Table 62: Main LDC and SIDS exporters to the EU
Country SIDS/LDC status % Share of exports to the EU
Cabo Verde SIDS 83%
São Tomé and Principe SIDS and LDC 70%
Marshall Islands SIDS 62%
Liberia LDC 57%
Antigua and Barbuda SIDS 50%
Bangladesh LDC 46%
Guyana SIDS 46%
Comoros SIDS and LDC 46%
Bahamas SIDS 39%
Malawi LDC 38%
Source: UNCTAD trade data 2019
However, these export and import data doesn’t differentiate direct voyages from voyages
with intermediary ports calls. In the cases of indirect export or imports (with an
intermediary port call), the carbon pricing would be limited to a portion of the emissions,
therefore limiting the impacts on these trades. A recent study indicated that for the
MEXTRA50 scope under actual carbon prices the transport cost for containers for a
voyage between Spain and Singapore will be increased by 0,5 to 1%32
.
Third countries could also be indirectly affected by the measure if their trade flows with
non-EU countries use EU ports as transhipment hubs. For containerised cargo, 12% of
the total traffic in TEUs moving between EU countries and non-EU countries transits
32
T&E study 2020 : all aboard!
47
through EU ports but neither originating from EU countries nor destined for EU
countries (World Shipping Council, 2020). Containerised products however tends to have
a relatively high value, the effect on the final price of the commodity for imports and
exports with non-EU partners transiting via EU ports is expected to be marginal. A
portion of these shipments would originate from or be destined for LDCs, especially in
North and West African locations, which are more likely to be connected through feeder
services to EU ports due to their proximity. In that case the MINTRA scope would also
have impacts on trade between SIDS and LDCS with non-EU countries, but these are
considered rather limited. Impact on SIDS and LDCs will increase with the geographic
scope, as with the carbon price. MAR2 and 3 are expected to have more impacts than
MAR1 and 4.
37 SOCIAL IMPACTS
Impacts on employment
37.1
As described in Section 6.2.3.1, the changes in employment for fuel suppliers and other
sectors which rely on shipping for trade are limited, as shown below (based on the
MAR1 MEXTRA50 option).
Figure 90: Impacts on the employment of fuel suppliers as a result of the measure
compared to the baseline in 2030 and 2050 in the EU 27
Source: RICARDO 2021
48
Figure 91: Impacts on the employment of non-energy sectors as a result of the measure
compared to the baseline in 2030 and 2050 in the EU 27
Source: RICARDO 2021
As demonstrated above, the net impact of employment on the energy sector is positive
over the period 2025-2050 as the fossil fuels are substituted by sustainable fuels, which
are expected to be mostly produced within the EU.
With regard to all other sectors, impacts on employment will be negligible or slightly
negative by 2030 and positive by 2050 for all but two sectors. The motor vehicles and
perishable goods sectors will likely suffer the greatest negative impacts on employment
by 2050, but again this impact will be very small, from about -0.002 to -0.004%.
Impact on vulnerable households
37.2
To assess the impact on vulnerable households, a differentiation has been made by
household income class depending on the consumption pattern and sources of income of
each class. The GEM-E3 model identifies income classes by deciles.
 Income effect: The skillset and the different sources of income (i.e. wages,
dividends, rentals etc.) for each household class determine the size of impact.
Changes in the sectoral production and employment affect household income.
Low income classes derive their income mainly from wages while high income
classes both from wages and dividends.
 Price effect: higher prices reduces consumers’ disposable income. Depending
on the consumption patterns the increase in prices of different commodities
affects differently each income class.
The overall impact on welfare is negative but small as it can be seen in the table below.
49
Table 63: Change in Welfare by Income Decile (EU-27 – Hicksian Equivalent
Variation – D1 is the lowest income decile)
Decile 2030 2050 2030 2050
In €m % of Income
1 -1.3 -82.1 -0.0003% -0.015%
2 -2.9 -109.2 -0.0005% -0.015%
3 -4.0 -134.0 -0.0005% -0.013%
4 -5.8 -168.5 -0.0005% -0.013%
5 -8.3 -191.0 -0.0006% -0.012%
6 -7.8 -247.8 -0.0005% -0.013%
7 -10.0 -289.2 -0.0005% -0.012%
8 -11.5 -343.0 -0.0005% -0.012%
9 -11.0 -431.7 -0.0004% -0.011%
10 -14.5 -924.4 -0.0002% -0.011%
Source: RICARDO 2021
38 CASE STUDIES EXPLORING THE POTENTIAL RISK OF CARBON LEAKAGE LINKED TO
THE MARITIME POLICY OPTIONS
Objectives and scope
Three detailed case studies building upon the support study carried out for this impact
assessment (E3M/ Ricardo forthcoming) explored the possible impacts of the maritime
policy options on selected regions, routes and vessel types, in particular as regards the
potential risks of policy evasion (through evasive port calls, or transhipment at non-EU
hubs) and policy avoidance (through modal shift).
In order to explore the potential impacts for specific regions and routes, the following
case studies have been selected:
 A modal shift case study: assessing the potential for shifting from short-sea
shipping (SSS) to road transport between the port of Barcelona (Spain) and the
port of Civitavecchia (Italy);
 A transhipment case study: assessing the potential for container ships to use
Tanger Med (Morocco) as an alternative transhipment hub to the port of
Algeciras (Spain);
 An evasive port call case study: assessing the potential for shipping operators to
engage in evasive non-EU port calls along routes ending at the port of Piraeus
(Greece), port of Algeciras and the port of Rotterdam (the Netherlands).
50
Methodology
38.1
The methodology followed for undertaking the cases studies draws upon the analysis
undertaken in the main impact assessment support study, and reflects the approach taken
in the 2013 Impact Assessment supporting study33
. Where specific input data were
available on the routes considered, such as distance travelled and speed of vessels, these
have been integrated into the calculations. Where possible, assumptions have been
refined, through use of more specific data. A thorough review of the relevant literature
was conducted, focusing on the potential for modal shift, transhipment and evasive port
calls, as well as the specific regions and routes considered. The literature has informed
the assumptions and results presented in the respective case studies.
Modal shift case study
38.2
This case study focused on assessing the risk of modal shift away from Short Sea
Shipping (SSS) freight transport to road freight, as a result of introducing policy
measures to control maritime GHG emissions in Europe and in the case road transport is
not covered by similar carbon pricing. The Ro-Pax service between Barcelona and
Civitavecchia provides a suitable example where maritime transport is in competition
with road freight transport, with the existing service running six days a week and taking
approximately 20 hours. In addition, to promote maritime transport and due to expected
growth along the route, CEF funding aims to support the infrastructure associated with
the respective ports in order to drive Ro-Pax traffic further.
33
Support for the impact assessment of a proposal to address maritime transport greenhouse gas emissions
https://ec.europa.eu/clima/sites/clima/files/transport/shipping/docs/ghg_maritime_report_en.pdf
51
Figure 92: Barcelona – Civitavecchia route
The resulting cost for the open ETS and closed ETS scenarios for this route and the
increase in total costs is presented in the table below, assuming no administrative costs
for the operator associated with complying with the policy option. The carbon price is
assumed to be respectively 45.5 EUR/ton CO2 and 268 EUR/ton CO2. The fuel price is
estimated at 480EUR per ton of fuel and the consumption per trip of 106 tons of fuel. For
the selected route and vessel, the average speed travelled is 21 knots and the gross
tonnage is 50.000.
Table 64: Total cost per trip for shipping operators
Parameter Unit Value
Total cost of trip without
carbon pricing
€m € 0.14
Total cost of trip with open
ETS
€m € 0.15
Total cost of trip with closed
ETS
€m € 0.19
Increase in total cost of trip
with open ETS
% 7
Increase in total cost of trip
with closed ETS
% 36
Source: RICARDO 2021
An increase in the total cost of the trip could result in an increase in the modal share of
road transport. In line with the Comi and Polimeni (2020) study, a 10% cost increase
52
would cause a 3.1% increase in the modal share of road transport, a 7% increase in total
costs would result in a potential 2% increase in road modal share, and a 36% increase in
total costs would result in a 11% increase in road modal share.
However, modal choice for freight transport depends on a range of factors, including
transit time, cost, and flexibility. Although there is the potential for road transport to offer
an alternative to SSS along this route, practical obstacles could limit the shift from SSS.
Freight operators are already likely to have invested in the use of the SSS route, and
would face sunk costs from returning to the use of road transport. In addition, it is
necessary for road hauliers to comply with EU legislation, including HGV speed limits
and daily driving limits. These legislative measures limit the potential time and cost
savings which could be associated with switching back to road transport, as it is likely
that either two drivers would be required to complete the route, or a single driver would
need to complete the trip over two days.
In addition to these operational obstacles associated with the potential shift back to road
transport, the use of the Ro-Pax route aligns more closely with the EU’s strategic
objectives to encourage the use of alternative modes. The cost associated with SSS is also
of primary significance in regard to modal choice. As shown before, there is potential for
the policy options to have an impact on fuel costs, and hence on the total costs associated
with SSS. However, assuming a cross elasticity of 0.31 for shifting from SSS to road, the
impact of the increase in total costs of SSS is likely to have a small impact on road modal
share along the route in the case of an open ETS (MAR1 or MAR4), and a more
significant impact in the case of a closed ETS or a tax (MAR2 and MAR3).
Transhipment case study
38.3
Transhipment is the ‘unloading of goods from one ship and its loading into another to
complete a journey to a further destination’ (Eurostat, 2016). The emergence of
containerisation since the 1960s has resulted in the development of new port
connection structures, such as transhipment, which emerged to optimise resources and
benefit from economies of scale (Grifoll, Karlis, & Ortego, 2018)
In line with this, container shipping lines are increasingly sending their vessels to
intermediate locations, between the origin and destination, where containers are
transhipped. According to Ducruet and Notteboom (2012), on average, a container was
handled 3.5 times between the first and final port of call in 2008, indicating the
significance of transhipment in the container shipping network. Container shipping lines
have been the key players in setting up liner services centred around transhipment hubs,
with transhipped containers representing 28% of global container port throughput in 2012
(Notteboom, Parola, & Satta, Partim transshipment volumes, 2014). Therefore, due to the
significance of transhipment to container traffic, this case study focuses on transhipped
container traffic.
53
Figure 93: Main transhipment hubs worldwide: container volumes transhipped, 2011
Source: Notteboom, et al., 2014
This case study focused on assessing the likelihood of freight operators shifting from the
use of an EU transhipment hub to a non-EU transhipment hub, as a result of introducing
policy measures to control maritime GHG emissions. Tanger Med offers an attractive
alternative to Algeciras as a transhipment port, in regard to its close proximity and
infrastructural capacity. In addition, recent investments in the port have enhanced the
quality of port services.
The practical feasibility of changing transhipment hub depends on a range of important
factors, including port location, berth availability, transit time, cost, frequency and
service quality. Although cost is an important factor, port location and proximity to
primary routes, cities and ports, are key factors which influence transhipment hub choice
in Europe.
However, it is also important to consider the costs associated with transhipment, which
have the potential to have a significant impact depending on the variation between ports.
In the case of Algeciras and Tanger Med, a significant difference in transhipment costs
already exists between the two ports. In addition to port fees, it is also essential to
consider other operational costs, and the costs associated with fuel, ETS/carbon levy
payments and capital costs. Fuel costs in particular comprise a significant share of the
total port costs.
Therefore, the potential for shipping operators to use non-EU transhipment ports, as a
result of the policy options, will depend both on the operational factors influencing
54
transhipment port choice, and the transhipment costs associated with proximal non-EU
transhipment hubs.
Table 65: Percentage cost difference of transhipment operations in Algeciras under the
proposed policy options illustrated for two different distances from the port of origin to
the transhipment port
Year Option
Carbon
price
(€/tCO2)
Geographical
scope
Total cost increase linked to
transhipment operations in
Algeciras (%)
1,000 nautical
miles from the
port of origin
10,000 nautical
miles from the
port of origin
2030
MAR 1
MEXTRA50
45.5
Intra-EU +
50% Extra-EU
3 6
MAR2
MEXTRA50
268
Intra-EU +
50% Extra-EU
16 33
MAR 1
MEXTRA100
45.5
Intra-EU +
100% Extra-
EU
5 11
Source: RICARDO 2021
The analysis looked at the increase in cost for calls to Algeciras linked to the different
options. The results are showed in the table above. The estimated total cost increase
linked to transhipment operations in Algeciras is one of the factors that could exacerbate
evasive behaviour in favour of Tanger Med, in particular for MAR2.
Evasive port call case study
38.4
This analysis studies the likelihood of freight operators to engage in evasive port calls at
non-EU ports, as a result of introducing policy measures to control maritime GHG
emissions. All of the considered non-EU ports offer potential additional port calls, due to
their relatively close proximity to the destination EU ports. In addition, the EU MS
selected are considered to be subject to a relatively high level of exposure, due to their
close proximity to non-EU ports.
The port of Algeciras, with an evasive port call at Tanger Med
In regard to adding an additional port call at Tanger Med, a T&E (2020) study estimated
that there is no risk of policy evasion at a CO2 price of €30/tonne, but a 9% risk at a CO2
price of €50/tonne. There is potential for a GHG emissions policy to lead to congestion at
Tanger Med, which would result in reducing significantly the risk of policy evasion at a
CO2 price of €100/tonne. For the trips travelling to or from Oceania, all trips covered
would be motivated to evade at a CO2 price of €45/tonne. However, none of the 1,194
voyages sailing to or from the UK and Svalbard would be encouraged to evade at CO2
prices below €215/tonne.
55
Two evasion cases were assessed in more detail (see next table). The two cases assess the
potential for evasion at Tanger Med, along the route ending at the Port of Algeciras. The
cases consider container vessels and dry bulk carriers, and draw upon the opportunity
costs and additional time incurred in the evasion scenarios presented by the T&E (2020)
study. As further inputs of this analysis, results from the PRIMES Maritime module on
shipping costs (fuel, operating and capital costs), carbon prices and emission reduction
for the different policy scenarios are considered.
Table 67: Port evasion case: Algeciras- Tanger Med
Evasion case 1 Evasion case 2
EU port Algeciras Algeciras
Evasion port Tanger Med Tanger Med
Type of vessel Containers Dry bulk carriers
Additional distance in
evasion scenario
(nautical miles)
32 32
Additional time in
evasion scenario
(days)
0.5 2.5
Evasive port fees (€) 31 368 16 582
Source: RICARDO 2021
The next table presents the distance turning points above which shipping operators would
be incentivised to add an additional port call, as a result of the proposed policy options.
For distances exceeding 12 000 nautical miles, it is assumed that evasion does not occur,
as this is higher than the travel distance to the equivalent point halfway around the
Earth’s circumference following a straight line.
Table 68: Distance turning points across the proposed policy options for routes to the
port of Algeciras with potential evasive port calls in Tanger Med
Year Option
Carbon
price
Distance turning point (nautical
miles)
Evasion case 1 Evasion case 2
2030
MAR1
MEXTRA50
45.5 No evasion 11 300
MAR2
MEXTRA50
268 2 900 2 200
MAR1
MEXTRA100
45.5 8 300 6 000
Source: RICARDO 2021
56
The port of Piraeus, with an evasive port call at the port of Haydarpaşa
The analysis undertaken by T&E (2020) suggests that it would not be financially
attractive for ships to evade policy by calling at the port of Haydarpaşa prior to the port
of Piraeus if the CO2 price was below €30/tonne. The analysis suggests that even a higher
CO2 price of €100/tonne would only result in policy evasion occurring for 0.5% of all
journeys. This is due to the additional port, fuel, operational and opportunity costs (and
the remaining CO2 costs), which outweigh the costs associated with policy compliance
(T&E, 2020).
The port of Rotterdam with an evasive port call at the port of Southampton
The T&E (2020) study concluded that there is no risk of policy evasion for shipping
operators completing their journey at Rotterdam, for CO2 prices under €100/tonne. The
study found that the opportunity costs of oil tankers increase at a much slower rate than
all other cost types, as the size of the vessel increases. As a result, the opportunity costs
represent a proportionately larger share of the total costs of the smallest oil tankers (2%),
relative to the largest oil tankers (1%). However, the port of Southampton charges very
high port fees, particularly for larger vessels. Policy evasion would result in port costs
equating to 30% of total costs for large oil tankers. Large oil tankers would require a
higher ETS price to evade policy through a stop in Southampton.
Other cases
The study estimated that all 125 voyages travelling to or from North and South America
would consider evading policy at CO2 prices between €100/tonne and €255/tonne.
However, this differed for the trips travelling from Russia or Ukraine, where none of the
voyages would be motivated to evade policy at a CO2 price under €300/tonne.
Furthermore, for CO2 prices below €100/tonne, only six voyages would consider evading
policy, and all of these journeys involved ships travelling to or from Asia. These results
highlight the importance of the distance travelled in regard to the likelihood to evade
policy (T&E, 2020).
Summary
The practical feasibility associated with an evasive port call has the potential to impact
the decision of the shipping operator to engage in an evasive port call. For example, it is
necessary for shipping operators to already have business at a port to allow them to call
at a port, and load or unload cargo. Therefore, shipping operators without existing
business in non-EU countries would be required to develop new business activities, to
enable them to call at non-EU ports in an attempt to evade policy. This would involve a
relatively high level of administrative burden.
It is essential to remain attuned to the significance of port costs on the potential for
evasive port calls, as it is possible that proximal non-EU ports will lower their port fees
to further attract shipping operators. This would in turn impact the turning point, and
therefore, directly influence the number of ships likely to evade policy. However, port
57
fees also comprise a much smaller share of total costs for large container vessels, relative
to fuel costs.
It is important to note that it is difficult to make assumptions regarding the response of
shipping operators to the uncertainty associated with the proposed policy options.
However, it can be concluded that the potential for shipping operators to engage in
evasive port calls, as a result of the proposed policy options, will depend both on the
practical feasibility of engaging in shipping activity, and the costs associated with
engaging in evasive port calls.
Table 69: Summary of risk of evasive port call for policy options in 2030
Year Option Risk of evasive port call
2030 MAR1 MEXTRA50 Very low
MAR4 MEXTRA50 Very low
MAR2 MEXTRA50 High
MAR1 MEXTRA100 Medium
Source: RICARDO 2021
58
Annex 11: Detailed analysis on the Innovation Fund
39 TYPES OF PROJECTS THAT CAN BE SUPPORTED BY THE INNOVATION FUND
Based on the applications to the first call for large-scale projects under the current
Innovation Fund, there were applications from all eligible sectors for projects to be
located in all EU MS, Iceland and Norway. As the evaluation is still ongoing, it is not
known which projects will actually be funded, so the analysis is based on the applications
received. Nevertheless, even only the analysis of the applications indubitably shows the
potential of the Innovation Fund to play a pivotal role as a key instrument for
decarbonising Europe through clean tech solutions.
The analysis of the proposals received reveals multiple technological pathways,
applicable across multiple industries and sectors of the economy, which can help reduce
emissions both in ETS but also in other sectors such as transport, buildings and
agriculture. For instance, there is significant interest from projects related to clean
transport – for instance integrated hydrogen distribution and use to various transport
modes, e.g. heavy-duty vehicles, buses, fuel cell and hydrogen vehicles, ships; use of
carbon capture and use technologies for production of aviation and other fuels; use of
bio-based solutions for the production of various fuels. There are also projects providing
technological solutions in the renewable heating and cooling of buildings. The call for
small-scale projects launched on 1 December 2020 and closed on 10 March is putting
further emphasis on projects providing carbon neutrality solutions for buildings or
construction products substituting carbon intensive ones.
When zooming into the proposals received for energy-intensive industries, three main
pathways can be identified: hydrogen, carbon capture and utilisation/storage (CCU/CCS),
and bio-based decarbonisation pathways, with a certain overlap between hydrogen and
CCU/CCS proposals. Other pathways include circular economy solutions such as
recycling (e.g. scrap metal, plastics), pyrolysis, and electrification.
A deeper analysis of the proposals concerning hydrogen technologies (hydrogen involved
as a final or intermediary product), shows that more proposals (12% of the total number
of received proposals) can be considered green hydrogen, i.e. they either intend to
produce their own renewable electricity or conclude power purchase agreement to secure
additional renewable electricity. About 7% of the hydrogen proposals concern blue
hydrogen (hydrogen produced from natural gas combined with CCS), and another 7%
concern integrated hydrogen distribution and use to various transport modes, while the
rest covers different varieties that have not clearly indicated the source of electricity.
A deeper look into the applications concerning carbon capture (a fifth of the total
proposals received) shows that most focus on one part of the CCU/CCS value chain, only
59
some proposals integrate all aspects of the value chain from CO2 capture to utilisation or
storage and 7% have the potential for net-carbon removals (negative emissions, net-
carbon removals. CO2 is captured from various sources: bio-refineries, ferrous and non-
ferrous metal production, cement and lime, refineries, chemicals, bio- and geothermal
combined heat and power (CHP) plants, Waste to Energy or ambient air, showing the
cross-cutting application of this technological pathway. The CCU/CCS proposals aim to
result in the production of different products: electricity & heat, hydrogen, methanol,
aviation fuels, methane, construction materials, other chemicals and other fuels
A deeper analysis of the proposals concerning bio-based products and technologies
shows that these amount to about a fifth of the total and they consider various biomass
feedstock, mostly waste and residues, while their products are various biofuels, different
bio-based chemicals, or combining chemicals and fuels.
In the renewable energy sector, there are proposals employing all types of on- and
offshore wind, floating and ground-based foundations, concentrated solar power (CSP),
photovoltaics (PV), production facilities for PV cells and modules, as well as tidal, wave,
salinity gradient and hydro energy, and deep geothermal energy. Many renewable energy
proposals combine different renewable energy technologies (CSP and PV, CSP and
biomass, wind and PV) an often variable renewable energy sources are combined with
battery or thermal storage or the production of hydrogen.
In the energy storage sector, many proposals aim to find solutions for the inter-daily
electricity storage, while others include other storage types (batteries, compressed or
liquid air storage, thermal, hydrogen, and hydro storage). Some proposals cover demand-
side measures by applying smart grids or virtual power plant solutions and others
concern production facilities for batteries.
The wide variety of project applications received for the first call under the Innovation
Fund shows that companies are willing to invest in a multitude of technological solutions
to decarbonise Europe, and are looking for public funding. This advocates for increasing
the size of the Innovation Fund to address this need and to help industry play its role in
EU transition to carbon neutrality.
40 LEVEL OF SUPPORT FOR PROJECTS UNDER THE INNOVATION FUND
As outlined above, the oversubscription of the first call for large-scale proposals under
the Innovation Fund demonstrates significant interest of companies in investing in low-
carbon technologies and the already high capacity for the market to absorb such funds.
The Commission impact assessment accompanying the delegated regulation on the
Innovation Fund was underpinned by a market study which estimates the potential
investment volume to EUR 55 to 68 billion for demonstration projects in the relevant
60
sectors for the period 2021-2030 (a conservative estimate as potential investments may
be higher especially in cross-cutting technologies)34
.
Currently, the project costs that can be funded by the Innovation Fund are defined as the
additional costs of the innovation and are much lower than the total project costs.
Furthermore, the current funding rate of the Innovation Fund is set at maximum 60% of
the relevant costs, thus leaving a significant part of the total project costs to be covered
by the project proponent or other public and private investors. This financial gap can be
very big in absolute terms when it comes to large-scale industrial projects. This may be
challenging and compromise the bankability and financial viability of an otherwise
promising clean tech projects in terms of emission reductions. The Impact Assessment
accompanying the Innovation Fund delegated regulation and academic literature
converge on the conclusion that the carbon price on its own is not expected to trigger
sufficient investment in many important breakthrough technologies in industry and
energy (e.g. CCS, low-carbon technologies for cement, green hydrogen-based steel
making, recycling and circular economy solutions).
Therefore, increased level of support under the Innovation Fund is clearly warranted. It
can be done in two ways which can be deployed together and address different needs and
specificities:
- a direct increase of the maximum funding rate,
By increasing the funding rate, the relative and absolute size of the funds that have to be
provided by the project sponsor is reduced, thus the financial viability of the project and
its bankability are improved. A higher funding rate would allow upscaling technologies
that have already reduced their technology risks (thanks to early demonstration) by
addressing the remaining market failure, stemming for revenue risk (where the
innovative products cannot be fully remunerated on the basis of market prices, as these
have not yet internalised the environmental benefits of clean solutions).
- a complementary mechanism, such as Carbon Contract for Difference (CCFD)
Such instruments can be based on competitive tendering, and take into account the CO2
price when determining the actual support, thereby minimising the required amount of
funding and optimising the use of the available amount of allowances. This would allow
upscaling technologies that have already reduced their technology risks (thanks to early
demonstration) by addressing the remaining market failure, stemming for revenue risk
34
https://ec.europa.eu/clima/sites/clima/files/innovation-fund/swd_2019_85_en.pdf
61
(where the innovative products cannot be fully remunerated on the basis of market prices,
as these have not yet internalised the environmental benefits of clean solutions).
41 CARBON CONTRACT FOR DIFFERENCE
In the context of the Green Deal, several policy documents have highlighted the
importance of innovation in carbon/energy intensive sectors, including envisaging
dedicated policy initiatives:
- Green Deal Communication (annex) : “initiatives to stimulate lead markets for
climate neutral and circular products in energy intensive industrial sectors (from
2020)”
- A new Industrial strategy for Europe: “the European Green Deal sets the
objective of creating new markets for climate neutral and circular products, such as
steel, cement and basic chemicals. To lead this change, Europe needs novel
industrial processes and more clean technologies to reduce costs and improve
market readiness”
- Hydrogen strategy: “Develop a pilot scheme – preferably at EU level – for a
Carbon Contracts for Difference programme, in particular to support the production
of low carbon and circular steel, and basic chemicals.’
- European Council conclusions (Dec 2020): ‘The Commission is invited to consider
(…) proposing measures that enable energy-intensive industries to develop and
deploy innovative climate-neutral technologies while maintaining their industrial
competitiveness’
In the coming years, it can be expected that the Innovation Fund will finance a
considerable number of first-of-a-kind demonstration projects, which will enhance the
market-readiness of break-through technologies in a range of sectors. This is clearly
demonstrated by the success of the first call.
The ETS revision is therefore an opportunity to widen the portfolio of financing
instruments. Notably, Carbon Contracts for Difference (CCFD) could be developed as a
complementary instrument (next to the existing grant and loan instruments) within the
Innovation Fund. Such a new window is well suited for commercial second, or third of a
kind projects, to be deployed in the second half of this decade. The operational
modalities of this instrument can be further developed later in implementing legislation.
In principle, CCfDs could be applied to the entire range of sectors and technologies that
are covered by the Innovation Fund, and broader or more focused approach can be taken,
focusing on maximum added value. For instance, a pilot CCFD could focus on a
technological pathway bringing GHG reductions across multiple sectors such as for
example the production of green hydrogen. In order to ensure that only innovative
62
technologies enabling deep decarbonisation are funded (not for instance incremental
investments), all projects should comply with a certain emission performance.
Problem definition and rationale
41.1
41.1.1 GHG emissions of energy-intensive sectors
Decarbonising basic materials is crucial to achieving the goal of climate neutrality by
2050. In Europe, their production accounts for 18% of total GHG emissions (around 750
Mt CO2-eq a year) and have kept relatively stable over the last years. The bulk of these
emissions come from just a few multi-purpose products (mainly cement, iron&steel) and
few chemical feedstocks (such as ethylene, propylene, hydrogen, methanol).
Figure 94: Share of specific sectors of total ETS emissions – EU-28 (based on the
average emissions over the period 2016-19)
Why additional policy instruments for early deployment?
41.2
Achieving ambitious emissions reductions targets for 2030 and 2050 will necessarily
entail addressing the emissions from basic materials. As 2050 is basically one investment
cycle away, major investments in energy intensive industry will still be operational in
2050. It is therefore important to kick-start deployment of such solutions sooner rather
than later.
63
In recent years, limited GHG emissions reductions in the production of basic materials
have been achieved, mainly by implementing incremental improvements of the efficiency
of production processes and/ or fuel switch.
Nevertheless, a substantial number of industrial break-through technologies have been
identified and researched, see e.g. ‘Industrial Transformation 2050, Pathways to Net-
Zero Emissions from EU Heavy Industry’35
. However, very few technologies have been
scaled beyond the pilot phase.
The prime reason is that current abatement costs for most technologies are today
substantially above current ETS prices. The figures below gives break-even cost
estimates of low carbon cement, primary steel, primary aluminium, green hydrogen, and
basic chemicals. These estimates include increases arising from both investment
(CAPEX) and operational costs (OPEX) as compared to conventional production
techniques.
Figure 95: Breakeven cost estimates
35
Material Economics et al, 2019
64
Considering the lack of experience with large-scale applications, there remains a
substantial uncertainty on such estimates, and certainly the first investments may face
even higher abatement costs. The policy experience with renewable energy has shown
that policy induced market deployment and learning by doing can be a powerful tool for
cost reduction, although such effects cannot always be transferred from one sector to
another on a one-to-one basis.
Figure 96: Marginal abatement costs of new technologies
While the ETS provides an incentive to reduce GHG emissions in those sectors, and this
incentive is expected to increase over time (including through a revised ETS in
accordance with a strengthened 55% overall target), the uncertainty over sustained
increased CO2 prices over longer periods also implies that the commercial viability is
uncertain. As a result the bankability (willingness by third parties to finance such
projects) is expected to remain low (too high commercial risk) and investments may not
materialize.
In conclusion, achieving deep decarbonisation by 2050 will require the first industrial
scale alternatives to be deployed during the coming decade. Complementary policies to
the ETS, to create lead markets for low carbon materials, seem justified because of,
(1) the current high abatement costs of these technologies compared to the CO2 price,
(2) uncertainty as regards CO2 price developments over the next decade(s) (and
associated investment and financing risks) and
(3) the need to first lower costs through learning by doing, industrialization and
economies of scale.
65
Carbon Contracts for difference (CCfD’s)
41.3
CCfDs are a policy instrument which can be used to develop lead markets for basic
materials and hydrogen by creating contracts for difference on the CO2 price. Such a
long-term contract with a public counterpart functions in a similar way as current
tendering systems for renewable power, but instead of paying the difference between the
electricity strike price and the electricity market price, the public authority would pay the
difference between the CO2 strike price and the actual CO2 price in the ETS.
The CCfDs are suited for 2nd or 3rd of a kind projects, making them ready for the market
in analogy to the support for renewables to make them market competitive and would
allow upscaling technologies that have already reduced their technology risks (thanks to
early demonstration) by addressing the remaining market failure, stemming for revenue
risk (where the innovative products cannot be fully remunerated on the basis of market
prices, as these have not yet internalised the environmental benefits of clean solutions).
It bridges in an explicit way the gap in costs (linked to the GHG abatement cost of the
technology) between conventional and low carbon alternative technologies in a
technology neutral way36
. A CCfD is therefore compensating the investor for both
additional CAPEX and OPEX, covering the entire cost difference between a low carbon
product and a conventional product.
Specific advantages of CCfD’s are:
- Builds on the ETS, but guaranteeing an investable carbon price to spur early
deployment
- Can be allocated through cost-effective, competitive and (if preferred) technology
neutral tendering processes whereby different projects submit a bid reflecting the
strike price they need to make their technology competitive
- Reduces regulatory risk for investor,
- Enhances bankability, reduces financing cost (lower interest rate for financing)
In terms of implementation, CCfDs involve a contract between a public entity (e.g.
national government, European institution) and a producer of basic materials. The
CO2-eq
contract needs to specify a “strike price” in terms of €/t and a period of duration
to be specified in the tender specifications. In each year over that period, the public entity
would pay the producer the difference between the strike price and the realized average
CO2-eq
allowance price for every ton of avoided , in accordance with following formula:
Yearly support = (strike price- av. ETS price)*(ETS benchmark - actual em.) * annual production
66
Figure 91
For instance (see CO2-eq
), with a strike price of 100 €/t and an average
€/t CO2-eq over a particular year, the producer would be able to
allowance price of 50
sell the surplus allocated allowances that it no longer needs for 50€/t CO2-eq and receives
an additional 50 €/t avoided CO2-eq from the public entity. The amount of CO2-eq
avoided each year is calculated as the difference between the amount of GHG emissions
in accordance with the relevant ETS benchmark and the actual emissions, multiplied by
the annual production. This support is paid during a number of years agreed in advance.
Figure 97: Illustration of the policy mechanism of the Carbon Contract for Difference
67
Annex 12 Modernisation Fund
42 OVERALL CONTEXT
The Modernisation Fund (MF) is a dedicated funding programme to support 10 lower-
income EU MS (BG, HR, CZ, EE, HU, LV, LT, PL, RO and SK) in their transition to
climate neutrality by helping to modernise their energy systems and improve energy
efficiency.
The size of the Fund, its beneficiaries and the sharing of allowances among them and the
types of investment that it can finance are regulated in the ETS Directive.
The table below shows the size of the Modernisation Fund in terms of allowances.
Table 70: Size and distribution of the Modernisation Fund in terms of allowances
Member
State
Share
(Annex
IIb)
Allowances
(Article 10(1))
Transfers
(Article
10(2)(b)& 10c)
Total
Annual
amounts
Bulgaria 5,84% 16.095.825 0 16.095.825 1.609.583
Czechia 15,59% 42.968.135 150.184.557 193.152.692 19.315.269
Estonia 2,78% 7.662.054 0 7.662.054 766.205
Croatia 3,14% 8.654.262 5.978.852 14.633.114 1.463.311
Latvia 1,44% 3.968.834 0 3.968.834 396.883
Lithuania 2,57% 7.083.265 8.696.818 15.780.083 1.578.008
Hungary 7,12% 19.623.677 0 19.623.677 1.962.368
Poland 43,41% 119.643.793 0 119.643.793 11.964.379
Romania 11,98% 33.018.490 167.747.579 200.766.069 20.076.607
Slovakia 6,13% 16.895.104 35.011.645 51.906.749 5.190.675
Total 100,00% 275.613.439 367.619.451 643.232.890 64.323.289
The biggest four beneficiaries (RO, CZ, PL and SK) hold around 87% of the Fund. Half
the beneficiary MS decided to transfer additional allowances to the MF, demonstrating
their preference for this instrument compared to solidarity or Article 10c derogation.
The table below shows the monetary size of the current Modernisation Fund with
different carbon prices and rounded to million EUR. For the period 2021-2030, it pools
together a very significant monetary volume ranging from some 19,3 billion EUR with a
30 EUR carbon price to some 25,73 billion EUR with a 40 EUR carbon price. These
amounts are significantly above the expectations when the MF was agreed in 2017.
68
Table 71: Size and distribution of the Modernisation Fund in monetary terms
Member
State
Total 2021-
2030
With 30 EUR CO2
price (mio EUR)
With 35 EUR CO2
price (mio EUR)
With 40 EUR CO2
price (mio EUR)
Bulgaria 16.095.825 483mio € 563 mio € 644 mio €
Czechia 193.152.692 5.795 mio € 6.760 mio € 7.726 mio €
Estonia 7.662.054 230 mio € 268 mio € 306 mio €
Croatia 14.633.114 439 mio € 512 mio € 585 mio €
Latvia 3.968.834 119 mio € 139 mio € 159 mio €
Lithuania 15.780.083 473 mio € 552 mio € 631 mio €
Hungary 19.623.677 589 mio € 687 mio € 785 mio €
Poland 119.643.793 3.589 mio € 4.188 mio € 4.786 mio €
Romania 200.766.069 6.023 mio € 7.027 mio € 8.031 mio €
Slovakia 51.906.749 1.557 mio € 1.817 mio € 2.076 mio €
Total 643.232.890 19.297 mio € 22.513 mio € 25.729 mio €
43 INVESTMENTS TO BE SUPPORTED
A clear majority of respondents to the OPC (74%) supported the streamlining of the
Modernisation Fund and the enhancement of its coherence with the Green Deal. About
one third of respondents each were in favour to restrict financing to non-fossil fuel based
heating and cooling systems (33%) and to remove the exception for financing coal-fired
district heating in certain MS (32%). Less respondents favoured that the fund should only
finance priority projects to simplify the administration (8%).
Priority investments
43.1
As priority investments defined in Article 10d(2) of the ETS Directive, the
Modernisation Fund supports investments in:
- Generation and use of energy from renewable sources
- Energy efficiency
- Energy storage
- Modernisation of energy networks, including district heating, pipelines and grids
- Just transition in carbon-dependent regions: redeployment, re-skilling and
upskilling of workers, education, job-seeking initiatives and start-ups
At least 70% of the resources of the MF have to be spent on such priority investments. In
the territories covered by a Territorial Just Transition Plan, the just transition investments
supported by the Modernisation Fund need to be consistent with these plans designed by
beneficiary MS and they have a narrower scope compared to Just Transition Fund as they
69
focus only on the human dimension. So far no beneficiary MS has indicated interest in
financing such investments from the Modernisation Fund.
Some examples of priority investments were included in an assessment guidance
document developed by the EIB and published37
.
Non-Priority investments
43.2
The ETS Directive sets strong limits for solid fossil fuel investments - no support from
the Modernisation Fund shall be provided to energy generation facilities that use solid
fossil fuels, other than efficient and sustainable district heating in Bulgaria and Romania.
It also defines the priority investments as explained above.
There is a ‘grey zone’ of investments eligible for MF, but are not priority, and these are
considered non-priority investments. Such projects could be for instance investments in
gas power plants, natural gas infrastructure, industrial gas-fired electricity generators,
nuclear power generation projects. The contribution of such investments to the aims of
the Modernisation Fund and their potential to reduce emissions needs to be clearly
proven, and they are subject to a more complex governance. The main difference with
priority investments is that for non-priority investments the EIB conducts a detailed
technical and financial due diligence assessment to establish its financial viability and
added value to decarbonisation, based on which the Investment Committee assesses the
proposal and makes its recommendation on its financing. Therefore, the category of non-
priority investments poses some implementation difficulties and administrative burden
(different submission and reporting requirements, more detailed assessment, different
deadlines etc.)
44 GOVERNANCE
The governance of the Modernisation Fund is adapted to the nature of the investments,
whereby MS are in the driving seat.
The Beneficiary MS are responsible for selecting and submitting investment proposals
for Modernisation Fund support, paying off the support to the project proponents or
scheme managing authority(ies) upon the disbursement decision of the Commission,
participating in the Investment Committee, monitoring and submitting annual reports on
the implementation of the Modernisation Fund investments, auditing the project
proponents or scheme managing authorities and taking appropriate measures to ensure
37
https://modernisationfund.eu/documents/
70
that the financial interests of the Modernisation Fund are protected, including recovery
actions.
The Investment Committee is the main governing body of the Modernisation Fund. It is
chaired by the Commission, and composed of the EIB (which also acts as its secretariat),
10 beneficiary MS, 3 non-beneficiaries (NL, DE, SE were elected for the first five year
period). It is indispensable for endorsing non-priority investments, and is the main forum
to discuss any matter pertinent to the Modernisation Fund.
The EIB plays a significant role in the implementation of the Modernisation Fund and is
responsible for, auctioning the allowances which provide the resources of the
Modernisation Fund in accordance with the Auctioning Regulation, confirming whether
an investment is a priority or a non-priority one, conducting financial and technical due
diligence of non-priority investments, including an assessment of the expected emission
reductions, managing the assets of the Modernisation Fund, transferring the respective
resources to the beneficiary MS following the disbursement decision of the Commission,
and keeping track of the use of MS resources and providing the secretariat of the
Investment Committee.
The European Commission is responsible for ensuring State aid control over the
Modernisation Fund investments, taking the disbursement decision once an investment
has been confirmed by the EIB or recommended for financing by the Investment
Committee, chairing the Investment Committee and ensuring compliance with the ETS
Directive and the implementing act on the Modernisation Fund.
Overall, the governance structure is efficient and simple for priority investments, and
significantly more complex and time consuming for non-priority ones.
71
Annex 13: Auctioning revenues and distributional issues
between Member States
45 OVERVIEW OF POSSIBLE ETS REVENUES
The level of ETS revenues varies across the policy options and its total size is determined
by both the volume of allowances for auctioning and the allowance price. The below
table provides for different policy options an estimate of possible yearly (average)
revenues in billion EUR38
including regular auctioning regardless for which purpose
(distribution to MS, solidarity/redistribution, EU own resources) and excludes the
allowances set aside in the existing ETS for both Modernisation and Innovation Funds
(i.e. Modernisation Fund of 2% of the cap, and Innovation Fund of 450 million
allowances, IF0). It does not prejudge potential increases in the use of funds (Innovation
and Modernisation Funds, including potential contribution of the new ETS).
For the existing ETS, Table 62 presents estimates for the combination of the four
different ETS cap ambition options (AMB1, 2a, 2b, 3) retained for interaction analysis
with other options, with different options on the design of the Market Stability Reserve
(MSR0+, MSR1, 2). For maritime transport, the focus is on the options covering an ETS
extension to maritime considering the three possible geographical scopes (MINTRA,
MEXTRA50 and MEXTRA100 for EU 27). For the possible extension to other sectors,
results for both scope options (EXT1 and EXT2) are presented.
Future ETS carbon prices are by design uncertain. The carbon price assumptions
(expressed in €2020) used are consistent with the central carbon price assumptions for
periods described in Section 5.2.1, using a carbon price of EUR 45 for the period 2021-
2025 and EUR 55 for the period 2026-30. In that section, also the underpinning ranges of
scenario results and related uncertainties are described.
The figures below provide for the assumed carbon prices the maximum auction revenues
under each option as determined by the following auction shares assumed: 57% for
existing ETS39
, 100% for maritime transport and for buildings and transport, and up to
100% for all fossil fuel combustion. In the latter scope, a certain amount of allowances
would need to be used for free allocation or other forms of compensation to protect small
industry in a similar way against the risk of carbon leakage. For reasons of simplicity and
avoidance of prejudgement of political choices, revenues estimated in Table 62, do not
38
A range is provided where options are grouped, e.g. MSR1 to MSR3 in existing ETS cap options.
39
The 3% free allocation buffer, sourced from the auction share, is considered to be used for free
allocation, which is in line with the analysis on the risk of triggering the cross sectoral correction factor.
72
consider any split of the total revenues in MS between regular auctions, own resources,
Innovation Fund use or solidarity mechanisms including the Modernisation Fund.
Table 72: Estimates of ETS auction revenues available for MS regular auctions, Own
Resources and MS solidarity/redistribution per ETS sector (in bn EUR)
Option Sector
Annual average 2021-
2025
Annual average 2026-
2030
Existing ETS – stationary40,41
AMB1
+MSR0-2, IF0 Power and industry [20 - 22] [14 - 19]
AMB2a
+MSR0-2, IF0 Power and industry [19 - 21] [14 - 21]
AMB2b
+MSR0-2, IF0 Power and industry [18 - 20] [16 - 22]
AMB3
+MSR0-2, IF0 Power and industry [20 - 22] [16 - 20]
Maritime transport extension42
MAR1, MAR4 Maritime [0.4 – 1.4] [1.5 – 4.9]
Extension to buildings and transport or all fossil fuel combustion
EXT1, IF0 Buildings, transport [47]
EXT2, IF0
Buildings, transport,
other fossil fuel CO2 [up to 57]
The following sections illustrate distributional impacts on MS of the ETS revision and
current solidarity/redistribution provisions which use a part of ETS revenues to address
such impacts, first for the existing ETS in a strengthening context and then illustrating
them in the context of the new ETS. The final section provides an overview of aviation
and maritime specific aspects.
40
The range of estimates is consistent with the MSR modelling exercise for the combination of AMB
options with MSR options 0+ to 2 and with analysing the AMB options combined with MSR0+ based
on PRIMES MIX modelling results.
41
Aviation which is also part of the existing ETS is subject to a specific Impact Assessment where options
on the sector cap reference and its split between auctioning and free allocation are assessed and auction
revenue estimates are presented in a consistent way with this impact assessment.
42
Assuming a phase-in approach in the period 2023-2025. Options MAR2 and MAR3 with maritime
specific ETS or levy are projected to lead to significantly higher carbon prices and therefore
significantly higher revenues, i.e. around EUR 6.5 bn of annual average revenues in the period 2026-
2030 for MINTRA scope.
73
46 MEMBER STATE DISTRIBUTIONAL IMPACTS OF STRENGTHENING THE EXISTING
ETS
While 90% of auctioning revenues are distributed between MS based on the established
auction key, the ETS Directive for the period 2021-30 prolongs the solidarity provision
consisting of the redistribution of 10% of the auctioned allowances to 16 low-income
MS43
and introduced the Modernisation Fund for those countries with GDP per capita
below 60% of EU average (2013 reference)44
. While these do not apply to exactly the
same countries, it can be estimated that the overall solidarity provisions to low income
MS amount to around 7% of the current cap or almost 1 billion allowances (over the
2021-30 period).
Currently, all auction revenues under the solidarity provision and at least 50% of total
auctioning revenues distributed to MS should be used for targeted climate purposes.
These include measures to provide financial support in order to address social aspects in
lower- and middle-income households and measures to promote skill formation and
reallocation of labour in order to contribute to a just transition to a low carbon economy,
in particular in regions most affected by the transition of jobs, in close coordination with
the social partners.
The importance of the Modernisation Fund in addressing distributional concerns was also
highlighted by the European Council conclusions of 11 December 2020.
The Modernisation Fund is currently financed with 2% of total allowances (calculated on
the basis of the ETS cap). Each beneficiary MS can also decide to top up its own share of
the MF with allowances under Article 10c (derogation for free allocation to power
generation) and Article 10(2)(b) (solidarity allowances). The top up by MS who have
chosen to do so (CZ, HR, LT, RO, SK) amount to 367 million allowances compared to
the 275 million allowances initial size of the Fund (see also Annex 12). This indicates
that several MS are in favour of streamlining the support instruments available.
In the following we illustrate the MS impacts of the current legislation: Solidarity
provisions are kept at a proportion of about 7% of the revised ETS cap, (Modernisation
Fund of 2% of the cap and solidarity redistribution of 10% of auctioned allowances).
43
Eligible MSs: BG; CZ; EE; EL; ES; HR; LT; CY; LV; HU; MT; PL; PT; RO; SI; SK
44
Eligible MSs: BG; CZ; EE; HR; LT; LV; HU; PL; RO; SK
74
Given that so far beneficiary MS have shown trust in the Modernisation Fund by
transferring additional allowances to it, and bearing in mind the benefits of avoiding a
multiplication of support systems, an increase of the size of the Modernisation Fund
could be one option to consider. This could be accompanied by a simplification of its
governance structure by focusing only on priority investments.
Table 63 compares MS’ projected ETS emissions under the REF scenario (with current
ETS policy framework) with the MIX scenario (with -55% overall ambition level). The
results show that in the scenarios with increased ambition, MS emissions are generally
lower than in the reference scenario. This is valid for the 2021-30 period but also for each
of the 5 year periods 2021-25 and 2026-30. Table 61 provides the overview of the MS’
emission profile for the period 2013-19 (measured as the change of verified emissions
(VE) between 2013 and 2019) and their projected changes of emissions for the period
2021-30 under different model scenarios. Comprehensive MS scenario data is presented
in the separately published technical note45
.
45
See the “Technical Note on the Results of the “Fit for 55” core scenarios for the EU Member States”.
75
Table 73: Verified emissions (“VE”) 2013 to 2019, projected emissions 2020 to 2030
and projected differences in emissions between the REF scenario (with current ETS
policy framework) and the MIX scenario per Member State– scope is power and
industry.
VE change
from 13 to 19
REF [2020-
2030]
MIX [2020-
2030]
2021-30 2021-25 2026-30
EU27 -16% -18% -37% -12% -6% -19%
AT -1% -28% -40% -8% -4% -13%
BE -1% 23% 19% -3% -2% -4%
BG -11% -20% -44% -16% -7% -25%
CY 11% -25% -35% -6% -3% -10%
CZ -8% -40% -49% -8% -4% -13%
DE -25% -15% -36% -14% -7% -21%
DK -44% -23% -30% -3% -1% -6%
EE -47% 1% -49% -34% -23% -46%
EL -31% -39% -35% 1% -1% 3%
ES -11% -25% -36% -16% -12% -20%
FI -26% -29% -49% -9% -3% -17%
FR -18% -27% -41% -9% -4% -15%
HR -14% -30% -42% -10% -6% -16%
HU 2% -22% -29% -3% -1% -5%
IE -10% -26% -36% -5% -2% -9%
IT -14% -15% -45% -11% -1% -22%
LT -22% -9% -6% -2% -3% 0%
LU -19% -16% -28% -5% -1% -9%
LV -6% 1% -7% 8% 12% 4%
MT -56% -1% -6% 8% 10% 5%
NL -4% -36% -42% -11% -9% -14%
PL -11% -2% -36% -17% -8% -27%
PT -12% -47% -54% -6% -3% -10%
RO -14% -11% -40% -21% -13% -30%
SE -7% -12% -30% -9% -4% -15%
SI -15% 13% -9% -12% -6% -17%
SK -9% -25% -40% -9% -3% -15%
REF to MIX
76
Legend: Negative values (red bar) indicate projected emissions decrease compared to reference, positive
values (blue bar) indicate projected emissions increase compared to reference - first two columns compare
2030 to 2020 under each scenario; following columns compare REF to MIX where negative values (red
bar) indicate MIX scenario emissions are X% lower than REF for the same period; positive values (blue
bar) indicate MIX scenario emissions are X% higher than REF for the same period; MS highlighted are
low income MS46
.
To account for differential impacts, since 2013 under the ETS some of its revenues have
been redistributed to the lower income MS. The remainder of this section illustrates how
the 16 MS that are currently beneficiaries of any such redistribution will be impacted by
the different strengthening options.
The strengthening options impact the ETS cap by reducing the overall volume of
allowances, which has an impact on the amount of allowances available for
redistribution. Within the ETS framework the elements used for redistribution are in
general set in relative terms to the cap, e.g. 10% redistribution of the auction revenues or
the 2% of the total cap for the Modernisation Fund.
For the full impact on distribution of revenues between MS one has to look at all the
elements that generate revenues, i.e. the redistribution elements and the regular
auctioning share (currently 90% of the auctioned amount). Applying the current re-
distributional elements results in an overall impact for the 16 MS mainly concerned that
is proportionate to the reduction of the cap, i.e. those MS all get a relative reduction of
their revenues.
The impact per MS thus depends on the allocation of auction revenue, and on how the
solidarity elements are defined, such as the size of Modernisation Fund, and the size and
eligibility of the “10% redistribution” solidarity47
. Table 64 shows the results of applying
current solidarity framework for different ambition options with the resulting MF size for
the period from when the cap is updated. The ambition options are defined as AMB1:
6.24% LRF from 2026 without rebasing; AMB2a: 5,09% LRF from 2024 without
rebasing; AMB2b: 3,90% LRF from 2024 with 163 million rebase; AMB2c: 4,22% LRF
from 2024 with 119 million rebase; AMB3c: 4,57% LRF from 2026 with 163 million
rebase. Because all solidarity provisions are defined as a share of the cap (e.g. MF is 2%
of the cap) the relative difference at MS level between the solidarity allowances of
different ambition options to the existing framework is equal to the difference of the total
46
Low income MS defined as currently defined for Modernisation Fund eligibility (GDP per capita at
market prices below 60 % of the Union average in 2013
47
One additional solidarity element to consider is the share by which MS contribute to the Market Stability
Reserve intake, i.e. until 2025, the “10% solidarity” share is not accounted to determine the MS
contribution to the MSR intake.
77
cap (provided the same solidarity framework is used). The relative difference to existing
framework/cap is referenced in each ambition option in square brackets.
Under the increased ambition scenarios, as the cap reduces and both solidarity elements
are defined in proportion to the cap, the solidarity allocations reduce. Their value
however could increase with the projected increase in carbon prices.
Table 74: Existing ETS total solidarity allowances, in million allowances (including 10%
redistribution and Modernisation Fund), and changes under the different ETS
strengthening options48
–for period 2021-30
Existing
framework
AMB1
[-8,7%]
AMB2a
[-12%]
AMB2b
[-15%]
AMB2c
[-14%]
AMB3c
[-11%]
BG* 77 -9 -12 -11 -9 -9
CZ* 121 -14 -18 -17 -14 -13
EE* 24 -3 -4 -3 -3 -3
EL 36 -4 -5 -5 -4 -4
ES 70 -8 -11 -10 -8 -8
HR* 16 -2 -2 -2 -2 -2
CY 3 0 0 0 0 0
LV* 9 -1 -1 -1 -1 -1
LT* 16 -2 -2 -2 -2 -2
HU* 42 -5 -6 -6 -5 -5
MT 1 0 0 0 0 0
PL* 358 -41 -54 -51 -41 -40
PT 17 -2 -3 -2 -2 -2
RO* 142 -16 -21 -20 -16 -16
SI 5 -1 -1 -1 -1 -1
SK* 48 -5 -7 -7 -5 -5
Total solidarity 985 871 836 845 871 876
MF size for 2021-
30 276 244 234 237 244 245
MF share 2% 2% 2% 2% 2% 2%
48
Indicative figures before MSR application and applying the solidarity eligibility criteria in ETS current
framework
78
47 MEMBER STATE DISTRIBUTIONAL IMPACTS OF A NEW ETS FOR BUILDINGS AND
ROAD TRANSPORT OR ALL FOSSIL FUELS
The new ETS for buildings and transport will generate substantial auction revenues.
Different uses are possible, including contributions to own resources, to the Innovation
Fund as indicated in options IF1 and IF2, to the Modernisation Fund, to address social
impacts, as well for a specific solidarity element in the distribution of auctioning
revenues to MS. Any such use of revenues from the new ETS for solidarity purposes
should be seen in the context of the specific impacts on citizens that the extension of ETS
to new sectors (notably road transport and buildings) could bring about.
For any auctioning revenues that would accrue to MS, the questions of the distribution
key is highly relevant, especially if one were to strengthen the link with enabling MS to
address social impacts of carbon prices.
As it has been done for the existing ETS so far, a combination of a general element based
on historical emissions and a specific solidarity element appears a reasonable starting
point. Such a solidarity element for the new ETS could also be complemented and partly
replaced by other instruments, e.g. due to the overlapping scope between instruments to
address social impacts and instruments to address MS distributional issues.
Recent historical emissions could serve as proxy for different economic structures and
different efficiencies of the capital stock of the sectors concerned. In the context of the
new ETS, recent (2016-2018) MS shares of emissions in sectors covered under the new
ETS could be used as basis for – or starting point for further considerations on – the
general element of the distribution key for MS revenues. This data has been reported for
the UNFCCC inventory and comprehensively reviewed as part of the implementation of
the Effort Sharing Regulation. It has been used to define the starting point of the national
ESR reduction trajectories defining current 2030 ambition related to the sectors covered
by the new ETS.
If auctioning revenues were distributed to MS, it could also be considered that a certain
share of the revenue in the new ETS would be earmarked for use for specific purposes
such as those outlined in Table 4 in Section 5.2.5.
For the solidarity elements specific for the new ETS, the needs mentioned in Table 4 like
the risk of energy poverty, the availability of finance for renovations and the availability
of transport alternatives e.g. in rural areas would need to be reflected, in line with a just
transition and the principle that no one is left behind. With no robust or agreed data to
represent vulnerable groups directly, different ways to include GDP as indicator for a
MS’ capacity to address these appears to be a reasonable proxy for considerations on the
solidarity element of the key.
The PRIMES modelling gives an indication of how additional emission reductions for
reaching a total of -55% reductions by 2030 compared to 1990 in the relevant new ETS
79
sectors differ between MS in different scenarios with carbon pricing. Table 65 illustrates
this for EXT1.
Table 75: Additional reduction in percentage points between 2025 and 2030 in the
transport and buildings sector together, per Member State, compared to the Reference
scenario
Reference
MIX
(percentage
points
compared to
Reference)
EU -15% -9%
AT -9% -5%
BE -13% -14%
BG -4% -5%
HR -1% -8%
CY -14% -10%
CZ -10% -6%
DK -8% -4%
EE -4% -5%
FI -22% -7%
FR -18% -11%
DE -16% -12%
EL -16% -9%
HU -9% -11%
IE -26% -2%
IT -19% -8%
LV -13% -4%
LT -15% -5%
LU -19% -8%
MT -3% -5%
NL -11% -4%
PL -12% -13%
PT -17% -4%
RO -2% -7%
SK -2% -6%
SI -13% -7%
ES -17% -5%
SE -17% -7%
If a new ETS is created for the road transport and/or buildings sector (EXT1), there ought
to be full auctioning of allowances (see Section 5.2.4.3 and Annex 5). For option EXT2
auctioning would be by far the dominating allocation method with some free allocation
likely to be needed.
80
By definition, no solidarity and support mechanisms exist today as it is a new system.
This Impact Assessment illustrates the impacts if ETS revenues would be used in a
similar manner to how revenues are used under the existing ETS. Nevertheless, the
potential new sectors have very different characteristics from those in the existing ETS,
and the policy choices to address potential impacts of extending the ETS to these sectors
will have to take account of a broader set of considerations than the use of revenues
generated by the ETS. In particular:
For the road transport sector, there may be less of a need for specific solidarity
mechanisms, to the extent that higher-income citizens are likely to drive larger and less
fuel efficient cars, and lower income citizens in cities are more likely to use public
transport. However, this might not be universally valid, as higher income groups might
find it easier to switch to electric vehicles, and some lower income groups live in areas
with limited alternatives to the use of (older) cars. This suggests the need for a package
of measures that offers citizens an alternative to shouldering the carbon price, for
instance in the form of a competitive supply of zero carbon vehicles, access to finance,
and adequate infrastructure.
For the buildings sector, the availability of finance for renovations is an issue, and
especially the risk of energy poor and low income households who often live in worst
performing buildings. ETS revenues can contribute to finance such investments and
address energy poverty, notably in the context of the transition to a low carbon economy,
although this is an issue which requires broader policies at both the Union and MS level.
Bearing in mind these considerations, the remainder of the analysis here will focus on
how the revenues from the extension of the ETS could be distributed if an approach
analogous to that of the existing ETS were to be adopted. The following considerations
focus on option EXT1, but considerations for EXT2 are similar as the additional amount
of emissions added is small.
As the new ETS will in particular impact on vulnerable groups, which exist in all MS but
often with higher shares in lower income MS, it will be important how the auctioning
distribution and in particular the solidarity provisions address this. With no robust data to
represent vulnerable groups directly, such as energy poverty, a GDP/capita related
element in the distribution of auction revenues could provide a reasonable proxy. How
the MS distribute the revenues to vulnerable groups and apply national policies is crucial
for succeeding in a fair and just effect of decarbonisation policies in general, and carbon
pricing policies in particular.
Concerning road transport, lower income MS could see a continued faster increase in
transport demand, as well as a car fleet more based on second hand cars, and therefore
encounter greater difficulties in abating emissions from this sector. Higher income MS,
instead, would likely see a faster electrification as well as less growth in transport
demand. In the buildings sector, many aspects play a role in the impact, including the
81
heating fuel mix, building types, the use of district heating and combined heat and power
and the national policy mix in the Reference. Given the importance of access to finance
for buildings investments, this will be a greater challenge for lower income MS.
Table 66 illustrates what the application of current instruments to use ETS revenues to
address distributional purposes could mean for the new ETS combines a general element
based on recent historical emissions, a 10% solidarity element based on GDP per capita,
as in the existing ETS and a 2% contribution to the Modernisation Fund.
If 10% were to be distributed on the basis of a key with a strong GDP/capita element49
to
certain MS to address solidarity as it is in the methodology for the existing ETS, it would
have important benefits for lower income MS, and provide them with additional
resources to address potential impacts on vulnerable groups (in particular in relation to
heating and cooling of buildings).
The amounts available for distribution could be significant, from the time the new ETS
comes into operation. Between 2026 and 2030, total allocations for the buildings and
road transport sectors could be around 4.4 Gton of allowances. Using 2% of the cap of
the new ETS for a solidarity-based fund (like the Modernisation Fund) could generate
some 88 million allowances. Using then 10% of the remainder for distributional purposes
as in the existing ETS could imply that, in total, some 518million allowances would be
available for solidarity purposes
Table 66 illustrates preliminary results under EXT1 the results of applying the solidarity
elements of the first illustration, a 2% Modernisation Fund50
and a solidarity-based 10%
distribution based on the GDP/capita as in the existing ETS methodology for distribution
would result in.
49
Using only the GDP per capita component of the auction key formula of the existing ETS, updated with
average 2016-2018 GDP, and applied only to member states with GDP/Capita below 90% of the EU
average
50
Assuming the same recipients and distribution key as in the existing ETS
82
Table 76: Illustration of applying current ETS solidarity elements to the new ETS for
buildings and transport (EXT1)
Distribution of
10% of
auctioning
revenues
according to
methodology
based on
GDP/Cap
Distribution of
2% of
auctioning
revenue
according to
current
modernisation
fund shares
2% of revenues
to increase
Modernisation
Fund, then
apply 10%
solidarity share
to remainder
(EXT1)
EU 438.9 87.8 517.9
AT 0.0 0.0 0.0
BE 0.0 0.0 0.0
BG 23.7 5.2 28.4
HR 14.7 2.8 17.2
CY 0.9 0.0 0.8
CZ 28.8 13.8 42.0
DK 0.0 0.0 0.0
EE 2.7 2.5 5.1
FI 0.0 0.0 0.0
FR 0.0 0.0 0.0
DE 0.0 0.0 0.0
EL 23.9 0.0 23.4
HU 38.8 6.3 44.4
IE 0.0 0.0 0.0
IT 0.0 0.0 0.0
LV 6.0 1.2 7.2
LT 9.4 2.3 11.4
LU 0.0 0.0 0.0
MT 0.1 0.0 0.1
NL 0.0 0.0 0.0
PL 181.9 37.9 216.1
PT 17.5 0.0 17.2
RO 52.0 10.5 61.5
SK 15.2 5.4 20.3
SI 4.7 0.0 4.6
ES 18.8 0.0 18.4
SE 0.0 0.0 0.0
MS results illustrating a general element for a distribution key for auction revenues based
on historical emissions similar as in the existing ETS (used in illustrations 1 and 2) are
shown below for option EXT1 in the second column of Table 67 below, using for that
average 2016-2018 emissions as used under the ESR.
83
The third column presents the above described solidarity share element of illustration 1 in
a comparable way to the general element, i.e. as distribution key to MS, calculated based
on a 10% redistribution under EXT1. As the comparison with column 2 indicates, such a
key element would clearly favour low income MS.
Table 77: Illustration of applying different currently used distribution keys of allowances
for the new ETS (buildings plus transport) across Member States,
Distribution
based on 2016 -
2018 average
emissions
Illustration 1:
Solidarity
distribution of
auctioning
revenues
according to
ETS
methodology
based on
GDP/Cap
Illustration 2:
ESR distribution
2016-2018 GDP-
based ESR
ambition based
on 40% overall
ESR target
EU 100.0% 100.0% 100.0%
AT 2.5% 0.0% 2.0%
BE 3.9% 0.0% 2.9%
BG 0.8% 5.4% 1.3%
HR 0.7% 3.4% 1.0%
CY 0.2% 0.2% 0.2%
CZ 2.4% 6.6% 3.2%
DK 1.2% 0.0% 1.3%
EE 0.2% 0.6% 0.3%
FI 1.1% 0.0% 1.1%
FR 16.1% 0.0% 13.8%
DE 22.7% 0.0% 16.0%
EL 1.6% 5.4% 3.2%
HU 1.9% 8.8% 2.6%
IE 1.6% 0.0% 1.8%
IT 13.6% 0.0% 12.8%
LV 0.3% 1.4% 0.5%
LT 0.5% 2.1% 0.7%
LU 0.6% 0.0% 0.3%
MT 0.1% 0.0% 0.1%
NL 4.4% 0.0% 4.4%
PL 8.3% 41.4% 10.5%
PT 1.6% 4.0% 2.3%
RO 2.1% 11.9% 4.5%
SK 0.9% 3.5% 1.2%
SI 0.6% 1.1% 0.6%
ES 8.9% 4.3% 10.0%
SE 1.3% 0.0% 1.4%
84
A second illustration combines a general element based on recent historical emissions
(second column), a solidarity element based on Effort Sharing targets for 2030 compared
to 2005 applied to the new ETS sectors, and a 2% contribution to the Modernisation
Fund (as in Table 66, column 3). The fourth column of Table 67 illustrates therefore a
distribution key to MS which would result from a solidarity element as used under the
Effort Sharing Regulation, proportional to 2030 ESR allocations51
, as calculated for a
40% reduction target, and which incorporate both historical emissions and a GDP/capita
component52
. As the comparison of column 4 and column 2 indicates, this would in
general benefit MS with lower GDP per capita, as they receive lower decreases of 2030
allocations compared to 2005 as higher income MS. If it is distributed according to the
ESR 2030 target formula for all MS as illustrated, all MS would receive allocations,
unlike with a methodology like in the existing ETS.
It is to be noted that the distributive effect of the solidarity elements under illustrations 1
and 2 in column 3 and 4 cannot be directly compared. Illustration 1 is calculated based on
a distribution key similar to the current 10% share ETS distribution. If one were to follow
the ESR solidarity rationale used for illustration 2, the key would need to be applied to a
significantly higher share of the total allowances to give benefits of similar order of
magnitude for the lowest income MS as the key used under illustration 1. Under the
existing ESR the 2030 element defines 50% of the target trajectory 2021 to 2030, with
the other 50% defined by 2016-18 emissions, the general distribution key element
illustrated in the second column.
For the residential sector, energy poverty issues are of special importance to investigate
in view of possibly distributional impacts between MS but also household income
groups. Below tables give an estimate of simple average rises by MS groups in terms of
GDP per capita in total residential sector household expenditures as a percentage of
consumption between Reference Scenario and the MIX and MIX-CP policy scenarios
with a different role of carbon pricing in the policy mix. The expenditure components
related to capital costs for investments and to fuel expenses have been presented in
Section 6.3.2 and 6.3.3.
51
Assuming for comparability an ESR reduction target of 40% compared to 2005.
52
Using 2005 emissions and average 2016-18 GDP as in the ESR review impact assessment.
85
The total expenditure rises presented in Table 68 are estimated for low, medium and high
income groups as defined according to PRIMES modelling and provided as an average
characterising different groups of MS: those with a GDP/ capita below 60% of the EU
average, those with a GDP/ capita between 60% and 100% of the EU average, and those
with a GDP/ capita above the EU average. The figures between the groups are not
necessarily comparable, as the high, medium and low income groups are defined relative
to the average income of a MS. Note that there are therefore uncertainties involved in the
aggregation within the groups.
Total expenditures are likely to rise, due to a rise in annual capital costs.
Table 78: Average rise in total household expenditures in the residential sector, as a
percentage of consumption per income group, average for Member States of a certain
income level, MIX and MIX-CP percentage point difference compared to Reference
Total expenditures vs Reference in
2030
Lower
income
Households
Medium
income
Households
Higher
income
Households
All
households
EU
MIX 1.16% 0.51% 0.33% 0.59%
MIX-CP 0.76% 0.40% 0.31% 0.45%
MS < 60%
GDP/capita
MIX 2.14% 0.96% 0.67% 1.09%
MIX-CP 2.24% 1.03% 0.74% 1.17%
MS between 60-
100% GDP/capita
MIX
1.50% 0.52% 0.27% 0.63%
MIX-CP 0.39% 0.21% 0.17% 0.23%
MS > 100%
GDP/capita
MIX 0.85% 0.42% 0.30% 0.48%
MIX-CP 0.66% 0.36% 0.28% 0.40%
Source: PRIMES
48 MEMBER STATE DISTRIBUTIONAL IMPACTS OF AVIATION AND MARITIME ETS
In accordance with Article 3d(3) of the ETS Directive, the revenue from auctioning
aviation allowances, for which a change to full auctioning is analysed in the aviation
ETS impact assessment, is proportionate to the share of the total attributed aviation
emissions for all MS for the reference year, which is the calendar year ending 24 months
before the start of the trading period. MS with higher aviation activity have a higher
share, without having regard to other economic aspects. For the fourth trading period of
the ETS (which has begun on 1 January 2021) this means that the reference year for the
distribution of aviation revenues is 2018. For the increased revenues from an increased
share of auctions from the allocation of aviation allowances the same rule could apply,
subject to considerations to use ETS revenues as own resources of the EU.
86
The transition to full auctioning would require the total quantity of allowances for
aviation cap to be consolidated, moving from the current bottom-up approach (which
defines the cap on the basis of free allocation, itself defined with the help of historical
emissions). The cap represented by the total quantity of allowances for aviation and the
application of the linear reduction factor on the cap have an obvious direct impact on the
revenues. Because the defined cap would continue to be lower than the actual emissions
from aviation (in 2019 it covered slightly more than half of the emissions), aviation
would represent an additional demand for allowances from other sectors under the ETS.
This demand, in practice, will depend to a considerable extent from the pace of the
recovery of the sector from the COVID 19 crisis and from the method how the cap will
be calculated.
Although maritime transport is essential to the competitiveness and economic
functioning of the EU as a whole, shipping activity is concentrated in specific regions
and countries. Ports attract a range of shipping-related activities, creating a cluster of
businesses and jobs which in turn support the local economies, through encouraging
expenditure on goods and services.
The parts of the EU-27 which are likely to be most affected by changes in the shipping
sector include countries and regions which heavily rely on maritime transport: to import
raw materials necessary for domestic industries; to import finished goods to meet the
demand of domestic consumers; to export products and services (including tourism) to
other parts of Europe; as a key mode of transport for commuters, industry and tourists;
and as a significant source of employment and revenue. A detailed analysis of these
activities and the extent to which they impact EU MS is presented in Annex 10.
Based on the above considerations, under all policy options, the countries and regions
which are most exposed to possible changes in shipping activity are likely to be islands,
countries with coastal areas and those which are particularly exposed economically to the
shipping sector. These areas rely heavily on maritime transport to facilitate tourism, draw
in export revenues and import the primary and secondary goods needed by their
residents. Some of these countries are heavily dependent on international trade for their
economic performance. A number of Mediterranean and Northern European countries
and regions are also heavily dependent on maritime transport, due to the significance of
tourism to these economies, including Malta, Denmark and Greece. The EU outermost
regions53
are also heavily dependent on maritime transport for territorial continuity, for
53
Scattered across the Atlantic Ocean, the Caribbean sea, Latin America and the Indian Ocean, the nine
EU outermost regions - Guadeloupe, French Guiana, Martinique, Mayotte, Reunion Island and Saint-
Martin (France), the Azores and Madeira (Portugal) and Canary Islands (Spain) - face permanent
87
imports of raw materials, essential goods and other products, as well as for some exports.
In addition, given their geographic location, (some) outermost regions rely on substantial
maritime freight transport with neighbouring third countries. The geographical
distribution of impacts will ultimately depend on the trade and economic characteristics
of each individual country and region. Moreover, for countries where shipping is most
important for extra-EU trade, a large geographical scope (MEXTRA50 or MEXTRA100)
will have a higher impact compared to MINTRA only.
It might warrant further considerations how to address this, subject to considerations on
using ETS revenues as own resources of the EU for repayment of the Recovery and
Resilience Facility which also supports investments needed for the transition to climate.
If maritime auctioning revenues were to be distributed to MS, different climate purposes
should be considered (e.g. for climate mitigation or adaptation measures, R&D
investments or supporting developed countries). In the targeted stakeholders' consultation
on the extension of EU emissions trading to maritime, the majority of stakeholders
indicated that revenues from carbon pricing could support the decarbonisation of the
sector, e.g. by supporting project development costs, reducing upfront costs or reducing
the price gap between fossil fuels and sustainable alternative fuels.
constraints due to their remoteness, small size, insularity, heavy dependence on air and maritime
connections to the European continent for goods, access to services and territorial continuity. They have
the highest EU unemployment rates and some of the lowest GDP rates. It is in this context that the
Treaty on the Functioning of the European Union (Article 349 TFEU), provides for specific measures to
support the outermost regions, including derogations on the application of EU law in these regions.
88
Annex 14: 2030 Climate Target Plan policy conclusions
49 2030 CLIMATE TARGET PLAN POLICY CONCLUSIONS
The Communication on stepping up Europe’s 2030 climate ambition - the Climate Target
Plan (CTP)54
and its underpinning impact assessment are the starting point for the
initiatives under the Fit for 55 package.
The plan concluded on the feasibility - from a technical, economic and societal point of
view - of increasing the EU climate target to 55% net reductions of greenhouse gases
(GHG) emissions by 2030 compared to 1990. It also concluded that all sectors need to
contribute to this target.
In particular, with energy supply and use responsible for 75% of emissions, the plan put
forward ambition ranges for renewables and energy efficiency, which correspond in a
cost-effective manner to the increased climate target. The climate target plan also
established that this increase in climate and energy ambition will require a full update of
the current climate and energy policy framework, undertaken in a coherent manner.
As under the current policy framework, the optimal policy mix should combine, at the
EU and national levels, strengthened economic incentives (carbon pricing) with updated
regulatory policies, notably in the field of renewables, energy efficiency and sectoral
policies such as CO2 standards for new light duty vehicles. It should also include the
enabling framework (research and innovation policies, financial support, addressing
social concerns).
While sometimes working in the same sectors, the policy tools vary in the way they
enable the achievement of the increased climate target. The economic incentives
provided by strengthened and expanded emissions trading will contribute to the cost-
effective delivery of emissions reductions. The regulatory policies, such as the
Renewable Energy Directive (RED), the Energy Efficiency Directive (EED), the
Regulation on CO2 standards for vehicles supported by the Directive on the alternative
fuels infrastructure, and the Re(FuelEU) aviation and maritime initiatives, aim at
addressing market failures and other barriers to decarbonisation, but also create an
enabling framework for investment, which supports cost-effective achievement of
climate target by reducing perceived risks, increasing the efficient use of public funding
and helping to mobilise and leverage private capital. The regulatory policies also pave
the way for the future transition needed to achieve the EU target of the climate neutrality.
COM (2020) 562 final.
54
89
Such a sequential approach from the CTP to the Fit for 55 initiatives was necessary in
order to ensure coherence among all initiatives and a collective delivery of the increased
climate target.
With the “MIX” scenario, the impact assessment included a policy scenario that largely
reflects the political orientations of the plan.
The final calibration between the different instruments is to be made depending, inter
alia on the decision on the extension of emissions trading beyond the maritime sector and
its terms.
The Table 78 below shows the summary of the key CTP findings:
Table 79: Key policy conclusions of the Climate Target Plan
POLICY CONCLUSIONS IN THE CTP
GHG emissions
reduction
 At least 55% net reduction (w.r.t. 1990)
 Agreed by the European Council in December 2020
 Politically agreed by the European Council and the European Parliament in
the Climate Law
ETS  Corresponding targets need to be set in the EU ETS and the Effort Sharing
Regulation to ensure that in total, the economy wide 2030 greenhouse gas
emissions reduction target of at least 55% will be met.
 Increased climate target requires strengthened cap of the existing EU ETS
and revisiting the linear reduction factor.
 Further expansion of scope is a possible policy option, which could include
emissions from road transport and buildings, looking into covering all
emissions of fossil fuel combustion.
 EU should continue to regulate at least intra-EU aviation emissions in the
EU ETS and include at least intra-EU maritime transport in the EU ETS.
 For aviation, the Commission will propose to reduce the free allocation of
allowances, increasing the effectiveness of the carbon price signal in this
sector, while taking into account other policy measures.
ESR  Corresponding targets need to be set in the Effort Sharing Regulation and
under the EU ETS, to ensure that in total, the economy wide 2030
greenhouse gas emissions reduction target of at least 55% will be met.
LULUCF  Sink needs to be enhanced.
 Agriculture forestry and land use together have the potential to become
rapidly climate-neutral by around 2035 and subsequently generate
removals consistent with trajectory to become climate neutral by 2050.
90
CO2 standards
for cars and
vans
 Transport policies and standards will be revised and, where needed, new
policies will be introduced.
 The Commission will revisit and strengthen the CO2 standards for cars and
vans for 2030.
 The Commission will assess what would be required in practice for this
sector to contribute to achieving climate neutrality by 2050 and at what
point in time internal combustion engines in cars should stop coming to the
market.
Non-CO2 GHG
emissions
 The energy sector has reduction potential by avoiding fugitive methane
emissions. The waste sector is expected to strongly reduce its emissions
already under existing policies. Turning waste into a resource is an
essential part of a circular economy, as is prevention of waste, addressed
by both Circular Economy and the Zero Pollution Action Plans. Under
existing technology and management options, agriculture emissions
cannot be eliminated fully but they can be significantly reduced while
ensuring food security is maintained in the EU. Policy initiatives have
been included in the Methane Strategy.
Renewables  38-40% share needed to achieve increased climate target cost-effectively.
 Renewable energy policies and standards will be revised and, where
needed, new policies will be introduced.
 Relevant legislation will be reinforced and supported by the forthcoming
Commission initiatives on a Renovation Wave, an Offshore Energy
strategy, alternative fuels for aviation and maritime as well as a Sustainable
and Smart Mobility Strategy.
 EU action to focus on cost-effective planning and development of
renewable energy technologies, eliminating market barriers and providing
sufficient incentives for demand for renewable energy, particularly for end-
use sectors such as heating and cooling or transport either through
electrification or via the use of renewable and low-carbon fuels such as
advanced biofuels or other sustainable alternative fuels.
 The Commission to assess the nature and the level of the existing,
indicative heating and cooling target, including the target for district
heating and cooling, as well as the necessary measures and calculation
framework to mainstream further renewable and low carbon based
solutions, including electricity, in buildings and industry.
 An updated methodology to promote, in accordance with their greenhouse
gas performance, the use of renewable and low-carbon fuels in the
transport sector set out in the Renewable Energy Directive.
 A comprehensive terminology for all renewable and low-carbon fuels and a
European system of certification of such fuels, based notably on full life
cycle greenhouse gas emissions savings and sustainability criteria, and
existing provisions for instance in the Renewable Energy Directive.
 Increase the use of sustainably produced biomass and minimise the use of
whole trees and food and feed-based crops to produce energy through inter
alia reviewing and revisiting, as appropriate, the biomass sustainability
criteria in the Renewable Energy Directive,
91
55
The Impact Assessment identifies a range of 35.5% - 36.7% depending on the overall design of policy
measures underpinning the new 2030 target. This would correspond to a range of 39.2% - 40.6% in
terms of primary energy consumption.
Energy
Efficiency
 Energy efficiency policies and standards will be revised and, where
needed, new policies will be introduced.
 Energy efficiency improvements will need to be significantly stepped up to
around 36-37% in terms of final energy consumption55
.
 Achievement of a more ambitious energy efficiency target and closure of
the collective ambition gap of the national energy efficiency contributions
in the NECPs will require actions on a variety of fronts.
 Renovation Wave will launch a set of actions to increase the depth and the
rate of renovations at single building and at district level, switch fuels
towards renewable heating solutions, diffuse the most efficient products
and appliances, uptake smart systems and building-related infrastructure
for charging e-vehicles, and improve the building envelope (insulation and
windows).
 Action will be taken not only to better enforce the Energy Performance of
Buildings Directive, but also to identify any need for targeted revisions.
 Establishing mandatory requirements for the worst performing buildings
and gradually tightening the minimum energy performance requirements
will also considered.


EN EN
EUROPEAN
COMMISSION
Brussels, 14.7.2021
SWD(2021) 601 final
PART 3/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Directive 2003/87/EC establishing a system for greenhouse gas emission
allowance trading within the Union, Decision (EU) 2015/1814 concerning the
establishment and operation of a market stability reserve for the Union greenhouse gas
emission trading scheme and Regulation (EU) 2015/757
{COM(2021) 551 final} - {SEC(2021) 551 final} - {SWD(2021) 557 final} -
{SWD(2021) 602 final}
Europaudvalget 2021
KOM (2021) 0551 - SWD-dokument
Offentligt
1
Table of contents
LIST OF FIGURES ........................................................................................................................................ 2
LIST OF TABLES.......................................................................................................................................... 3
ANNEX 7: LEGAL REVIEW OF THE MARKET STABILITY RESERVE............................................... 4
19 REQUIREMENTS OF THE LEGAL REVIEW CLAUSE .................................................................. 4
20 MSR AND THE HISTORICAL SURPLUS......................................................................................... 5
The Total Number of Allowances in Circulation (TNAC)............................... 5
20.1
The historical surplus........................................................................................ 6
20.2
The introduction of the Market Stability Reserve (MSR)................................. 8
20.3
The impact of the MSR on the historical surplus.............................................. 8
20.4
Net demand from other sources ...................................................................... 10
20.5
20.5.1 Aviation........................................................................................................................10
20.5.2 The Swiss ETS.............................................................................................................11
20.5.3 Market behaviour .........................................................................................................12
21 MSR AND EU ETS RESILIENCE .................................................................................................... 15
The MSR and competitiveness impacts.......................................................... 18
21.1
ANNEX 8: DESIGN OPTIONS FOR THE MARKET STABILITY RESERVE........................................ 20
22 SENSITIVITY ANALYSIS FOR THE MSR..................................................................................... 20
Performance of each MSR design option given future shocks ....................... 20
22.1
Anticipated decrease in EUA demand: coal phase out ................................... 23
22.2
Unanticipated change in EUA demand: economic shock............................... 27
22.3
Induced holdings to stimulate tightening........................................................ 39
22.4
23 POLICY VARIATION SENSITIVITIES........................................................................................... 43
MSR results for the extreme cap scenarios..................................................... 43
23.1
23.1.1 Market balance.............................................................................................................43
23.1.2 Stylised carbon prices ..................................................................................................47
MSR results for AMB2c ................................................................................. 48
23.2
MSR results for a hybrid MSR option ............................................................ 50
23.3
Introduction of a Carbon Border Adjustment Mechanism.............................. 55
23.4
24 ESTIMATES OF FUTURE HEDGING NEEDS AND POTENTIAL IMPLICATIONS FOR THE MSR
THRESHOLDS................................................................................................................................... 58
2
LIST OF FIGURES
Figure 26: 2019 TNAC Calculations ...................................................................................................5
Figure 27: TNAC composition Phase 2 and 3 .....................................................................................7
Figure 28: Recent evolution of the TNAC...........................................................................................8
Figure 29: Allowance price evolution compared to the TNAC.........................................................10
Figure 30: The TNAC with and without net aviation demand ..........................................................11
Figure 31: TNAC under an anticipated reduction in EUA demand...................................................24
Figure 32: MSR intakes under an anticipated reduction in EUA demand.........................................25
Figure 33: EUA prices under an anticipated reduction in EUA demand...........................................26
Figure 34: Emissions under an anticipated reduction in EUA demand .............................................27
Figure 35: TNAC under a temporary reduction in EUA demand......................................................28
Figure 36: MSR intakes with a temporary reduction in EUA demand..............................................29
Figure 37: EUA prices relative to baseline under a one period unanticipated reduction in EUA
demand................................................................................................................................30
Figure 38: EUA prices relative to baseline (for MSR0+)..................................................................31
Figure 39: TNAC under a persistent unanticipated reduction in EUA demand ................................32
Figure 40: MSR intakes with a persistent unanticipated reduction in EUA demand ........................33
Figure 41 EUA prices under a persistent unanticipated reduction in EUA demand....................34
Figure 42: TNAC under a persistent unanticipated increase in demand for EUAs ...........................36
Figure 43: MSR intake under a persistent unanticipated increase in demand for EUAs...................37
Figure 44: EUA prices under a persistent unanticipated increase in EUA demand ..........................38
Figure 45: TNAC under an induced holdings shock..........................................................................40
Figure 46: MSR intakes under an induced holdings shock................................................................41
Figure 47: EUA prices under induced holdings.................................................................................42
Figure 48: TNAC, intake and cap post-MSR adjustments under cap scenarios under the baseline
design MSR0+ ....................................................................................................................45
Figure 49 TNAC, intake and cap post-MSR adjustments under cap scenarios under MSR1......46
Figure 50: TNAC, intake and cap post-MSR adjustments under cap scenarios under MSR2 ..........47
Figure 51: Carbon price with MSR0+, for the cap scenarios AMB1, AMB2a, AMB2b ..................48
Figure 52: TNAC for MSR0+, MSR1 and MSR2, for cap scenario AMB2c....................................48
Figure 53: TNAC and intakes for MSR0+, MSR1 and MSR2, with cap scenario AMB2c ..............49
Figure 54: Stylised presentation of carbon price and emissions for MSR0+, MSR1 and MSR2,
for the cap scenario AMB2c ...............................................................................................50
Figure 55: Intake profile for the MSR hybrid option, MSR1 and MSR2 at various TNAC levels ...51
Figure 56: TNAC and intakes for MSR0+, MSR1, MSR2 and the hybrid MSR option, for central
cap scenario AMB2a...........................................................................................................52
Figure 57: TNAC and intakes for MSR1, MSR2 and the hybrid MSR option, for cap scenario
AMB2c................................................................................................................................53
Figure 58: Evolution of the TNAC with the hybrid MSR option, for the cap scenarios AMB1,
AMB2a, AMB2b.................................................................................................................54
Figure 59: Evolution of the stylised carbon price and emission level for the MSR options, for cap
scenario AMB2a .................................................................................................................55
Figure 60: Auction volumes with and without a CBAM (prior to MSR adjustment), under cap
AMB2a................................................................................................................................56
Figure 61: TNAC with and without a CBAM under the three MSR options (with cap setting of
AMB2a) ..............................................................................................................................57
Figure 62: Range of estimates for hedging demand from utilities to 2030........................................58
Figure 63: Makeup of total hedging demand for EU allowances to 2030 .........................................59
3
LIST OF TABLES
Table 23: Stress tests analysed in the model......................................................................................22
Table 24: Parameters of a hybrid MSR option ..................................................................................50
4
Annex 7: Legal review of the Market Stability Reserve
19 REQUIREMENTS OF THE LEGAL REVIEW CLAUSE
When the European co-legislators introduced the MSR into the EU ETS in 2015, they introduced an
obligation into Article 3 of the MSR Decision for the Commission to conduct a review of the
reserve within three years of its start of operation (i.e. by the end of 2021)1
and at five-year intervals
thereafter, on the basis of an analysis of the orderly functioning of the European carbon market:
paying particular attention to the percentage figure for the MSR feed, the numerical value of the
threshold, and the number of allowances to be released from the reserve; looking also into the
impact of the reserve on growth, jobs, the Union's industrial competitiveness and on the risk of
carbon leakage.
Another aspect to be considered in the review was introduced in 2018, namely concerning the
invalidation mechanism set out in Article 1(5a) of the MSR Decision2
.
Article 3 of the MSR Decision requires the Commission to submit, where appropriate, a legislative
proposal to the EP and Council.
In what follows, the results of this review are presented, in two sections: (i) an analysis of whether
the MSR has reduced the historical surplus, and (ii) an analysis of whether the MSR has improved
market resilience. The results are based on a study conducted by Vivid Economics to support the
European Commission in the review of the Market Stability Reserve (MSR) of the EU ETS (“the
Vivid study”)3
.
The study concluded that taking into account all sources of net demand in the calculation of the
TNAC and in the threshold-setting would improve the impact of the measure on market resilience.
Future changes to the MSR should try to minimise regulatory complexity to the extent possible
while maintaining market balance.
1
Article 3: “The Commission shall monitor the functioning of the reserve in the context of the report provided for in
Article 10(5) of Directive 2003/87/EC. That report should consider relevant effects on competitiveness, in particular
in the industrial sector, including in relation to GDP, employment and investment indicators. Within three years of
the start of the operation of the reserve and at five-year intervals thereafter, the Commission shall, on the basis of an
analysis of the orderly functioning of the European carbon market, review the reserve and submit a proposal, where
appropriate, to the European Parliament and to the Council. Each review shall pay particular attention to the
percentage figure for the determination of the number of allowances to be placed in the reserve pursuant to Article
1(5) of this Decision, as well as the numerical value of the threshold for the total number of allowances in
circulation and the number of allowances to be released from the reserve pursuant to Article 1(6) or (7) of this
Decision. In its review, the Commission shall also look into the impact of the reserve on growth, jobs, the Union's
industrial competitiveness and on the risk of carbon leakage.”
2
See in this regard Article 2 of Directive (EU) 2018/410 amending article 1 of the MSR decision, by adding a new
paragraph 5a: “Unless otherwise decided in the first review carried out in accordance with Article 3, from
3
Vivid Economics (2021) – « The Review of the EU ETS Market Stability Reserve », unpublished.
5
20 MSR AND THE HISTORICAL SURPLUS
The Total Number of Allowances in Circulation (TNAC)
20.1
The EU ETS cap defines the number of allowances that are made available to market participants,
where allowances that are not used can be banked for future use. Regulated entities as well as non-
compliance market participants may bank allowances between years and trading periods without
constraint. Therefore, allowances accumulate in holding accounts when they are not needed for
compliance.
Credits from international projects are incremental to those distributed under the cap. Certified
Emission Reductions (CERs) from the Clean Development Mechanism (CDM) and Emission
Reduction Units (ERUs) from Joint Implementation (JI) that are issued under the Kyoto Protocol
can be used for compliance up to a predefined limit. In Phase 2, these could be used directly for
compliance, whereas in Phase 3 these credits had to be exchanged for EU allowances. These
allowances cannot be used for compliance under Phase 4 of the EU ETS.
The Total Number of Allowances in Circulation (TNAC) estimates the cumulative amount of
banking by market participants. The TNAC captures the total supply of allowances issued in
accordance with the cap that have not been used for compliance, voluntarily cancelled, or otherwise
made unavailable to market participants. The TNAC also includes allowance supply from
international credits. Since 2017, the TNAC is calculated and published each year by the European
Commission.
Each May, the TNAC from the previous calendar year is calculated and published by the EU
Commission. The TNAC publications include data on underlying supply and demand components
as recorded on 1 April. As an example, Figure 26 depicts an example of the 2019 TNAC, published
in May 2020.
Figure 26: 2019 TNAC Calculations
6
MSR adjustments are based on 24% of the TNAC (12% post-2023) when it exceeds the pre-defined
thresholds of 833 million allowances. When the TNAC is shown to exceed the upper threshold,
auction volumes are reduced from 1 September of the current year to 31 August of the following
year. These allowances are placed in the MSR. When the TNAC falls short of a 400 million
allowance threshold, auction volumes are increased by 100 million in the same year of the TNAC
publication by injecting allowances held in the MSR.
The TNAC is an important indicator of a surplus or deficit of allowances in the market, and
therefore provides an indication of market balance and allowance prices. The TNAC is a quantity-
based indicator to of allowance scarcity. A large or growing TNAC is an indicator of a lack of
scarcity in the short-term, which may be associated with low market prices and therefore
insufficient incentives to abate emissions. Likewise, a very low TNAC is an indicator that there is
not sufficient supply in the market, including enough available allowances to optimise low-carbon
investment strategies across time periods. This may be associated with high allowance prices and
volatility.
The historical build-up of the TNAC led to market imbalances and very low prices in Phase 2 and
Phase 3 of the EU ETS, motivating the introduction of measures to address this imbalance,
including the MSR. The historical evolution of the TNAC is described in the following section,
along with a description of how the market imbalance was addressed through policy interventions
and the introduction of the MSR.
The historical surplus
20.2
The TNAC is an indicator of a surplus or deficit of allowances in the market, and therefore provides
an indication of market balance and allowance scarcity. A large or growing TNAC is an indicator of
a lack of scarcity in the short-term, which may be associated with low market prices and therefore
insufficient incentives to abate emissions. Likewise, a very low TNAC is an indicator that there
may not sufficient supply in the market, including enough available allowances to optimise low-
carbon investment strategies across time periods.
There was a historical build-up of the TNAC, that led to market imbalances in Phase 2 and Phase 3
of the EU ETS, motivating the introduction of measures to address this imbalance, including the
MSR.
In Phase 2 of the EU ETS (2008 to 2012) the number of allowances that were put into
circulation exceeded demand, leading to a buildup of 1.75 billion unused allowances in the
system. Total supply of allowances exceeded demand in every year except 2008. The volume of
allowances allocated for free or auctioned exceeded verified GHG emissions each year post 2008.
This supply-demand imbalance resulted in the initial build-up of the TNAC over the period.
Market participants were able to carryover these unused allowances into Phase 3, adding supply
equivalent to 11% of the cumulative cap over Phase 3.
In Phase 3, actual GHG emissions were lower than anticipated when the cap was set. This low
underlying demand would likely have resulted in the continued growth of the TNAC in the absence
of market intervention. The allowance surplus was further exacerbated by delivery of allowances
under the NER300 program and continued use of international credits.
7
The growing TNAC at the beginning of Phase 3 also lead to the price of EU allowances fell to lows
of €4.46/t and €6.00/t in 2013 and 2014 respectively.4
These low prices would have provided very
little incentive to regulated entities to reduce emissions or invest in low-carbon technologies. Given
these structural market imbalances could not be dealt with by the market itself within a reasonable
timeframe, the European Commission approved the backloading of 900 million allowances and
subsequently the introduction of the MSR as a long-term solution5
.
Figure 27: TNAC composition Phase 2 and 3
Source: Vivid Economics based on European Union Transaction Log
Other policy changes helped reduce the TNAC over Phase 3. These included the removal of
unallocated allowances from the New Entrants Reserve and allowance adjustments from
installations that had closed or reduced their production or production capacity (compared to the
ones initially used to calculate Phase 3 allowance distribution). Estimates put these unallocated
allowances at 550 to 700 million allowances through 20206
. Restrictions on international credit
entitlements also significantly constrained allowance supply. The TNAC was further reduced by
voluntary cancellation of allowances, totalling 441 393 allowances from 2013 to 2020.
4
https://ember-climate.org/data/carbon-price-viewer/
5
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014SC0018&from=EN
6
https://ec.europa.eu/clima/policies/ets/reform_en
8
The introduction of the Market Stability Reserve (MSR)
20.3
The MSR was introduced as a permanent rules-based approach to addressing market
imbalances. The MSR was introduced in 2015, amended in 2018 and became operational in 20197
.
The MSR was chosen over other policy options since it could both resolve the historical allowance
surplus as well as automatically respond in the event of future supply-demand imbalances.
Figure 28: Recent evolution of the TNAC
Note: the 2020 MSR holdings include the unallocated allowances from Article 10a(7) of the ETS Directive. The
unallocated allowances from Articles 10a(19) and 10a(20) of the ETS Directive were not available at the time of the
publication of this document.8
Source: Vivid Economics based on European Union Transaction Log
The impact of the MSR on the historical surplus
20.4
The MSR has begun to address historical imbalances with its first two years of operation
leading to intakes of nearly 700 million allowances. This includes an adjustment of 397 million
allowances withdrawn from auction volumes over 2019-20, and over 300 million allowances to be
withdrawn from auction volumes over 2020-21, representing 24% of the previous year’s published
TNAC in each case. These adjustments alongside others such as backloading reduced the 2019
TNAC to 1 385 million allowances, or 29% below its high in 2013. In 2020, reduced emissions due
7
Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the
establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and
amending Directive 2003/87/EC, OJ L 264, 9.10.2015, p. 1. See: https://eur-lex.europa.eu/legal-
content/EN/TXT/?toc=OJ:L:2015:264:TOC&uri=uriserv:OJ.L_.2015.264.01.0001.01.ENG
8
See C(2021) 3266 final - Communication from the Commission - Publication of the total number of allowances in
circulation in 2020 for the purposes of the Market Stability Reserve under the EU Emissions Trading System
established by Directive 2003/87/EC.
9
to COVID 19 resulted in an increase of the TNAC to 1 579 million allowances. This will result in a
higher MSR intake over the period 2021-2022 of 379 million allowances.
Intakes to the MSR are expected to continue reducing auction supply in coming years, with
the TNAC remaining well above the upper threshold, and the COVID-19 pandemic reducing
demand. With a depressed demand for allowances, the TNAC would grow in the absence of MSR
adjustments. As such, the MSR will continue to address the historical surplus built up over Phase 2
and 3 while simultaneously responding to the impact of the demand shock stemming from the
COVID-19 pandemic. According to the Vivid study, in a scenario where GHG emissions fall by
155 MtCO2e in 2020, but then rebound to market balance by 2023, the TNAC would be
expected to fall below the upper MSR threshold of 833 million allowances in 2023.9
In the
absence of the COVID-19 pandemic, the TNAC may have reached this outcome in 2022. With
a counterfactual intake rate of 12% addressing this imbalance is likely to have taken a substantially
longer period of time.
According to the Vivid study, the MSR and backloading measures may also have played an indirect
role in relation to EU allowance prices and helped restore historical prices from all-time lows.
However, the increase in the allowance price from historical lows cannot be fully attributed to the
MSR and may also be due to the broader strengthening of the EU ETS in 2018, and expectations for
future ETS adjustments10 11
.
9
The 155 MtCO2e drop in emissions is based on analysis using the PRIMES energy system model, estimating the
impact of COVID on GHG emissions. Emissions pathways are fictional and static in the sense that they do not
incorporate price effects in this analysis. The PRIMES model has also been used in the 2030 EC Impact Assessment
https://eur-lex.europa.eu/resource.html?uri=cellar:749e04bb-f8c5-11ea-991b-
01aa75ed71a1.0001.02/DOC_2&format=PDF
10
https://ercst.org/background-note-the-eu-ets-market-stability-reserve-coping-with-covid-19-and-preparing-for-the-
review/
11
https://www.eionet.europa.eu/etcs/etc-cme/products/etc-cme-reports/etc-cme-report-3-2019-trends-and-projections-
in-the-eu-ets-in-2019
10
Figure 29: Allowance price evolution compared to the TNAC
Note: EUA Prices (€) (LHS); TNAC (billion allowances) (RHS)
Source: Vivid Economics based on European Union Transaction Log, EEX/ICAP
Net demand from other sources
20.5
The TNAC as currently defined does not include aviation demand or supply, nor net demand from
linked Emission Trading Systems.
20.5.1 Aviation
According to the Vivid Economics study, the inclusion of aviation would have reduced the
TNAC in each year of Phase 3, impacting MSR adjustments (Error! Reference source not
found.). When included in calculations, net aviation demand reduces the TNAC, resulting in lower
total allowances in circulation than recorded at present. Thus far, this impact has been limited with
the largest difference occurring in 2019 when net aviation demand was the highest at approximately
151 million cumulative allowances. The corrected MSR adjustment would result in an intake of 303
million allowances in 2020 which is 8.8% lower than the MSR adjustment made without aviation.
With the forecasted growth in aviation emissions, there is a strong case for the inclusion of net
demand from aviation in TNAC calculations going forward. Aviation emissions in 2020 were
11
significantly lower due to COVID-19, which may limit aviation’s demand for EU allowances, but
demand is projected to grow thereafter12
.
Figure 30: The TNAC with and without net aviation demand
Source: Vivid Economics based on European Union Transaction Log
20.5.2 The Swiss ETS
The Swiss ETS linked with the EU ETS on January 1st, 2020 after a 10-year process of
negotiations. The Swiss ETS covered about 10% of the country’s total GHG emissions in 2019, or
4.72 MtCO2e (2017 data)13
. EU and Swiss operators can surrender allowances from either system
to meet their emissions liabilities14
.
Allowances allocated under the Switzerland’s ETS are available for market participants and
will form part of the TNAC publication starting in May 202015
. Since allowances are fully
fungible between the two systems, allowances auctioned or allocated for free under the Switzerland
system will need to be treated the same as EUAs for the purpose of calculating the TNAC. These
figures should be included in subsequent TNAC calculations.
Likewise, verified emissions from Switzerland’s covered entities will represent demand for
allowances and may need to be included in future TNAC calculations.
12
https://www.eurocontrol.int/sites/default/files/2020-04/eurocontrol-aviation-recovery-factsheet-27042020.pdf
13
https://icapcarbonaction.com/en/?option=com_etsmap&task=export&format=pdf&layout=list&systems%5B%5D=64
14
https://ec.europa.eu/clima/sites/clima/files/ets/markets/docs/faq_linking_agreement_part2_en.pdf
15
https://ec.europa.eu/clima/sites/clima/files/ets/markets/docs/faq_linking_agreement_part2_en.pdf
12
20.5.3 Market behaviour
The Vivid study also looked at changes in market behaviours related to the introduction of the
MSR, and whether the evolution of market behaviours would have an impact on the levels of the
MSR thresholds. The MSR’s upper and lower thresholds (currently 400 and 833 million allowances
respectively) represent a range of estimates of the required efficient level of hedging demand,
however emerging sources of additional demand other than utility hedging could require changes to
threshold levels, especially if those changes result in higher overall holdings.
 Utilities have actively managed their carbon exposure in some markets by hedging.
There is some evidence that larger industrials, especially in the oil and gas industry, also
hedge to some extent, but it is less common overall compared to utilities. Many large
utilities companies have increased their hedging timeframes in recent years due to concern
over rising carbon prices, such as RWE, who have hedged some proportion of their
liabilities as far out as 203016
.
 The Vivid Economics study found that hedging demand from utilities is likely to fall
due to high EU allowance prices triggering increased abatement and the coal phase-
out. Below a price of €30, EU allowance pricing did not have a significant impact on
business decisions by utilities. However, if price increases are sustained, utility companies
may look at changing investment or abatement decisions. Increased investment in abatement
reduces the volume of hedging demand because of reduced EU allowance compliance
requirements in the future. Sustained higher prices could also reduce the profitability of
some higher emissions power plants. Therefore, as prices remain high and as MS proceed
with planned coal phase-outs, utility hedging demand is likely to fall with the sector’s
carbon exposure.
 Industrials have historically not undertaken significant hedging given the large
number of banked allowances they hold. The Vivid Economics study found that
industrial demand is increasing in volume and frequency. There are still many small
industrials which have no active EU allowance exposure management. However, an
increasing number of industrials which did not buy much volume historically (for example,
large chemical firms) now undertake hedging over multi-year timeframes. Most small to
mid-size industrials trade via intermediaries such as banks, traders, or other financial
institutions rather than using in-house trading teams. As free allowances decrease, banked
allowances are used, and prices increase, industrials are expected to increase strategic
behaviour, including hedging.
Short-term speculative trading in the market was relatively low in the mid-2010s following the
downturn in carbon prices. Prior to 2014, a significant number of participants traded speculatively
in the market in relatively large size, with a focus on short-term trades (less than 1 year holding
periods). However oversupply in the EU allowance market and depressed prices reduced the
number of short-term speculators. Drivers of oversupply included the global financial crisis and the
16
https://carbon-pulse.com/94238/
13
EU credit crisis, with carbon trading desks shrinking substantially. Some of the remaining players
still held large positions, though most predominately participated in the carry trade17
.
 Short-term speculation increased in volume over 2018 and 2019, driven by price
expectations. By the end of 2017, the implementation of the MSR and other policy
announcements contributed to increased market confidence. There were signs of increasing
EU ambition and several research houses published “buy” recommendations for the EU
allowance market. This led to an increase in speculative trading, although increased
volatility meant that trading sizes were significantly smaller compared to earlier speculative
activity. Short-term speculative trading is less impactful on the overall holdings compared to
other types of activity because holding periods are less than 1 year.
 Short-term trading volumes fell over 2020, with increasing speculation from long-term
investors. Volatility reduces the amount of allowances most short-term traders can hold
because of capital requirements. The cost of holding positions became increasingly more
expensive as the market saw significant volatility from COVID-19. At the same time,
awareness of the EU’s climate ambition increased among investors with the announcement
of the EU’s net zero commitment and a strengthened 2030 carbon target. Volume shifted to
long term investors and hedge funds seeking to generate returns from price increases over
several years. These long-term positions have a direct effect on TNAC holdings by
removing EU allowances from circulation, similar to the effect of banking and hedging.
 The size of long-term speculative holdings in the market is estimated to range between
50 MtCO2e to 100 MtCO2e. This includes over-hedging by utility firms and the long-term
positions held by investors. Utility desk maximum positions are estimated to range from
between 1 to 10 MtCO2e. For long term investors, fund positions are estimated to range
between 1 to 5MtCO2e. Overall, the total size of this market is estimated to be less than 100
MtCO2e. An increase in total speculative holdings in the market from 50-100 to 200+ could
affect market balance, but this scenario is considered extremely unlikely by market
participants.
 Most recently, there have been some very small volumes from participants in the
market who buy EU allowances voluntarily for non-speculative reasons. Corporates
who are looking to hedge against climate change fall into this group. There are also socially
motivated buyers who voluntarily cancel EU allowances without associated emissions (for
example, CarbonKiller or World Carbon Fund) or offer a decarbonisation service for
investment funds (Cap2). It is not expected that this segment of the market will be large
enough to affect the TNAC.
17
The carry trade seeks to exploit differences in the relative prices of spot and future EUA contracts relative to other
risk-free assets. Simultaneously buying spot EUA contracts vs selling EUA futures contracts creates a risk flat position,
which held over time can generate a risk-free return. Over Phase III this rate of return was around 4-5%.. This is
sometimes referred to as “optimising cost of cash” or a “contango trade” and does not reflect an outright investment or
holding in the underlying EUA instrument.
14
To sum up, the Vivid Economics study found that there is no evidence that increases in
industrial hedging or speculative behaviour have substantially offset decreases in utilities
hedging. Market participants interviewed as part of this analysis considered it unlikely that either
industrial hedging or speculative behaviour would become significant enough in the next few years
to pose a problem for market balance.
15
21 MSR AND EU ETS RESILIENCE
The Vivid Economics study also looked at the impact of the newly-introduced MSR on
the resilience of the EU ETS.
The study began by the simplest indicator of market balance, the TNAC in relation to the
MSR thresholds. The TNAC thresholds for MSR intakes and releases are set in a manner
that aims to reflect the range of secondary market holdings that would be consistent with
the efficient functioning of the allowances market. The study indicated that the TNAC
definition is a more accurate measure of market balance when it accounts for all relevant
sources of supply and demand, such as aviation operators and the link with the Swiss
ETS. Further, demand stemming from other regulated compliance options might need to
be considered going forward. Moreover, the appropriate level of the TNAC thresholds
are subject to change with market developments, policy design and participants’ hedging
needs.
The study also proposed other indicators for assessing whether a market is “resilient”,
being able to function well under a range of plausible circumstances and returning the
market to balance in a reasonable timeframe following a shock. Aside from supply-
demand balance, an assessment of market stability should include characteristics such as
allowance price levels and price volatility, market liquidity, and how the market interacts
with other climate and energy policies. The study then looked at the types of events and
market shocks that could impact market stability in the EU ETS, and whether the MSR’s
response is sufficient to restore market stability in a timely fashion:
 Exogenous events or shocks - changes to the environment where the ETS
operates, without changes to the ETS design or market characteristics themselves.
Exogenous events could include changes to the economy that increase or decrease
emissions below/above ex-ante expectations, in a temporary or definitive manner;
changes in relative prices (particularly for energy); breakthroughs in low-carbon
technologies; and anticipated and unanticipated policy changes.
 Market-related shocks - changes to market design and in market participants’
behaviour. Changes to market design could include changes to the linear
reduction factor (LRF), linking to other ETS systems, and new legislated sources
of allowance demand. Changes in market participants’ behaviour include changes
in hedging demand or speculative holdings, or changes in behaviour related to the
voluntary cancellations of allowances.
The study found that the time to return the TNAC to acceptable levels after a demand
shock is significantly faster under a 24% MSR intake rate as compared to a 12% intake
rate, and specifically that only the 24% rate can reduce the TNAC to below the upper
threshold in the event of a lasting negative demand shock. The MSR’s response to
16
negative and positive demand shocks was tested with a constant MSR intake rate of 12%
or 24% in all years. It takes two additional years to return to TNAC thresholds after a
temporary negative demand shock under a 12% intake rate as compared to a 24% intake
rate. Similarly, it takes one additional year in the case of the temporary positive demand
shock to reach TNAC thresholds under a 12% intake rate as compared to a 24% intake
rate, as there is a need to continue correcting for the historical imbalance for a longer
period of time. All these scenarios fall within ‘reasonable’ timeframe definitions of
commentators (see ERCST, 2019)18
. However the MSR does not return the TNAC to
within the acceptable level in the case of a lasting negative demand shock given a 12%
intake rate.
The study suggested that the market price for allowances is determined by
allowance supply and demand levels both today and perceived future conditions.
Allowance prices are determined by allowance demand relative to allowance supply as is
primarily determined by the cap. Since market participants have the ability to bank
allowances, the relative level of market supply to demand, both today as well as in the
future, will impact allowance prices. Given that firms have imperfect foresight (i.e.,
market-related and exogenous future events are unknown), allowance prices will also
reflect expectations about an unknown future, which may prove to be inaccurate. For
example, if market participants believe the stringency of the system will increase in the
future, economic growth accelerate, or low-carbon technologies will fail, this will inflate
market prices today. As such the MSR’s adjustments to auctioning volumes are expected
to have only a partial impact on the allowance price.
The impact of the MSR on price formation in case of shocks depended on whether
the shock was expected, or anticipated.
If the demand shock is unexpected, the MSR would cushions the price effect from a
negative temporary demand shock, supporting additional GHG mitigation. The MSR
immediately helps support short-term prices in response to negative demand shocks by
buoying expectations about future prices, regardless of the delay in its actual impacts on
supply. Although the MSR’s mechanistic effect on the TNAC has more than a year-long
delay and takes place gradually over time, it has the ability to shape price expectations
immediately as market participants anticipate a reduction in the future supply of
allowances. The MSR’s role in increasing short term prices after demand shocks can help
firms invest in low-carbon technologies today, benefiting from innovation while avoiding
market outcomes such as stranded assets. The MSR’s restrictions to auctioning volumes
increase short-term allowance scarcity and drives up prices. Academic modelling shows
that this should incentivise firms to adopt low-carbon technologies and invest in other
18
https://ercst.org/wp-content/uploads/2019/07/20191008-MSR-review-draft-paper-presentation-v.1-1.pdf
17
abatement solutions19
. This could stimulate early innovation and help avoid higher-
carbon lock in of capital assets.
However, if the drop in demand is known ahead of time, then the MSR could have a
counterproductive impact on allowance prices20
. The MSR’s adjustment to supply
could be counterproductive when the TNAC is high due to future expectations about
allowance scarcity. This could occur, for example, through a policy announcement that
the LRF were to be increased. In this case, compliance-based actors might abate more
GHG emissions today in order to save their allowances for future use. As such, emissions
would fall and the TNAC would rise in the current period, triggering the MSR. In this
case, the MSR would reduce auctioning volumes further, introducing even more scarcity
in the market where it is not needed. The TNAC in this case could be an inaccurate
indicator of overall market stringency over the lifespan of the program, and the MSR
adjustment could work in a counterproductive direction.
Recent empirical analysis suggests that the MSR may have had a stabilising effect
on prices, indicating many of the theoretical channels that could drive price
volatility may not materialise in practice. Gerlagh et al. (2020) and Azarova and Mier
(2020) cite the COVID-19 induced demand shock as evidence that the MSR works well
in stabilising EUA prices for short term demand shocks21,22
. EUA prices did not fall
below 15 EUR, despite the EU’s GDP declining by an estimated 7% and industry
production in the EU-27 declining by nearly 20% in April23
. Interviews with financial
market participants suggest that without the MSR, prices would have dropped
substantially more than what was observed over the COVID-19 induced demand shock.
However, there is not yet literature on the degree to which the MSR has impacted price
volatility in the ordinary operation of the market.
The study also found that the MSR introduces additional market complexity to the
operation of the EU ETS through the addition of rules which influence market
supply, interactions with other policies and ultimately prices. The MSR’s rules-based
approach provides transparency and a degree of predictability, however complexities
regarding changes to auction schedules and updates to data impacting TNAC calculations
could make it hard for market participants to understand or predict the MSR’s future. As
a quantity-based mechanism, the MSR’s indirect impact on price needs to be estimated
by market participants adding a level of complexity to allowance price projections.
19
https://www.pik-potsdam.de/members/pahle/mauer-et-al-2019.pdf/at_download/file
20
Marcu et al. (2020), Gerlagh et al. (2020), Healy et al (2019)
21
https://link.springer.com/article/10.1007/s10640-020-00441-0
22
https://www.ifo.de/en/publikationen/2020/working-paper/msr-under-exogenous-shock-case-covid-19-
pandemic
23
https://ec.europa.eu/eurostat/statistics-explained/index.php/Impact_of_Covid-
19_crisis_on_industrial_production#Development_of_industrial_production_in_2020
18
Market participants may struggle to form rational expectations on EUA prices given both
the MSR’s response to allowance demand and supply, and the subsequent feedback
effects from the MSR’s actions. Flues and van Dender (2020) argue that the MSR
increases price uncertainty in the market as the quantity of emission allowances in
circulation does not provide any focal point about future price levels24
. The addition of
the invalidation mechanism adds uncertainty regarding the absolute quantity of
allowances that will be available in the future.
Moreover, in the future, the MSR could be prone to threshold effects. Threshold
effects are small deviations in the TNAC around the threshold can result in significant
supply shocks if the deviations trigger the MSR. This can lead to oscillatory price
behaviour around the threshold. This could be exacerbated by speculation to take
advantage of the TNAC being near the threshold where speculators change their banking
behaviour to trigger the MSR, increasing volatility further. So far, the TNAC has
remained far above the upper threshold so such behaviour has not been observed.
The MSR and competitiveness impacts
21.1
As shown earlier, the MSR is designed to ensure market balance and thereby both
directly and indirectly affects competitiveness through several channels. These can
include impacts via market prices, price volatility, market liquidity, strategic behaviour,
market sentiment, predictability, complexity and transparency.
According to the Vivid study, the MSR’s impact on competitiveness is yet to be
directly discussed in the broader academic literature, given its recent introduction
and limited evidence of carbon leakage from the initial phases of the EU ETS. MSR
adjustments to auctioning volumes restrict short-term supply, and therefore put upward
pressure on allowance prices. However, many other factors, such as the perception of
increasing ambition in the future and developments in mitigation technologies will also
impact allowance prices. Disentangling the level of price rise that is attributable to the
MSR relative to other events occurring concurrently is challenging, but it is broadly
agreed that the MSR contributed, in part, to the price rise. Given free allocations
throughout Phase 3 and Phase 4 for EITE sectors, these firms only experience a
proportion of any MSR induced price rises. Interviews with market participants indicate
that the most important aspects with respect to competitiveness considerations are the
LRF and decisions on free allocation and CBAMs for EITE sectors.
Price stability and predictability are important for investment decisions and
therefore a firm’s longer-term competitiveness position. Investment in mitigation and
24
https://www.oecd-ilibrary.org/taxation/carbon-pricing-design-effectiveness-efficiency-and-
feasibility_91ad6a1e-en
19
low-carbon technology is fundamental to a smooth progression to period of higher
carbon prices. The MSR plays a supporting role in increasing certainty on the EUA price
path, but the MSR also adds to regulatory complexity. To the extent that the MSR helps
ensure price stability it will also support competitiveness. However, this is unlikely to
significantly impact competitiveness as excessive volatility has not been observed since
the introduction of the MSR.
Modelling performed in the context of the Vivid study suggests that over the longer
term, the impact of the MSR on market prices is small relative to the potential
impact of other policies, such as a strengthened LRF. Given the relatively small
difference in these price levels the effect of the MSR on competitiveness is likely to be
minor. This alongside the ongoing high level of allocations to free allocations suggests
that the MSR is unlikely to have had any significant effect on competitiveness over the
period of its operation.
For EITE firms who are able to abate at low cost, EUA price increases may increase
competitiveness. If EITE sectors receiving free allocation are able to mitigate at a lower
price than the EUA price they would be able to sell excess free allowances. EUA price
rises could support competitiveness for these firms. An increase in EUA prices will
increase the net value of the firms who hold allowances in excess of their current
liabilities. In this sense, any MSR induced allowance price rises will benefit them in the
short term.
20
Annex 8: Design options for the Market Stability Reserve
22 SENSITIVITY ANALYSIS FOR THE MSR
Performance of each MSR design option given future shocks
22.1
This section provides stress tests to assess how different MSR designs interact with
changes in external market conditions. The modelled performance of the MSR under
different market and policy outcomes can be used to assess the resilience of the MSR.
The results of these stress tests will inform the extent to which negative outcomes may be
mitigated or accentuated by the MSR.
We consider two types of stress test:
 Shocks, such as a reduction in economic demand or an increase in complementary
policy ambition due to coal phase outs. These can largely be incorporated into the
model based on reasonable estimates of magnitude to assess the outcome, with
some complementary qualitative analysis as required.
 Induced imbalances, such as strategic speculative behaviour aiming to
destabilise the ETS by purchasing large quantities of allowances. These
imbalances have been designed by identifying areas of potential risk in the current
MSR design and constructing scenarios which could lead to destabilising
outcomes based on these risks. Given the nature of these risks, we will
complement modelled results with a discussion of the potential risks and
outcomes. We identify two potential induced imbalances below.
Shocks may operate through different impact channels, but ultimately have the
same effect on market outcomes. For example, increased speculation and increased
hedging demand both provide a temporary increase in demand for allowances. On the
other hand, a reduction in economic activity (and associated emissions) or a coal phase
out both permanently reduce demand for allowances. These shocks have different root
causes, but ultimately pose the same implications for the functioning of the MSR.
We therefore classify the stress tests based on their ultimate impact channel. They
are:
 An anticipated increase or decrease in EU allowance demand. These shocks
include announcements of complementary policies such as coal phase outs, and
technological breakthroughs for low-emissions technologies. Their effect on
future emissions can be anticipated before the effects start to materialise. These
shocks can be modelled as an exogenous change in market participants’
expectations for future emissions. While shocks can also result in an unanticipated
increase in EUA demand, this less likely than a decrease in demand for
allowances due to sustained decarbonization efforts across the economy. This
analysis therefore focuses on the impact of an anticipated reduction in allowance
21
demand, modelling the announcements of further coal phase outs beyond what is
confirmed by 2020.
 An unanticipated increase or decrease in EU allowance demand. Temporary
shocks of this type include a change in long-term speculation or hedging demand
from compliance entities, while permanent shocks include a change in abatement
costs or economic activity relative to expectations. To estimate the impact of an
unanticipated reduction in EUA demand, we analyse a shock similar in size to the
2020 COVID-19 shock, but occurring in 2025. COVID-19 represents a large
shock by historic standards, illustrating the impact of a tail risk to EUA demand
materialising. We also assess the impact of a similar magnitude of shock but in
the opposite direction (i.e. an unanticipated increase in EUA demand). This could
happen for example due to a sudden nuclear incident causing nuclear energy to be
replaced with natural gas or coal.
 Induced holdings to stimulate tightening. This could occur where market actors
deliberately hold allowances in order to induce additional tightening from the
MSR, inflating the prices. For instance, speculators or actors seeking to enhance
the overall ambition of the EU ETS could buy and hold enough allowances to
corner a large share of the TNAC, triggering the MSR repeatedly and creating a
price spiral. To assess the impact of induced holdings, we analyse the prospect of
non-compliance entities holding a significant number of allowances from 2025.
The plausible magnitude of shocks used in stress tests is informed by numerous
sources, including literature review, interviews and surveys with market
participants and quantitative analysis. For stress tests based on external factors such as
coal phase out in MS, a literature review and internal analysis has provided sensible
estimates of magnitude. To analyse factors with less publicly available data, such as
hedging and speculative demand, we have complemented our understanding with input
from interviews and surveys with market participants.
As indicated in annex 4, Section 9.1.4, the modelling outputs are not intended to be used
as forecasts for prices and emissions. In particular the modelling focuses on carbon prices
as adjustment variable and does not well cover the overall policy mix. However, when
combined with qualitative and quantitative insights, the model can provide useful
indications of the direction and size of impact.
22
The stress tests implemented here are summarised below
Table 23: Stress tests analysed in the model
Type of stress
test
Specification
of stress test
implemented
Other causes of similar stress
Key issue for current
MSR design
Anticipated
decrease in EU
allowance
demand
Communicated
policy
measures,
specifically
coal phase out.
 Technological
breakthrough with
deployment delay.
Anticipated reductions in
EU allowance demand
can lead to an increase in
cumulative emissions
under current ETS policy.
A reduction in future
demand means firms need
to bank less. They then
have more liquidity in the
current period, reducing
prices.
Unanticipated
decrease in EU
allowance
demand
Economic
activity (and
emissions)
below
expectations.
 Reduced demand for
hedging.
 Reduction in abatement
costs.
 Additional
complementary policy
measures e.g., larger coal
phase out.
MSR has a partial and
delayed response to
negative demand shocks
and price drops. Its
effectiveness depends on
timing of shock
Unanticipated
increase in EU
allowance
demand
Economic
activity (and
emissions)
exceeds
expectations
 Increased long-term
speculation.
 Increasing hedging
demand from industrials.
 Increase in current
abatement costs.
 NGOs or governments
buy and bank allowances
permanently.
 Complementary policies
underperform, e.g.,
energy efficiency and
renewable targets.
Sudden increases in
demand for EU
allowances can lead to an
increase in EU allowance
prices. The MSR is not
suited to positive demand
shocks, as it was designed
to remove a surplus.
Induced
holdings to
stimulate
tightening
Non-
compliance
entities hold a
large number
 Speculators seek to
corner market to induce
price increases.
The MSR removes
allowances from future
auctions if the TNAC is
above the threshold,
23
Type of stress
test
Specification
of stress test
implemented
Other causes of similar stress
Key issue for current
MSR design
of allowances
for long-term
investment
 Actors seek to hold
allowances to induce
tightening and increased
emissions reductions
from ETS sectors.
regardless of the price
level. Actors without
compliance obligations
could use this to multiply
their impact on the
emissions market by
holding a large share of
the TNAC over multiple
years to drive price rises
and additional mitigation.
Source: Vivid Economics
Anticipated decrease in EUA demand: coal phase out
22.2
The regulated phase out of coal power has the potential for a significant permanent
reduction in EUA demand. The coal phase out is expected to reduce EUA demand by
up to 277 million allowances by 2030. Half of this reduction is built into baseline
emissions. The shock here simulates a scenario where the other half of emissions
reductions are also realised, reducing EUA demand by 27 million allowances in 2021 and
up to 138.5 million allowances by 2030. This shock is expected to be larger than other
likely sources of anticipated demand reduction such as complementary policy measures
or significant progress in industrial abatement technologies. It therefore represents the
upper limits of a realistic shock.
An anticipated reduction in EUA demand leads market participants to anticipate
lower future prices, leading to a reduction in abatement. If prices fall, compliance
entities would rather pay for emissions than invest in abatement. However, this only
partially offsets the reduction in emissions from the closure of coal plants, such that total
emissions are still lower in the coal phase out scenarios. In other words, the reduction in
emissions pushes up TNAC (as there is an excess supply of allowances) while the
expectation of future emissions reductions reduces TNAC.
Intakes increase under all MSR designs when faced with an anticipated reduction in
EUA demand, but MSR1 and MSR2 generate a stronger response than MSR0+ due
to higher intake rates. Under MSR0+, the shock results in cumulative intakes from
2021-2030 increasing by 0.22 billion (from 1.24 billion EUAs to 1.146 billion). Under
MSR1, there is an increase of 0.24 billion allowances (from 1.50 billion to 1.74 billion),
reflecting the higher intake rate and lower thresholds for activation of the MSR. MSR2
results in an increased cumulative intake of 0.0.22billion, the same as MSR0+ but lower
than MSR1.
24
Figure 31: TNAC under an anticipated reduction in EUA demand
Source: Vivid Economics
The shock bumps TNAC up further, resulting in prolonged intakes into the MSR
throughout the 2020s for MSR0+ and MSR2, and till 2028 for MSR1. While MSR1
intakes more allowances than MSR0+ and MSR2, the intakes are large and concentrated
between 2021-2028. MSR0+ and MSR2 have a more long drawn out response, taking
longer to neutralise the shock as intakes continue till 2030. This is due to the relatively
low intake rates compared to MSR1. MSR2 gradually ramps up intakes as the impact of
the shock gets bigger.
25
The 2030 TNAC is therefore lowest under MSR1, followed by MSR2 and finally
MSR0+. Under MSR1, TNAC in 2030 is 47 million higher with coal phase out. This
compares to 1110 million under MSR2 and 45 million under MSR0+.
Figure 32: MSR intakes under an anticipated reduction in EUA demand
Source: Vivid Economics
A long-term reduction in EUA demand leads to a consistent decrease in price across
MSR designs. As the reduction in emissions is assumed to be permanent, firms have a
lower demand for allowances. Prices therefore remain lower to 2030, despite the higher
cumulative intakes across all design options. The reduction in prices cause by the shock
(measured against the respective reference case) is fairly consistent, at around 10 EUR in
26
all MSR designs. This indicates that the MSR is not well suited to maintaining a
particular price level in the event of an anticipated long term shock, which permanently
alters the available allowances and firm behaviour.
Figure 33: EUA prices under an anticipated reduction in EUA demand
Note: Prices are shown in constant 2015 Euros.
Source: Vivid Economics
Emissions reductions from the coal phase out persist across all MSR designs. These
results do not support the ‘green paradox’ theory, whereby anticipated emissions
reductions lead to entities reducing abatement behaviour. This is due to the fact that the
impact of the coal phase out on emissions is realised gradually, with additional
reductions occurring each year from 2021-30. The emissions reductions realised from
2021 offset the reduction in abatement due to lower anticipated emissions levels in future
years, leading to a consistent reduction in emissions relative to the baseline.
27
Figure 34: Emissions under an anticipated reduction in EUA demand
Note: Prices are shown in constant 2015 Euros.
Source: Vivid Economics
Unanticipated change in EUA demand: economic shock
22.3
A sudden economic downturn can result in reduced emissions and an unanticipated
decrease in EUA demand. Conversely, an economic boom could result in higher
demand for EUAs. In this section we explore four different variations of an economic
shock:
 A temporary economic recession. This tests the impact of a 155 Mt shock occurs
in 2025, lasting for one period before economic production and baseline emissions
bounce back to previous levels. The magnitude of the shock is based on the 2020
emissions impact of COVID-19, which represents an unprecedented reduction in
emissions.
 A temporary economic recession with a shorter anticipation horizon for the
firm. This scenario tests the impact of a temporary shock (as outlined above)
when firms have a shorter time horizon (3 years instead of 10 years).
 A persistent economic recession. This tests the impact of a 155 Mt shock in
2025, which halves in 2026 (78 Mt), and halves again in 2027 (39 Mt). The 39 Mt
reduction is considered structural and remains persistent to the end of 2050.
 A persistent economic boom. Finally, we consider a scenario where there is an
unanticipated increase in EUA demand rather than a decrease.
28
(1) Temporary reduction in EUA demand
An unanticipated reduction in EUA demand leads to an increase in TNAC across
MSR designs as firms bank excess allowances, but different intake rules lead to
varied reactions. The initial change in TNAC is fairly similar across different MSR
designs, with TNAC increasing in 2025 in response to a negative economic shock.
However, subsequent reaction to the shock is dependent on the MSR design. MSR0+ is
just able to bring the TNAC back in line with the baseline by 2030, five years after the
shock occurs. MSR1 reduces the surplus quicker due to the higher intake rate. The larger
intakes as a result of the shock even result in TNAC dipping below what it would have
been without a shock. This result is due to threshold effects. MSR2 is able to reduce the
surplus by 2030. Under MSR0+ and MSR1 intakes stop by the end of the decade.
However, declining thresholds mean that intakes continue under MSR2.
Figure 35: TNAC under a temporary reduction in EUA demand
29
Source: Vivid Economics
Figure 36: MSR intakes with a temporary reduction in EUA demand
30
Source: Vivid Economics
The price response to an unanticipated shock is limited and equivalent across MSR
designs, in part due to an assumption on 10 year foresight for firms. In the years
following the initial demand shock, prices relative to the reference case without the shock
are broadly the same, with some small deviations for MSR0+ and MSR1 due to threshold
effects. The variation between designs is in the range of 1.5 euros. This is due to the
temporary nature of the shock and the MSR’s delayed time scale of action. By the time
the intakes kick in, economic activity has returned to normal. The price trajectory is
unstable for MSR0+ and MSR1 due to changing expectations of the size of intakes in
future periods. This contrasts with a relatively stable price path under MSR2. This is also
due to modelling assumptions, as firms anticipate that the long-term emissions trajectory
is relatively unaffected.
Figure 37: EUA prices relative to baseline under a one period unanticipated reduction in
EUA demand
Note: Prices are shown in constant 2015 Euros.
Source: Vivid Economics
31
(2) Temporary unanticipated reduction in EUA demand with shortened time
horizons
The relatively muted price response in the previous section is partially a result of
the modelling assumption that firms have a 10 year forward looking horizon. While
this horizon is likely appropriate for the medium term without any economic
disturbances, firms typically behave in a more short-sighted fashion in times of crises.
We therefore tested this reduction in EUA demand with a 3 year time horizon. Results
show that there is a more dramatic decrease in price when firms have a shorter time
horizon.
Figure 38: EUA prices relative to baseline (for MSR0+)
Note: Prices are shown in constant 2015 Euros.
Source: Vivid Economics
(3) Persistent and unanticipated reduction in EUA demand
The key difference between a temporary and persistent reduction in EUA demand
is the effect on prices, which fall more significantly and remain slightly lower than
the baseline through to 2030. Prices fall by around 10 EUR in 2025 when the shock
occurs and remain about 4 EUR lower than the counterfactual without the shock across
all MSR designs in 2027. This price impact persists to 2030 due to the long-term
persistence assumed in this case. The price impacts vary slightly by MSR design, with
MSR1 making the quickest recovery due to the higher intake rate. However, differences
of this small size (approx. 2 EUR) should be interpreted with caution.
32
Figure 39: TNAC under a persistent unanticipated reduction in EUA demand
Source: Vivid Economics
33
Figure 40: MSR intakes with a persistent unanticipated reduction in EUA demand
Source: Vivid Economics
34
Figure 41 EUA prices under a persistent unanticipated reduction in EUA demand
35
Note: Prices are shown in constant 2015 Euros.
Source: Vivid Economics
An auction reserve price, which is part of MSR3, could provide a faster and more
effective response to negative demand shocks. The MSR3 design outlines an auction
reserve price that starts at €25 in 2025 and increases by a real rate of 3% each year,
reaching €29 in 2030 if unadjusted. While this price floor does not bind in the scenarios
tested, it could serve to bolster market participants’ confidence in the system in case of a
larger demand shock. A minimum price also unlocks investment in abatement options
below the price floor by removing uncertainty around future prices and market evolution.
Alternative projections of price impacts should also be considered, as these results reflect
outputs of one model and do not constitute a definitive forecast of prices.
(4) Persistent unanticipated increase in EUA demand
A persistent increase in EUA demand mirrors the results presented for a persistent
decrease in demand, and has been included for completeness. Prices increase by
around 12 EUR in the initial period of the shock, with this differential reduced to around
4 EUR across all MSR designs by 2027. This price impact continues to 2030 due to the
long-term persistence assumed in this case.
36
Figure 42: TNAC under a persistent unanticipated increase in demand for EUAs
Source: Vivid Economics
37
Figure 43: MSR intake under a persistent unanticipated increase in demand for EUAs
Source: Vivid Economics
38
Figure 44: EUA prices under a persistent unanticipated increase in EUA demand
39
Note: Prices are shown in constant 2015 Euros.
Source: Vivid Economics
Induced holdings to stimulate tightening
22.4
In some cases, actors may seek to leverage the MSR’s design to deliberately drive
prices up. An artificially high TNAC means the MSR is triggered more often, causing
intakes and rising prices. For instance, long term investors may hold a large share of
allowances to increase prices and return on investment, and environmental NGOs may
hold allowances to drive increased climate action through higher prices. The shock
modelled assumes that allowances being held by non-compliance entities from 2025, are
driving up TNAC by 240 million, as well as increasing prices in the ETS.
MSR1 results in the largest intakes due to induced holdings. An induced holdings
shock increases EUA demand, ultimately leading to an increase in TNAC and intakes
across all designs. Due to the way the intakes are structured, MSR2 intakes allowances
more slowly and avoids sharp threshold effects. Note that if these induced holdings
remain inaccessible to market participants, the higher intake rates will also have negative
impacts on liquidity for compliance entities.
40
Figure 45: TNAC under an induced holdings shock
Source: Vivid Economics
41
Figure 46: MSR intakes under an induced holdings shock
Source: Vivid Economics
An induced holdings shock increases prices in all MSR designs, but is exacerbated
by higher intake rates and lower thresholds. As expected, the holding shock instigates
prices increases as supply of allowances falls short of demand. Prices are driven up by
further reductions in auctioned allowances, as the higher TNAC leads to increased
intakes to the MSR. In the interim period, prices are stabilised, as firms benefit from the
early abatement activity undertaken when allowance supply was tighter. However, prices
increase again relative to the case without induced holdings as TNAC approaches zero,
42
as firms have been unable to bank as many allowances as desired, and the MSR
continues to reduce supply relative to the case without the shock. Prices are increased
most under MSR1 followed by MSR2, where higher intake rates cause the induced shock
to reduce cumulative allowance supply most.
MSR1 results in sharper price increases than MSR2 due to threshold effects. The
graph below shows the change in price between the ‘shock’ scenario and the respective
baseline case for each MSR design. MSR1 results in the highest increase in prices, but
also the most volatile ones because of the large intakes when the threshold is crossed. In
practice, this volatility may be more pronounced than modelling shows. This is because
the model is only able to represent an annual time period (which abstracts away from
within-year volatility), and assumes firms have a 10 year anticipation horizon (which
may not hold in practice, resulting in more myopic and erratic behaviour of short term
prices).
Figure 47: EUA prices under induced holdings
Note: Prices are shown in constant 2015 Euros.
43
Source: Vivid Economics
Insights from interviews and discussions with market participants suggest that the
likelihood of speculation triggering a price spiral is low. The primary reason that the
likelihood is small is because of the relatively small size of the speculative market. Short-
term speculators do not tend to hold large positions and would be more likely to sell in
the event of a larger-than-expected price increase. Long-term investors represent a small
part of the market (less than 100 million allowances) so would not be a significant driver
of a price spiral. Speculative activity may also serve to reduce prices as investors may be
incentivised to sell off a portion of holdings if the EUA price exceeds internal price
targets. However, this market is changing rapidly and high-profile investment in EUAs
may cause the size of the market to expand suddenly and dramatically.
23 POLICY VARIATION SENSITIVITIES
MSR results for the extreme cap scenarios
23.1
In this impact assessment, we consider three cap scenarios, a central one (AMB2a),
and two extremes (AMB1 and AMB2b), which represents differing levels of
stringency over the 2021-2030 period. All cap variations lead to an equal level of
allowance supply in 2030, with variations in the annual allowance supply from 2024-
2030.
23.1.1 Market balance
Detailed modelling results for each MSR option under the different cap variations
are presented below. The figures present the modelled level of the TNAC, the intakes
into the MSR and the effective cap level – the cap as it would be affected by MSR
intakes or releases. The qualitative insights regarding the MSR designs discussed in
Section Error! Reference source not found. remain unchanged in these cap variations,
although there are some important differences in the numerical results driven by the
adjusted cap trajectories. The key observations are summarised below:
 A tighter Phase IV cap (e.g. AMB2b) results in a lower TNAC between 2024 and
2030. This is a direct result of a reduced supply of allowances available to market
participants. The resulting differences in the level of TNAC across the cap variations
is more pronounced between 2025 to 2027, after which the impact of MSR intakes
become observable from the narrowing differences across the cap variations. By 2030,
the difference in TNAC between AMB1 and AMB2a typically lies within 100 million.
The same is true when comparing 2030 TNAC between AMB2a and AMB2b under
the different MSR options.
 A tighter Phase IV cap has two immediate implications for the MSR: (a) fewer
MSR intakes, and (b) shorter intake period and potentially earlier releases. For
instance, under MSR1, the MSR intakes become zero by 2027 under AMB2b with
MSR1, three years earlier compared to AMB1. In this particular example of AMB2b
with MSR1, TNAC in 2027 goes just below the lower threshold of 400 million,
44
resulting in releases from the MSR by 2029. The extent to which (b) occurs, and by
how much, is sensitive to model parameters. This creates some uncertainty for market
participants facing MSR0+ and MSR1, because intakes are discontinuous at the upper
threshold, swinging from over 100 million in a particular year to zero in the next year.
Depending on whether market expectations are met, this ‘threshold effect’ can
produce kinks in the price path. Meanwhile, this is not the case for MSR2, as intakes
continue throughout the period.
 Across all MSR options, the main analytical statistics under AMB2a are nested
between AMB1 and AMB2b. For this reason, the impact discussion in the main text,
which is based on AMB2a, can be interpreted as the midpoint of policy ambitions in
the EU ETS cap.
With MSR0+, the lower intake rate is unable to limit the increase of the surplus as
of 2025, across cap scenarios.
45
Figure 48: TNAC, intake and cap post-MSR adjustments under cap scenarios under the
baseline design MSR0+
Source: Vivid Economics
The higher intake rate under MSR1 leads to a larger volume of intakes into the
MSR, more quickly offsetting the relative slack in AMB1 and AMB2a. Cumulative
intakes are 1 billion higher under AMB1 than under AMB2b. The relatively high supply
of allowances in the short term under AMB1 leads to more banking, a higher TNAC and
therefore larger intakes to the MSR. Under AMB1, there are intakes to the MSR until
2030, whereas the final year of intakes under AMB2b is 2027. This leads AMB1, the
least stringent cap, to have a lower effective supply than AMB2b during the period 2026-
46
2030 (see the bottom graph in Figure 49). The post-MSR cumulative supply of
allowances under AMB1 is 10.6 billion, compared with 10.7 billion under AMB2b.
Figure 49 TNAC, intake and cap post-MSR adjustments under cap scenarios under
MSR1
Source: Vivid Economics
A similar outcome is seen under MSR2, where the higher availability of allowances
under AMB1 results in larger intakes into the MSR, lowering the effective cap.
Unlike MSR0+ and MSR1, there is no threshold effect to account for in MSR2, as the
TNAC remains above the (declining) upper threshold to 2030 in all cap variations.
However, the higher intake rate of 33% leads to consistently higher intakes under the
looser cap scenarios, which brings cumulative supply down substantially in these
scenarios.
47
Figure 50: TNAC, intake and cap post-MSR adjustments under cap scenarios under
MSR2
Source: Vivid Economics
23.1.2 Stylised carbon prices
Differences in prices across different cap scenarios are smaller because supply
under a less stringent cap would be tightened by larger intakes to the MSR (see
Figure 51 below). Caps which are initially less stringent, such as AMB1, have a higher
surplus of allowances in earlier periods due to greater annual supply. This increases the
TNAC during 2021-2030, which subsequently increases intakes into the MSR, reducing
auctioned allowances and the effective cap. This leads to similar price outcomes across
the different caps.
48
Figure 51: Carbon price with MSR0+, for the cap scenarios AMB1, AMB2a, AMB2b
Source: Vivid Economics
MSR results for AMB2c
23.2
In what follows, the modelling results for cap scenario AMB2c are also presented.
The key observations are summarised below:
 The higher intake rate of MSR1 reduces the TNAC the highest with this cap
option, possibly leading to releases in 2030. The outcomes with MSR0+ and
MSR2 have similar trajectories, although the TNAC with MSR2 is nearly 100
million lower at the end of the period, possibly leading to releases from the MSR.
Figure 52: TNAC for MSR0+, MSR1 and MSR2, for cap scenario AMB2c
Source: Vivid Economics
 Intakes
49
The behaviour in terms of intakes is consistent with the other cap scenarios. Intakes with
MSR0+ and MSR1 last until the middle of the period, while with MSR2, due to the
decreasing cap, they continue up to 2029.
Figure 53: TNAC and intakes for MSR0+, MSR1 and MSR2, with cap scenario AMB2c
Source: Vivid Economics
 Prices and price volatility
The price results are comparable to the other price scenarios, in particular with AMB2a
and AMB2b.
50
Figure 54: Stylised presentation of carbon price and emissions for MSR0+, MSR1 and
MSR2, for the cap scenario AMB2c
Note: Prices are presented in constant 2015 prices.
Source: Vivid Economics
MSR results for a hybrid MSR option
23.3
This section analyses the outcomes of an MSR option that combines elements from the
various MSR options presented in Section Error! Reference source not found. above.
Table 24: Parameters of a hybrid MSR option
Hybrid MSR option
Intake25
If the TNAC is above 1096 million
25
For a TNAC of 833 million, the intake is 0. For a TNAC of 834 million, the intake is 834-833 million =
1 million allowances. For a TNAC of 900 million, the intake is 900-833 = 67 million allowances. For a
TNAC of 1096 million, the intake is 1096-833 = 263 million allowances. For a TNAC of 1100 million
allowances, the intake is 24%*1100 = 264 million allowances.
51
Hybrid MSR option
allowances, 24% of the TNAC
If the TNAC is below 1096 million
allowances but above the upper
threshold, the difference between the
TNAC and the upper threshold
Injections 100m
Upper threshold 833m
Lower threshold 400m
Invalidation
mechanism
Invalidate excess above lower threshold
Auction reserve
price
-
MSR review Every three years
This option keeps the current MSR threshold of 833 million, in order to guarantee a
sufficient level of liquidity in light of uncertainties about future liquidity needs, including
hedging volumes, and introduces more frequent reviews of the MSR. This option
introduces a gradual approach to the intake, depending on the level of the TNAC If the
TNAC is between the upper threshold and 1096 million allowances, the difference
between the TNAC and the upper threshold is put in the MSR. If the TNAC is above
1096 million allowances, then 24% of the TNAC is put in the MSR. At 1096 million
allowances, the two options would result in approximately the same intake. Using a
gradual approach for the intake rate allows at the same time to avoid the threshold effect
(since the intake near 833 million allowances is very low), while keeping the efficient
intake of the 24% rate for higher levels of the TNAC.
Figure 55 below shows the intakes that would result at various TNAC levels, for the
hybrid MSR option, compared to MSR1 (24% of the TNAC) and MSR2 (33% of the
difference between the TNAC and the upper threshold).
Figure 55: Intake profile for the MSR hybrid option, MSR1 and MSR2 at various TNAC
levels
52
Source: European Commission
The main results for this option are summarized below:
For the central cap scenario AMB2a, the hybrid MSR option results in a TNAC
similar to MSR0+ and MSR2. The TNAC briefly jumps back above the upper threshold
of 833 million allowances in 2026 and 2027, before returning between the two
thresholds. The modelling shows that this MSR option avoids the threshold effect in
2024, when the TNAC is very close to the upper threshold of 833.
In terms of intakes, this option results in intakes similar to MSR0+, 20 % lower than
MSR1, and 24% lower than MSR2.
Figure 56: TNAC and intakes for MSR0+, MSR1, MSR2 and the hybrid MSR option, for
central cap scenario AMB2a
53
Source: Vivid Economics
For tighter cap scenario AMB2c, the hybrid MSR option reduces the TNAC in a similar
manner to MSR0+, all the while avoiding the threshold effect. The TNAC stays between
the two thresholds constantly after 2023.
In terms of intakes, this option results in intakes 26% lower than MSR1, and 25% lower
than MSR2.
Figure 57: TNAC and intakes for MSR1, MSR2 and the hybrid MSR option, for cap
scenario AMB2c
54
Source: Vivid Economics
A comparison of this hybrid MSR option across for the extreme cap scenarios
AMB1 and AMB2b shows that the outcomes of this MSR option depend on the cap
scenario chosen. For the less stringent AMB1 cap, the TNAC would be above the upper
threshold from 2024 until 2028. With the tightest cap option AMB2b, the TNAC would
stay between the thresholds as of 2023.
Figure 58: Evolution of the TNAC with the hybrid MSR option, for the cap scenarios
AMB1, AMB2a, AMB2b
Source: Vivid Economics
In terms of impact on carbon prices and emissions, this option results in similar outcomes
to MSR0+. Since this option also eliminates the threshold effect, this option does not
induce price volatility when the TNAC is close to the upper threshold. Even if the
intake rates are different above and below the level of 1 096 million allowances, the
0
200
400
600
800
1000
1200
1400
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
EUAs,
millions
AMB2a AMB1 AMB2b
55
difference in MSR intake around this level is too insignificant26
to create market
volatility.
Figure 59: Evolution of the stylised carbon price and emission level for the MSR options,
for cap scenario AMB2a
Note: Prices are presented in constant 2015 prices.
Source: Vivid Economics
Due to the lower intake levels, this option results in the highest auction volumes and
therefore highest auction revenues, despite the lower price. The auction volumes are
similar with, or slightly higher than MSR0+.
Introduction of a Carbon Border Adjustment Mechanism
23.4
The introduction of a CBAM is being considered as an alternative to free allocations
to prevent carbon leakage. A CBAM prevents carbon leakage and safeguards
competitiveness by imposing a tariff-like adjustment to emissions-intensive imports
and/or exports to account for differences in carbon prices between the EU and its trading
partners. Free allocations could be phased out for some sectors if a CBAM is introduced,
26
If the TNAC is 1 096 million allowances, the intake would be 1096 – 833 = 263 million allowances.
With a TNAC of 1097 million allowances, the intake would be 1097 * 24% = 263.28 million
allowances, or 280 thousand allowances more. The difference in intake between the two levels is only
0.1%, too low to be significant.
56
forcing them to participate in the market. This is likely to increase the number of
allowances required for banking and hedging, resulting in a higher TNAC.
The analysis in this section investigates the impact of different MSR designs with a
hypothetical CBAM. Since the precise design and scope of a CBAM is not yet
available, the analysis makes the simplifying assumption that firms in the steel and
cement sectors will be subject to a CBAM in 2023, and see their free allocations phased
out gradually between 2023 and 2030. In this scenario, free allocations within the EU
ETS each year drop from 43% of the cap towards 21% of the cap in 2030, remaining
constant post-2030. The share of auctions under the cap increases correspondingly, as
shown in Figure 60 below.
Figure 60: Auction volumes with and without a CBAM (prior to MSR adjustment), under
cap AMB2a
Note: Auction volumes shown include the 3% flexibility buffer.
Source: Vivid Economics
The inclusion of a CBAM increases TNAC (and MSR intakes), but do not change
the conclusions made in previous sections comparing the different MSR options.
Across all the MSR options, the introduction of the hypothetical CBAM specified above
results in a level increase in TNAC by 50 to 100 million for most of the 2020s. In some
cases, such as MSR1, the inclusion of a CBAM shifts the point in which TNAC goes
below the upper threshold back by a year. This has the direct consequence of prolonging
intakes for an extra year. However, whether this 1-year shift occurs is sensitive to the
particular cap and model parameters, regardless of the MSR design.
0
200
400
600
800
1000
1200
1400
1600
1800
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Auction
volume
(millions)
Auctions without CBAM
Auctions with CBAM
Annual cap
57
Figure 61: TNAC with and without a CBAM under the three MSR options (with cap
setting of AMB2a)
Source: Vivid Economics
The introduction of a CBAM reduces the rate at which allowances are invalidated
within the MSR. Under MSR0+ and MSR1, allowances within the MSR that exceed the
auction volume in the previous year is invalidated. As there are more auctioned
allowances under the CBAM scenario, the MSR stock declines slower. By contrast, there
is no such distinction under MSR2, under which allowances that exceed the lower
0
200
400
600
800
1000
1200
1400
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
TNAC,
millions
MSR0+
MSR0+ with CBAM
0
200
400
600
800
1000
1200
1400
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
TNAC,
millions
MSR2
MSR2 - with CBAM
58
threshold are invalidated. It should be noted that the MSR stock is influenced by both the
invalidation threshold (e.g. prior year auction for MSR0+ and MSR1, upper threshold for
MSR2) and the size of MSR intakes. This directly affects the number of allowances in
the MSR available for release beyond 2030 but lies outside of the scope of this impact
assessment.
Moreover, as explained above, the level of the cap in 2030 influences the most the
evolution of the carbon price. As such, the introduction of the CBAM would not have a
significant influence on the carbon price in the results of the model.
24 ESTIMATES OF FUTURE HEDGING NEEDS AND POTENTIAL IMPLICATIONS FOR THE
MSR THRESHOLDS
The Vivid study also performed an analysis of hedging needs and expectations on their
evolution. The study pointed to significant uncertainties in this estimate, in terms of the
total number of banked allowances, as well as which sectors or companies are likely to
engage in hedging activities in the future. The study found that utility hedging is
expected to decrease significantly by 2030 as emissions decrease, which will be
partially offset by increases in industrial hedging.
Figure 62: Range of estimates for hedging demand from utilities to 2030
Source: Vivid Economics, drawing from ICIS and BNEF estimates
The study estimated increased demand due to industrial hedging ranges from 75 to 300
million allowances in 2030.
 Industrial hedging is generally expected to increase, although the potential size of
the market and growth trajectory is extremely uncertain. Projections for industrial
hedging demand are not readily available. This necessitated a scenario-based
approach to estimate the potential size of this demand. Estimates range from 50 to
150 million allowances in 2021, increasing to 75 to 175 million allowances by
2030.
0
100
200
300
400
500
600
700
800
900
1,000
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
59
 Hedging demand from airlines currently covered by the ETS is expected to
increase up to 2030, but its pathway is highly dependent on the airline
industry’s recovery from COVID-19. Airline hedging is estimated to be less
than 25 million allowances in 2021, partially driven by projected decreases in
emissions due to COVID. 2030 estimates range from 20 to 75 million allowances.
 The study estimates excluding the impact of a possible Carbon Border
Adjustment Mechanism (CBAM), leading to additional demand in 2025 of
approximately 50 million allowances, increasing to over 100 million in 2030
The estimates for total hedging demand to 2030 are between 300 and 600 million
allowances, assuming no changes in other aspects of ETS design (especially free
allocations).
Figure 63: Makeup of total hedging demand for EU allowances to 2030
In view of these uncertainties, the Vivid study found that upper and lower threshold
recommendations of 700 and 400 million allowances respectively fall within a reasonable
range of hedging expectations. In general, hedging demand is expected to decrease
overall as emissions decrease, implying that a mechanism to reduce thresholds over time,
like in MSR2, may be appropriate.
0
200
400
600
800
1,000
1,200
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Power (low) Industrial (low) Aviation (low)
Power (high) Industrial (high) Aviation (high)


EN EN
EUROPEAN
COMMISSION
Brussels, 14.7.2021
SWD(2021) 601 final
PART 2/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Directive 2003/87/EC establishing a system for greenhouse gas emission
allowance trading within the Union, Decision (EU) 2015/1814 concerning the
establishment and operation of a market stability reserve for the Union greenhouse gas
emission trading scheme and Regulation (EU) 2015/757
{COM(2021) 551 final} - {SEC(2021) 551 final} - {SWD(2021) 557 final} -
{SWD(2021) 602 final}
Europaudvalget 2021
KOM (2021) 0551 - SWD-dokument
Offentligt
1
Table of contents
LIST OF FIGURES ........................................................................................................................................ 4
LIST OF TABLES.......................................................................................................................................... 5
ANNEX 1: PROCEDURAL INFORMATION.............................................................................................. 6
1 LEAD DG, DECIDE PLANNING/CWP REFERENCES.................................................................... 6
2 ORGANISATION AND TIMING........................................................................................................ 6
3 CONSULTATION OF THE RSB......................................................................................................... 6
4 EVIDENCE, SOURCES AND QUALITY........................................................................................... 9
ANNEX 2: STAKEHOLDER CONSULTATION....................................................................................... 10
5 FEEDBACK RECEIVED ON THE INCEPTION IMPACT ASSESSMENT ................................... 11
6 RESULTS OF THE OPEN PUBLIC CONSULTATION .................................................................. 12
Overview of respondents.................................................................................12
6.1
Methodology for data processing ....................................................................13
6.2
Questionnaire...................................................................................................13
6.3
6.3.1 Contribution of ETS to the overall climate ambition for 2030 .................. 13
6.3.2 Addressing the risk of carbon leakage........................................................ 14
6.3.3 An increasing role for emissions trading.................................................... 15
6.3.4 Extension to maritime GHG emissions ...................................................... 16
6.3.5 Market Stability Reserve ............................................................................ 17
6.3.6 Revenues..................................................................................................... 18
6.3.7 Low-carbon support mechanisms............................................................... 19
Position papers.................................................................................................20
6.4
6.4.1 Contribution of ETS to the overall climate ambition for 2030 and main
challenges.................................................................................................................. 20
6.4.2 Addressing the risk of carbon leakage........................................................ 20
6.4.3 Market Stability Reserve ............................................................................ 21
6.4.4 Extensions of emissions trading to other sectors........................................ 21
6.4.5 Revenues and low-carbon support mechanisms......................................... 21
ANNEX 3: WHO IS AFFECTED AND HOW? .......................................................................................... 23
7 WHO IS AFFECTED AND HOW ..................................................................................................... 23
Practical implications of the initiative.............................................................23
7.1
Summary of costs and benefits........................................................................25
7.2
ANNEX 4: ANALYTICAL METHODS ..................................................................................................... 34
2
8 COMMON ANALYTICAL FRAMEWORK FOR THE IMPACT ASSESSMENTS OF
THE REVISION OF ESR, ETS, CO2 STANDARDS, LULUCF, RED AND EED........................... 34
Introduction .....................................................................................................34
8.1
Modelling tools for assessments of policies....................................................35
8.2
8.2.1 Main modelling suite.................................................................................. 35
8.2.2 Energy: the PRIMES model ....................................................................... 36
8.2.3 Transport: the PRIMES-TREMOVE model .............................................. 39
8.2.4 Maritime transport: PRIMES-maritime model........................................... 40
8.2.5 Non-CO2 GHG emissions and air pollution: GAINS................................. 42
8.2.6 Forestry and land-use: GLOBIOM-G4M................................................... 43
8.2.7 Agriculture: CAPRI.................................................................................... 44
Assumptions on technology, economics and energy prices ............................46
8.3
8.3.1 Economic assumptions............................................................................... 46
8.3.2 International energy prices assumptions .................................................... 48
8.3.3 Technology assumptions ............................................................................ 49
The existing 2030 framework: the EU Reference Scenario 2020 ...................49
8.4
8.4.1 The EU Reference Scenario 2020 as the common baseline....................... 49
8.4.2 Difference with the CTP “BSL” scenario .................................................. 50
8.4.3 Reference scenario process......................................................................... 51
8.4.4 Policies in the Reference scenario.............................................................. 51
8.4.5 Reference Scenario 2020 key outputs ........................................................ 52
Scenarios for the “Fit for 55” policy analysis .................................................55
8.5
8.5.1 From the Climate Target Plan scenarios to “Fit for 55” core scenarios..... 55
8.5.2 Scenarios for the “Fit for 55”package ........................................................ 57
8.5.3 Quantitative elements and key modelling drivers ...................................... 64
8.5.4 Key results and comparison with Climate Target Plan scenarios .............. 68
Results per Member State................................................................................71
8.6
9 SPECIFIC ANALYTICAL ELEMENTS FOR THIS IMPACT ASSESSMENT .............................. 72
Model used for MSR analysis .........................................................................72
9.1
9.1.1 MSR model................................................................................................. 72
9.1.2 Reparameterisation of model...................................................................... 75
9.1.3 Quantification of magnitude and direction of shocks................................. 78
9.1.4 Guidance on interpreting modelling results ............................................... 78
Models used for carbon leakage analysis ........................................................81
9.2
9.2.1 Calculation of free allocation ..................................................................... 81
9.2.2 Calculation of projected emissions............................................................. 84
3
9.2.3 Calculation of economic impacts ............................................................... 88
Models used for the extension of emissions trading or alternatives for
9.3
maritime emissions..........................................................................................90
ANNEX 5: DESIGN ELEMENTS FOR ETS EXTENSION TO BUILDINGS AND ROAD
TRANSPORT OR TO ALL FUELS EMISSIONS............................................................................. 92
10 CAP SETTING AND LINEAR REDUCTION FACTOR.................................................................. 92
11 MARKET STABILITY FOR THE NEW ETS................................................................................... 94
12 POINT OF REGULATION ................................................................................................................ 96
Technical feasibility ........................................................................................97
12.1
Ability to pass-on the carbon price to the end-consumer..............................103
12.2
Administrative cost........................................................................................104
12.3
Addressing possible double burden and loopholes/Interaction with the
12.4
existing ETS ..................................................................................................111
13 COMPLIANCE, ENFORCEMENT AND USE OF INFRASTRUCTURE ..................................... 112
14 MONITORING REPORTING AND VERIFICATION ................................................................... 112
15 TRADE OF ALLOWANCES........................................................................................................... 118
16 COHERENCE WITH OTHER POLICIES....................................................................................... 119
Interactions with possible parallel coverage by Effort Sharing
16.1
Regulation......................................................................................................119
Compatibility and implications of an ETS covering buildings with the
16.2
relevant pieces of EU legislation in force......................................................119
Compatibility and implications of an emissions trading system for
16.3
road transport with the relevant pieces of EU legislation in force ................135
Compatibility with other pricing instruments at Member states level ..........138
16.4
Additional consideration on policy compatibility for a possible
16.5
extension to all fossil fuels for the sectors not under the ETS ......................139
ANNEX 6 SPECIFIC ELEMENTS OF MARITIME TRANSPORT OPTIONS....................................... 141
17 COMMON DESIGN ELEMENTS FOR ALL MARITIME OPTIONS........................................... 141
Overview of the different policy options.......................................................141
17.1
Regulated entities ..........................................................................................141
17.2
Regulated ships and activities .......................................................................143
17.3
Geographical scope .......................................................................................144
17.4
Legal feasibility of maritime options ............................................................145
17.5
18 DESIGN ELEMENTS SPECIFIC TO MARITIME ETS OPTIONS (MAR1, MAR2 AND
MAR4) .............................................................................................................................................. 146
Maritime ETS cap and LRF ..........................................................................146
18.1
Maritime allowance allocation ......................................................................147
18.2
Administering authority.................................................................................148
18.3
MRV and Enforcement..................................................................................149
18.4
Design elements for simplification and limitation of the administrative
18.5
burden............................................................................................................152
Other discarded design elements for the maritime sector .............................154
18.6
4
LIST OF FIGURES
Figure 14: Distribution of respondents by type and country............................................ 13
Figure 15: Interlinkages between models......................................................................... 36
Figure 16: Schematic representation of the PRIMES model............................................ 37
Figure 17: Fuel mix evolution of the Reference Scenario 2020....................................... 54
Figure 18: Share of energy carriers in final energy consumption in the Reference
Scenario 2020.................................................................................................... 54
Figure 19: Final energy demand by sector in the Reference Scenario 2020.................... 55
Figure 20: Interactions between different policy tools..................................................... 56
Figure 21: Baseline emissions estimates for covered sectors under the central policy
scenario.............................................................................................................. 76
Figure 22: Correction to the assignment of verified emissions at sector level for onsite
electricity generation and heat/waste gas transfers (average for 2014 to 2018) 86
Figure 23: Illustrating cap setting at the example of option EXT1 .................................. 94
Figure 24: Expected administrative burden for the regulated entities depending on the
type of fuel....................................................................................................... 106
Figure 25: Number of reported policy measures by Member State ............................... 123
Figure 26: Number of reported policy measures by Member State, as of November
2020................................................................................................................. 124
Figure 27: Share of reported energy savings by policy measure type on EU level, as of
November 2020 ............................................................................................... 124
Figure 28: Share of reported energy savings by sector on EU level, as of November
2020................................................................................................................. 125
Figure 29: Number of policy measures by instrument type for targeted sector on EU
level, as of November 2020............................................................................. 125
Figure 30: Number of policy measures only targeting buildings and measures
including buildings by instrument type on EU level, as of November 2020 .. 126
Figure 31: Number of reported policy measures by Member State, as of November
2020................................................................................................................. 127
Figure 32: Number of policy measures by instrument type, as of November 2020....... 127
Figure 33: Share of cumulative energy savings 2021-2030 by instrument type, as of
November 2020 ............................................................................................... 128
Figure 34: Share of cumulative energy savings 2021-2030 by targeted sector, as of
November 2020 ............................................................................................... 128
Figure 35: Number of policy measures (type) reported per sector, as of November
2020................................................................................................................. 129
Figure 36: Scope of the EU maritime transport MRV regulation .................................. 144
Figure 37: Origin of companies that reported under the EU maritime transport
regulation in 2018............................................................................................ 149
Figure 38: Main steps of the EU maritime transport MRV process............................... 151
5
LIST OF TABLES
Table 30: Overview of benefits ........................................................................................ 25
Table 31: Overview of costs............................................................................................. 29
Table 32: Projected population and GDP growth per Member State............................... 46
Table 33: International fuel prices assumptions............................................................... 48
Table 34: REF2020 summary energy and climate indicators .......................................... 52
Table 35: Scenario assumptions description (scenarios produced with the PRIMES-
GAINS-GLOBIOM modelling suite)................................................................ 60
Table 36: ETS prices by 2030 in the difference scenarios (€2015/tCO2) ........................ 64
Table 37: Energy efficiency value and renewable energy value (averaged 2025-2035) . 65
Table 38: Carbon value applied to non-CO2 emissions in the GAINS model
(€2015/tCO2) ..................................................................................................... 68
Table 39: Key results of the “Fit for 55” core scenarios analysis for the EU .................. 68
Table 40: Comparison with the CTP analysis .................................................................. 70
Table 41: Assumed annual average growth rates for the modelling of free allocation.... 83
Table 42: Factors used for the adjustment of the exchangeability of fuel and electricity
for the modelling of free allocation................................................................... 84
Table 43: Assumed annual average improvement in the GHG emission efficiencies
per sector for the modelling of emissions ......................................................... 87
Table 44: Deflation indices used for the modelling of carbon costs ................................ 89
Table 45. EUA prices used for the modelling of carbon costs......................................... 90
Table 46: Overview of relevant data for LRF calculation for options EXT1 and EXT2. 94
Table 47: Illustrative cost estimate for regulated entities under EXT 1 (supplier of
coal)................................................................................................................. 108
Table 48: Effective 2020 carbon price by Member States ............................................. 135
Table 49: Summary of maritime transport policy options.............................................. 141
Table 50: Overview of the different maritime geographical scope................................ 145
Table 51: Turnover, number of enterprises and persons employed in water transport in
2018................................................................................................................. 154
6
Annex 1: Procedural information
1 LEAD DG, DECIDE PLANNING/CWP REFERENCES
The Directorate-General (DG) for Climate Action has led the preparation of this initiative
and the work on the Impact Assessment in the European Commission. The planning
entry was approved in Decide Planning under the reference PLAN/2020/8684. It is
included in the 2021 Commission Work Programme1
under the headline ambition
‘European Green Deal’ and the policy objective ‘Fit for 55 package’.
2 ORGANISATION AND TIMING
The planned adoption date (Q2 2021) was included in the Commission Work
Programme. The Inception Impact Assessment was open for feedback between 29
October 2020 and 26 November 2020. The Open Public Consultation was online
between 13 November 2020 and 05 February 2021.
An inter-service steering group (ISSG) for preparing the climate-related “Fit for 55
Package” initiatives to implement the 2030 climate target plan was established in
October 2020 to prepare this initiative. Its members were: SG, LS, AGRI, BUDG,
COMM, COMP, CNECT, DGT, DIGIT, EAC, ECFIN, ECHO, EMPL, ENER, ENV,
ESTAT, FISMA, FPI, GROW, HOME, HR, IAS, INTPA, JRC, JUST, MARE, MOVE,
NEAR, OLAF, REFORM, REGIO, RTD, SANTE, TAXUD, and TRADE. The ISSG
met four times in the period from September 2020 until adoption. On 13 October it
discussed the draft Inception Impact Assessments and the questionnaires for the Open
Public Consultations, on 14 December IA sections 1 to 4 and the policy options, on 3
March the complete IA draft before submission to the Regulatory Scrutiny Board, and on
8 June the legal draft and the revised impact assessment.
3 CONSULTATION OF THE RSB
Two upstream orientation meetings on the Fit for 55 package in general and on ETS and
ESR were held in November. A draft Impact Assessment was submitted to the
Regulatory Scrutiny Board (RSB) on 10 March 2021. A framing note on policy
coherence in “Fit for 55” climate and energy initiatives was submitted to the RSB on 7
April 2021. Following the RSB meeting on 14 April 2021, it issued a positive opinion
with reservations on 19 April 2021.
The RSB’s recommendations for improvement have been addressed as presented below.
1
COM(2020) 690 final
7
1) The report should be more accessible to inform the key policy choices. The narrative
should be less technical, shorter and be readable without an extensive prior knowledge
of European climate policies. The report should make particular effort to improve the
presentation of the preferred option(s), making the various trade-offs and open choices
clear for policy-makers.
 We have improved the readability throughout the document and added
explanations to make the content better accessible.
 Although both elements, as well as the required more detailed inclusion of
stakeholder feedback (see item 4) tend to make the text longer, we still managed
to shorten the main part of the impact assessment significantly.
 As the assessment covers four distinct but interrelated elements which are all
worth an assessment on its own (strengthening of the existing ETS, review of the
Market Stability Reserve, extension of the ETS to maritime transport, extension
of emissions trading to buildings and transport or all fossil fuel combustion
emissions), the document still exceeds the length of a typical impact assessment.
 We have improved the presentation of the preferred options in Section 8, linked
them back to stakeholder feedback and making trade-offs clearer where relevant.
2) While the report should be self-standing, it should highlight the significant
interlinkages with other ‘Fit-for-55’ initiatives. It should be clear on what the Climate
Target Plan has decided and which ‘sectoral’ choices are still left open. It should
elaborate on the consequences of deviating from the ‘optimal balance’ between
regulatory and pricing instruments. The report should further clarify coherence with the
possible Carbon Border Adjustment Mechanism (CBAM), in particular the auctioning
share for trade exposed and energy-intensive sectors. It should explain to what extent the
ETS revision depends on the CBAM initiative. It should also clarify to what extent it
takes into account CO2 reductions generated by a possible revision of the Energy
Taxation Directive. Moreover, it should explain why aviation is dealt with in another
initiative.
 We have further strengthened the interlinkages with other ‘Fit-for-55’ initiatives,
notably in Sections 2.4.1, 2.4.2, 6.2.1, 6.3.1 and 6.3.5.
 We have clarified in Section 1.1 what the Climate Target Plan has decided and
what it left still open. In the same section we also explain why aviation is dealt
with in another impact assessment.
 The consequences of deviations from a balance between regulatory and pricing
instruments are e.g. reflected by the MIX-CP scenario. The interpretation of
differences between the MIX-CP and MIX scenarios has been strengthened, e.g.
in Sections 5.2.1 and Section 6.3.
 We have further clarified the coherence with the possible Carbon Border
Adjustment Mechanism (CBAM) in Sections 5.2.2.4 and 6.1.2.2.5, including how
CBAM could impact the auctioning share and related parts of the ETS revision. A
CBAM sensitivity is part of the MSR sensitivity analysis in Annex 8, Section
23.4.
8
 CO2 reductions by the preferred option of a possible revision of the Energy
Taxation Directive are covered in the MIX scenario, the core modelling scenario
used in this impact assessment. This is clarified in Section 5.2.1 and Annex 4,
Section 8.5.2.
3) The report should strengthen the rationale why the ETS should be extended to the
maritime sectors and (part of) the ESR sectors. It should reinforce the analysis of the
related problems and clarify what and how much these individual extensions would add
to other existing or planned regulatory initiatives, such as the CO2 emissions for cars
and vans and the FuelEU maritime initiative. The report should better argue the choice
of ETS coverage in the current ESR sectors. It should discuss whether a selective
coverage of ESR sectors in the ETS might lead to increased complexity or distortions, as
sectors would fall under different climate policy regimes.
 The rationale why the ETS should be extended to the maritime sectors, the
analysis of related problems has been strengthened, notably in Section 2.4.1, and
the complementarity with the contribution of the FuelEU maritime initiative has
also been further clarified in Section 6.2.1.1.
 The rationale why emissions trading could be extended to buildings and transport
and the analysis of related problems has been strengthened, notably in Section
2.4. The complementarity with the initiative on CO2 emission standards for cars
and vans (see Section 6.3.5.2) has also been further clarified in Section 6.3.1.1.2.
 Analysis of interactions with the ESR in Section 6.3.5.1 has been strengthened.
4) The report should systematically take into account the comments made by the different
stakeholder groups and confront them with the findings of the analysis throughout the
report.
 The main text and Annex 2 were amended to expand the discussion on
stakeholder views. In particular, where relevant, the provided description has
been complemented with the results of the undertaken correlation analysis by
stakeholder group.
 Stakeholder views have also been integrated in the preferred option section.
5) The methodological section (in the annex), including methods, key assumptions, and
baseline, should be harmonised as much as possible across all ‘Fit for 55’ initiatives.
Key methodological elements and assumptions should be included concisely in the main
report under the baseline section and the introduction to the options. The report should
refer explicitly to uncertainties linked to the modelling. Where relevant, the
methodological presentation should be adapted to this specific initiative.
 A common methodological section across the seven CLIMA and ENER ‘Fit for
55’ initiatives including models used, key assumptions, baseline and policy
scenarios has been included in Annex 4, before the specific additional methods
used in this impact assessment are presented.
9
 The concise presentation of key methodological elements and assumptions in the
main report has been improved in Sections 5.1 and 5.2.1, also referring explicitly
to uncertainties related to the modelling.
6) Annex 3 should follow the standard format and present a summary of costs and
benefits with all key information, including quantified estimates.
 A summary of costs and benefits in table format with all key information,
including quantified estimates, where available, has been added to Annex 3.
4 EVIDENCE, SOURCES AND QUALITY
This initiative builds upon evidence gathered in the Impact Assessment for the previous
ETS revision2
concluded in 2018, the Impact Assessment accompanying the 2030
Climate Target Plan3
, analysis conducted in support of the Commission’s Long-Term
Strategy4
and any relevant evidence compiled in other concurrent Green Deal initiatives.
It builds on emissions data and experiences from the implementation of the EU
monitoring, reporting and verification systems. It makes use of updated EU Reference
Scenario 2020, which includes COVID-19 impacts, and updated policy scenarios,
building upon the scenarios developed for the 2030 CTP (see Annex 4, Section 8). In
addition it makes uses of several support contracts. Vivid Economics conducted a study
to support the European Commission in the review of the MSR5
. Concerning carbon
leakage provisions, support work was carried out by Öko-Institut, Trinomics, Ricardo
and Adelphi. Furthermore, a study team led by Ricardo conducted a study on “EU ETS
for maritime transport and possible alternative options or combinations to reduce
greenhouse gas emissions”6
. Further information on evidence, scenarios and sources is
provided in Annexes 2 and 4.
2
SWD (2015) 135.
3
SWD(2020)176.
4
European Commission: In-depth analysis in support of the Commission Communication COM(2018) 773
A Clean Planet for all, A European long-term strategic vision for a prosperous, modern, competitive and
climate neutral economy, Brussels 28 November 2018.
5
Vivid Economics, (2021) – “Review of the EU ETS’ Market Stability Reserve”, report prepared for DG
CLIMA, publication upcoming.
6
Ricardo, E3 Modelling and Trinomics, (2021) – “Study on EU ETS for maritime transport and possible
alternative options or combinations to reduce greenhouse gas emissions”, publication upcoming.
10
Annex 2: Stakeholder consultation
The revision of the ETS builds upon the feedback on the 2030 CTP and interlinkages of
the ETS with parallel policies and the broader objectives of the European Green Deal.
The scope of the ETS consultation was limited to potential amendments to the ETS. In
particular, the main objective of the consultation was to gather stakeholder views on the
strengthening of the existing ETS, the extension of the ETS to new sectors (maritime
transport as well as buildings, road transport or all fossil fuel combustion) and the review
of the Market Stability Reserve (MSR). The consultation also looked for inputs on how
to address the risk of carbon leakage, the use of revenues and low-carbon support
mechanisms.
The Commission first invited feedback on the Inception Impact Assessment (IIA),
outlining the initial considerations and policy options of the revision. The consultation on
the IIA was open for feedback from 29 October 2020 to 26 November 2020.
The Commission then organised an online public consultation (OPC) with a
questionnaire. The OPC was open for 12 weeks, in line with the Better Regulation
Guidelines, from 13 November 2020 to 5 February 2021. The online questionnaire
contained 29 questions, mainly multiple choice questions but with the possibility to
elaborate on the given response.
Respondents could also submit position papers both in response to the IIA and the OPC.
The Commission asked a contractor7
to produce a report analysing the results of the IIA
and the OPC, including the submitted position papers. The results of the public
consultation are summarised below based on the report provided by the contractor.
To support the maritime initiative, a targeted stakeholder survey was carried out between
December 2020 and February 2021, accompanied by a targeted interview programme
launched in January 2021 and concluded in February 2021. The results are reflected in
the analysis of impacts.
In addition, the Commission held (virtual) bilateral and multilateral stakeholder meetings
to discuss the revision of the ETS. In total, the Commission participated in more than 50
(virtual) stakeholder meetings, including with companies and business associations
across different sectors, trade unions, non-governmental organisations (NGOs) and
7
Technopolis Group in association with COWI, SQ Consult and Exergia.
11
public authorities of MS.8
The Commission also participated in several virtual
conferences in order to present the upcoming revision of the ETS and to invite
stakeholders to participate in the public consultation. Finally, the Commission instructed
a contractor to organise two expert workshops on the review of the MSR.9
The outcome
of these meetings and workshops will not be further analysed in this report as concerned
stakeholders’ views are also reflected in their responses to public consultation and hence
no additional analysis is required.
5 FEEDBACK RECEIVED ON THE INCEPTION IMPACT ASSESSMENT
The Commission received 258 unique responses, including 128 from business
associations and 59 from companies/business organisations (together private sector
stakeholders), 34 from NGOs, 15 from EU citizens and 6 from public authorities. 90% of
respondents came from 20 EU MS and 10% from outside EU (Japan, Norway,
Palestine10
, South Korea, Switzerland, UK, Ukraine and the US, mostly private sector
stakeholders). 163 position papers were received as attachments from these stakeholders.
As contributions did not necessarily touch upon all aspects of the revision, the results
presented below refer to those respondents that expressed their views on a certain topic.
The majority of respondents agreed with the context of the revision of the ETS presented
in the IIA roadmap, meaning that there is an overall support for the need to revise the
ETS legislation to align it with the higher climate target set in the European Green Deal.
With regards to achieving an increased ETS ambition, the majority of respondents
favoured increasing the linear reduction factor (LRF) and/or rebasing the cap. NGOs and
clean energy/technology/service providers tended to opt for the combined LRF/rebased
cap approach to maximise the increase in ambition, whereas industry stakeholders
preferred an increased LRF over a rebased cap to avoid big step changes that impact
predictability. Respondents agreed that climate objectives should not be met through a
one-off MSR review.
However, about half of respondents were in favour of strengthening the MSR to meet its
objective of ensuring market stability (largely NGOs, ‘green’ businesses, but also some
‘traditional’ business stakeholders). Only few respondents commented on a carbon price
8
As notable example, on 1 June 2021, the Commission, represented at the highest level, met with social
partners from both the employer and employee side to discuss the Fit for 55 package, including the ETS
revision.
9
https://ec.europa.eu/clima/events/expert-workshop-market-stability-reserve_en,,
https://ec.europa.eu/clima/events/2nd-expert-workshop-market-stability-reserve_en.
10
This designation shall not be construed as recognition of a State of Palestine and is without prejudice to
the individual positions of the Member States on this issue.
12
floor with a slight majority of those being in favour (mostly environmental NGOs and
clean-energy companies).
Stakeholders were generally in agreement with the proposed inclusion in the current ETS
of the maritime sector. In contrast, just over half of respondents were in disagreement
with the inclusion of emissions from buildings or road transport in the current ETS.
Those opposing it had concerns relating to impacts on the competitiveness of the current
ETS sectors by including sectors with high abatement costs and/or different price
elasticities. More generally with regard to the extension of emissions trading to road
transport and buildings, some stakeholders raised concerns regarding the increased
administrative burden from overlapping policies as well as the impact of rising heating or
transport prices on consumers, especially for low-income households. Some respondents,
mainly from the private sector, mentioned their support for a separate ETS for buildings
and road transport emissions.
6 RESULTS OF THE OPEN PUBLIC CONSULTATION
Overview of respondents
6.1
493 stakeholders responded to the OPC on the revision of the ETS. The largest group
was private sector stakeholders (70%; 342), followed by NGOs (10%; 49 responses), EU
citizens (7%; 35), public authorities (5%; 26) and academia (2%; 8). Five trade unions
also responded to the OPC. Respondents came from 25 EU Members States with no
respondents from Bulgaria and Croatia. The largest number of replies came from
Belgium11
(23%; 114), followed by Germany (13%; 63), France and Italy (both at 6%).
Respondents from outside the EU were from Canada, Japan, Norway, Russia,
Switzerland, UK, Ukraine and the US.12
No campaigns were identified.
Additional position papers could be provided in response to the OPC. In total, 145 papers
were received. Based on a preliminary review and a selection (e.g., exclusion of
duplicates), 129 papers were thoroughly analysed. About half of the papers originated
from business associations, 27% from companies from various sectors (notably 13 from
11
This result is influenced by the fact that many business associations and NGOs that responded are based
in Belgium.
12
In the remainder of the analysis, the differentiation between stakeholder groups focusses on the private
sector and NGOs given the large number of respondents. Results for other stakeholder groups will also
be mentioned, however, results have to be interpreted with caution. For instance, the number of replies
from EU citizens is too low to give a representative picture, while the group of public authorities
encompasses a very diverse spectrum from different policy fields and levels, including local, regional
and federal authorities.
13
the energy sector), 9% from NGOs and 8% from public authorities. Remaining papers
included positions from academia, environmental organisation, trade unions and others.
Figure 14: Distribution of respondents by type and country
Source: Technopolis Group
Methodology for data processing
6.2
The responses from the online survey were processed statistically and thematically, with
a correlation analysis for each question.13
As questions in the online survey were
optional, the percentages presented below refer to the total respondents that answered the
concerned questions. Some questions allowed respondents to ‘rate’ options (1-5). On
these ratings, the report provides figures for the “highest rating” category, as this is
indicative of most support.
Position papers were processed via cataloguing, meaning data from each paper was
logged in a database to provide key themes and information from paper and author.
Questionnaire
6.3
6.3.1 Contribution of ETS to the overall climate ambition for 2030
37% of respondents (145) from a wide range of stakeholder groups indicated that the
current ETS sectors should increase their contribution (compared to 2005) in line with
13
The data set resulting from the public consultation was fine-tuned based on data triangulation with regard
to a few questions, which allowed multiple replies to questions originally meant to receive a single reply
only. To avoid contradicting replies and make the statistics easier to interpret, the reply was reduced to
one option based on all available information from the respondent, including replies to previous
questions, open text replies and submitted position papers. This data manipulation did not significantly
change the results compared to the original dataset. In particular, the relative ranking of options has not
been altered.
14
the new target and based on cost-efficiency considerations. Only about 10% of
respondents each argued for either a higher (mainly NGOs, environmental organisations
and EU citizens) or lower (mainly private sector respondents) contribution of the ETS
compared to the cost-efficiency principle. The remaining 39% of respondents (151),
mainly from the private sector, selected “other” and commented that alternative
contributions could be set, stressing the need for a thorough impact assessment of each
sector to determine what level of cost-effective emissions reduction can be achieved by
2030 and the need to ensure business predictability and competitiveness of the carbon
market.
A majority of respondents (67%; 220) from all stakeholder groups indicated the increase
of the LRF to be the most relevant factor to strengthen the ETS ambition. Respondents
were more divided on the importance of a one-off cap reduction in combination with
increasing the LRF as well as the early application of a strengthened cap. While these
options were found important by a wide range of stakeholder groups (including NGOs,
environmental organisations, academic/research institutions, EU citizens and public
authorities), this was not the case for the private sector, notably not for the manufacturing
sector. Similarly, a divide was registered in respondents’ views on the importance of
changes in the MSR parameters as means to achieve the increased ambition.
There was also no agreement on how a strengthened ETS cap should be divided between
auctioning and free allocation. Between the two proposed options of the survey,
increasing the auction share while decreasing free allocation was, by a small margin, the
preferred option (24%, including the majority of EU citizens and academic/research
institutes and some NGOs) over the continuation of the current auction share of 57%
(19%, including some private sector respondents and the majority of public authorities).
However, a significant share of respondents (57%), including the majority of NGOs and
the private sector, indicated “other” providing various replies. While some NGOs asked
to abolish free allocation all together, many respondents from the private sector pointed
to the risk of carbon leakage and the need to avoid the application of the cross-sectoral
correction factor.
6.3.2 Addressing the risk of carbon leakage
Most responses expressed14
(80%; 540) from a wide range of stakeholder groups argued
in favour of amending or replacing the current carbon leakage framework, including
most of NGOs and public authorities, either introducing other measures to further
incentivise GHG reductions (31%), replacing it with a CBAM for selected sectors (18%),
targeting the support even more to the sectors most at risk (17%), or making free
14
This was a multiple choice questions and respondents could select several options.
15
allocations conditional on beneficiaries carrying out investments for reducing their GHG
emissions (14%).
Regarding possible changes to benchmark-based allocation, the most preferred option
was to increase transparency regarding benchmark values and process via mandatory
publication of the underlying data by industry (55% of respondents found this to be
important or very important). Otherwise, respondents’ opinions were very much divided
with about one half of respondents finding the following proposals important, and the
other half, in particular the majority of respondents from the private sector, not: the
introduction of a modified method to determine benchmark values to ensure faster
incorporation of innovation and technological progress, additional product benchmarks
or revised definitions of product benchmarks to incentivise innovation. 84% of
respondents also referred to other important aspects and provided many different ideas,
such as the use of benchmarks to reward first-movers, support for other measures such as
carbon contracts for difference as well as general claims for a higher or lower level of
carbon leakage protection.
The responses to the question on indirect cost compensation are summarised in Annex 9.
6.3.3 An increasing role for emissions trading
The vast majority of respondents from a wide range of stakeholder groups argued that, in
addition to carbon pricing, other policies should be deployed when extending the use of
emissions trading to emissions from buildings, road transport or all fossil fuel
combustion, including CO2 standards for cars and vans (87%), transport policies (79%),
policies addressing energy efficiency of buildings (79%) and renewable energy policies
(76%) as well as, to a lesser degree, energy taxation (56%).
A narrow majority of responses15
(52%; 636), including from NGO, private sector
respondents and trade unions, had a negative view on the integration of the building and
transport sectors into the ETS because of the large differences between new sectors and
the current ones so that abatement efforts would mainly materialise in the current ETS
sectors, because it would give an insufficient price signal for the transport and building
sector to decarbonise, and/or because the integration of the new sectors in the current
ETS might disrupt and undermine its stability. Only less than one-third of responses,
including the majority of EU citizen and academic/research institutions, saw an
integration favourable, arguing that it would provide for cost-effectiveness, a level-
playing field and a uniform carbon signal. 18% of responses referred to “other” (positive
or negative) effects, with half of them arguing against the introduction of emission
trading for new sectors and the other half being open to consider an extension as an
15
This was a multiple choice questions and respondents could select several options.
16
option, generally either after a careful assessment of the impacts and a trial period or in a
separate temporary or permanent ETS.
Most of respondents (46%; 164), including the majority of NGOs, private sector
respondents and trade unions, felt that a separate EU-wide emissions trading system for
road transport and buildings or all fossil fuel use as a parallel system to the current ETS
should stay independent and no relationship between the current and new separate system
should be established. 19% of respondents, including the majority of EU citizens, argued
for ‘two-way flexibilities’ between the systems, while only 2% argued for one-way
flexibilities. Further 33%, including the majority of academic/research institutions,
indicated “other” giving various replies, in particular stressing the need for a thorough
impact assessment before integrating the two systems.
Views were divided on whether the ETS revision should already determine when and
how emissions trading for road transport and buildings or all fossil fuel use could be
gradually integrated into the existing ETS. 45% (174) of respondents, including the vast
majority of NGOs, environmental organisations and trade unions as well as almost half
of the private sector respondents (in particular from the manufacturing sector), claimed
that the risks associated with an integration are too high and that the legislation should
not pursue such a step. 43% (165) of respondents, including the majority of
academic/research institutions, public authorities and EU citizens as well as the slight
majority of private sector respondents (in particular from the energy sector), were open to
having the revised ETS Directive determine when and how emissions trading for road
transport and buildings or all fossil fuels could be gradually integrated into it. These
respondents preferred a review clause (26%) to a fixed integration date (17%).
6.3.4 Extension to maritime GHG emissions
Most respondents who expressed a view on the proposed policy options (35%; 117),
including the majority of NGOs, environmental organisations, academic/research
institutions and public authorities, argued that extending the ETS to cover maritime
transport would be the most appropriate measure to put a price on GHG emissions from
EU maritime transport activities. This option was followed by a specific ETS just for
maritime transport (14%) and a tax at EU level (8%). However, 43% of respondents
indicated “other” giving various replies, including more than half of private sector
respondents. The majority of respondents from the maritime industry argued against the
extension of the ETS to cover maritime transport, preferring a global approach at IMO
level instead.
A clear majority of respondents (54%; 144) from a broad range of stakeholder groups
stated that EU carbon pricing measures in the maritime sector should be combined with
EU emission standards for ships (notably technical or operational carbon intensity
standards). However, only 25% of respondents from the maritime sector selected this
option, while most of them indicated that emissions standards would be sufficient.
17
In terms of design elements, a large majority of respondents (71%; 155) from different
stakeholder groups felt that a carbon price should be paid by ship commercial operators.
Regarding exemptions to a carbon pricing policy for maritime transport, 37% of
respondents (75) indicated that only ships below 400 GT should be excluded, in line with
the IMO’s existing measures in place for those ships. A slightly smaller number (28%;
57) stated that ships below 5000 GT should be excluded, while this was the preferred
option of respondents from the maritime industry. Concerning the geographical scope of
carbon pricing for the maritime sector, 76% of total respondents (171) (and 57% of
respondents from the maritime industry) supported addressing emissions from intra-EU
and extra-EU voyages. Regarding the type of emissions covered, there was a nearly even
split between respondents preferring an inclusion of only CO2 emission and those in
favour that also methane, nitrous oxide and black carbon emissions should be accounted
for in view of their important increase over the period 2012 to 2018. The majority of
respondents from the maritime industry preferred to only include CO2 emissions in line
with the EU MRV system for shipping.
If the EU were to apply carbon pricing to emissions from extra-EU voyages, a majority
(65%; 123) favoured as a basis criterion the application of 100% of both the incoming
and the outgoing journeys. 48% of respondents from the maritime industry supported this
option, while 33% indicated a preference for 50% of both the incoming and outgoing
journeys.
6.3.5 Market Stability Reserve
The prevailing view (71%; 232) across a wide range of stakeholder groups was that the
MSR has delivered on its main objective and should be continued (only 4% indicated that
the approach did not work, 25% indicated “other” with various replies). Among these
respondents, for 54%, the MSR would benefit from improvements, either in its
parameters (30%), through the addition of a carbon price floor (13%), or in its reactivity
to address unexpected demand or supply shocks (11%), while the other 17% of
respondents indicated that the approach has worked well and should not be changed. The
carbon price floor option (12%) was mostly supported by private sector stakeholders,
arguing that a carbon price would strengthen the current framework, ensure a clear price
signal for low-carbon investments and improve the predictability of the ETS.
For 46% of respondents (108), the current MSR thresholds, used to determine whether
allowances are placed in the MSR or released, should be kept as they are. This option
was the most preferred by private sector stakeholders, public authorities and trade unions.
37% of respondents argued that the thresholds should be decreased, i.e. making a release
less likely and a placement in the MSR more likely, including the majority of NGOs,
environmental organisations and parts of the private sector (in particular the energy
18
sector). A minority of respondents (18%) from different stakeholder groups indicated that
the thresholds should be increased.
As regards the options for the MSR intake rate, respondents were almost evenly split
between those in favour of keeping it as per current regulation16
(23%; 65) and those
opting for the MSR intake rate to be kept at 24% beyond 2023 (21%; 58). These are the
options most preferred by private sector respondents and trade unions. Another 18% (51)
argued that the intake rate should be higher than 24% to reduce the surplus faster,
including the majority of NGOs and environmental organisations. 12% (34) indicated
that the intake rate should be decreased to lower than 12% from 2024 onwards, including
parts of the private sector (in particular the manufacturing sector).
A clear majority of respondents (63%) from a wide range of stakeholder groups
expressed a preference to maintain the invalidation rule, according to which allowances
in the MSR above the level of auction volumes of the previous year are invalidated as of
2023, either unreservedly (38%) or with an amendment (25%). 27% of respondents were
instead in favour of abolishing the invalidation rule, including parts of the private sector
(in particular the manufacturing sector).
Furthermore, a clear majority of respondents (62%; 173) from a wide range of
stakeholder groups supported the option to include aviation allowances and emissions in
the calculation of the surplus. A minority of respondents (38%) from different
stakeholder groups was against the inclusion.
With regards to the cancellation of allowances for MS that implement national measures
to close fossil fuels power plants or other measures that substantially reduce demand for
allowances, the most preferred option (44%; 139) was that it should not be made
mandatory. This was the preferred option for the majority of private sector respondents.
However, one third of the respondents (35%; 111), including the majority of NGOs and
environmental organisations, was in favour of cancelling them proportionally.
6.3.6 Revenues
The most preferred option17
for using the ETS revenues, was “Support for clean
investment in ETS sectors” (22%; 299), followed closely by “More support to
innovation” (20%; 279).
The vast majority of respondents (87%; 307) from a wide range of stakeholder groups
indicated that stricter rules are necessary to ensure MS spend their ETS auction revenues
in line with climate objectives. 64% of this group of respondents opted for MS to spend
16
Meaning at 24% and fall back to the level of 12% beyond 2023.
17
This was a multiple choice questions and respondents could select several options.
19
more revenues on climate-related purposes, while 23% of them indicated that MS should
spend ETS revenues in a way compatible with the climate neutrality objective (‘do no
harm’).
6.3.7 Low-carbon support mechanisms
An increase of the Innovation Fund in some form was supported by an overwhelming
majority of respondents (83%; 280) from a wide range of stakeholder groups. The most
preferred option was an increase by using more allowances from the auction share (45%;
151), followed by a significant increase regardless of the source of allowances (29%; 98),
and by an increase by using more allowances from the free allocation share (9%; 31).
The first option (allowances from auction share) was the private sector’s preferred
option, while NGOs expressed more support for the latter two options. A minority of
respondents (17%) from different stakeholder groups indicated that the size of the
Innovation Fund should remain unchanged.
A large majority of respondents (74%; 251) agreed that the maximum funding rate for
projects financed by the Innovation Fund should be increased from the current 60% of
the relevant costs. This was supported by both NGOs and the private sector, albeit not the
majority of academic/research institutes and environmental organisations. Among the
supporters of such a change, more than half (55%; 188) favoured an unconditional
increase allowing better risk-sharing for risky and complex projects, whereas about one-
fifth (19%; 63), including the majority of NGOs, were in favour of an increase but only
in case of competitive bidding.
88% of respondents (288), coming from all stakeholder groups, were also in favour of
additional supporting instruments be introduced to support full market deployment of
low-carbon products through the Innovation Fund.
53% of respondents (130) argued favourably for an increase in the Modernisation Fund
with a further 4% of respondents (9) arguing that the size of the Modernisation Fund
should remain unchanged in terms of the absolute amount. An increase in the
Modernisation Fund was supported by the vast majority of NGOs and environmental
organisation and about half of private sector respondents. According to 36% of
respondents (87), the Modernisation Fund should remain at a 2% cap.
A clear majority of replies18
(74%) from a wide range of stakeholder groups supports the
streamlining of the Modernisation Fund and an enhancement of the coherence with the
Green Deal. The most favoured option was that the Modernisation Fund be allowed to
finance only non-fossil fuel based heating and cooling systems (33%; 132), closely
18
This was a multiple choice questions and respondents could select several options
20
followed by the exception for financing coal-fired district heating in certain MS be
removed (32%; 129 responses). Only weak support had the notion that the Modernisation
Fund should be allowed to finance only priority projects to simplify the administration
(8%).
Position papers
6.4
Three quarters of the analysed position papers originated from companies and business
organisations and many focussed on specific topics of the revision. The majority opinion
put forward in the group of stakeholders that submitted position papers on certain topics
is not necessarily aligned with the majority opinion put forward by all stakeholders in
response to the questionnaire.
6.4.1 Contribution of ETS to the overall climate ambition for 2030 and main challenges
Thirty-eight respondents commented specifically on the contribution of the current ETS
sectors to increased targets. Eight business associations representing a wide range of
industries and two companies (mining and aluminium/hydropower), felt that there was a
strong argument for other sectors to contribute more to increased targets. Ten
respondents largely from the energy and power industry supported an increase in
ambition from the ETS sector. The remaining respondents either expressed support in an
increase in ambition without specifying details or called for the targets to be based on
cost-effectiveness analysis.
Most of the papers referred to challenges in achieving the higher 2030 ambition in some
from or other. There were differing views on the main challenges – the ones mentioned
include costs and technology readiness levels of decarbonisation technologies in general
or in certain industries, the need to avoid carbon leakage and provide investment
certainty as well as the need to ensure changes in the ETS and the wider policy landscape
are mutually reinforcing. The mentioned means to address these challenges included
providing financial support through EU funds and maintaining or strengthening the role
of free allocation as well as other carbon leakage provisions (including indirect cost
compensation).
6.4.2 Addressing the risk of carbon leakage
Which level of free allocation is appropriate was generally not stated as it was recognised
that it would also depend on other elements of the carbon leakage framework.
Respondents who commented on this aspect (48) generally supported maintaining the
carbon leakage framework or increasing the protection against the risk of carbon leakage.
Free allocation and indirect cost compensation were elements that were frequently
mentioned. Opinions were mixed on whether a CBAM should replace other measures or
should be additional.
The issue of benchmarks attracted few comments (26) which were varied with no clear
preference on how to update the benchmarks.
21
Most respondents who commented on indirect cost compensation (27) were supportive of
it continuation.
6.4.3 Market Stability Reserve
Respondents commenting on the MSR (47) raised several points. Several respondents
commented that the MSR revision should be seen in the larger context of the ETS
revision. Various respondents (from the energy sector, general business sector and
NGOs) supported maintaining the intake rate of 24% after 2023 or support strengthening
of the MSR in more general terms. Others felt that strengthening the MSR would lead to
an undesirable increase in the carbon price and that the MSR should be used to avoid
application of the cross-sectoral correction factor, to fund innovation or clean technology
or to top up the New Entrants Reserve (mainly energy intensive industry). Several
respondents from industry emphasised that the MSR should be viewed primarily as a
stability instrument (i.e. addressing volatility), and should not be used as an instrument to
drive up the carbon price. There was opposition as well as (more limited) support for
using price-based triggers for the MSR or inclusion of a carbon price floor.
6.4.4 Extensions of emissions trading to other sectors
Forty-eight stakeholders commented on the extension of emissions trading to buildings
and transport. The overwhelming majority were against inclusion of the sectors in the
current ETS, with 27 preferring to strengthen existing legislation rather than using
emissions trading and 16 responding that it should be through a separate scheme.
Notably, the option of a separate ETS was mentioned as a testing ground and as a
possible preparatory step towards inclusion in the current ETS. If these sectors were to be
integrated in the current ETS, such integration should be done carefully to avoid
disruption in the current ETS. The only support for integrating new sectors into the
current ETS came from four energy related companies and a public authority.
There was a clear preference from the maritime industry respondents for regulation to
occur at IMO level. These respondents argued that if developments are to occur at EU
level the clear preference is for it to cover intra EU voyages only and be based on free
allocation. The same stakeholders also stressed that any formal maritime ETS should be
separate from the current ETS.
6.4.5 Revenues and low-carbon support mechanisms
Most of the thirty-two stakeholders who responded on the use of ETS auction revenues
supported them going to decarbonisation technologies, often those technologies to be
supported related to the sector of the respondent. A trade union supported investment in
decarbonisation technologies with a requirement that it also brought jobs to Europe.
Most of the respondents agreed with using an EU mechanism such as the Innovation
Fund or the Modernisation Fund for supporting clean technologies. Almost all
respondents who mentioned carbon contracts for difference were supportive of their use.
22
Most respondents from the maritime industry argued that, in case allowance were
auctioned or a levy used, all revenues should flow back in full to the R&D needed by to
decarbonize the maritime industry.
23
Annex 3: Who is affected and how?
7 WHO IS AFFECTED AND HOW
Practical implications of the initiative
7.1
The ETS has been in force since 2005 and its scope has remained largely intact, covering
around 9.200 to 9.500 large, stationary installations (11.000 before UK’s withdrawal
from the EU) and, since 2012, approximately 500 airlines. Small installations do not take
part in the ETS or can be opted out. The covered entities, have become very familiar with
the ETS’s annual compliance cycle based on obligations related monitoring, reporting
and verification of emissions. Compliance with these rules is almost 100%. This also
holds for the national authorities responsible for various implementing tasks, such as the
issuing of emission permits, the assessment of monitoring plans and emission data, as
well as the allocation of free allowances.
For the regulated entities under the existing ETS in the power and industry sector, a
strengthening of the ETS does not affect these regular activities. However, as ambition
increases and free allocation starts to decrease, industrial players may choose to become
more active participants on the carbon market, increasing their hedging behaviour to
better manage their compliance costs.
The situation is different for the new sectors to which emissions trading may be
extended.
With regard to the maritime sector, the regulated entities, i.e. the companies, whose role
is described in more detail in Annex 6, will already be familiar with the dedicated MRV-
rules for their sector, but these activities will have to be complemented by allowance
management to ensure a sufficient number of allowances is acquired and surrendered in
time.
The regulated entities19
in the road transport and buildings sector have no experience
with emissions trading or its practical implications. However, putting the obligation
upstream on the tax warehouses and on fuel suppliers implies that those entities usually
have experience in dealing with fuel taxation and related administrative procedures.
Additional administrative tasks will be related to the particularities of an emissions
trading system, such as obtaining a GHG emissions permit, opening and maintaining
registry account(s), including paying the registry fees, complying with the specific ETS
MRV rules (preparing and updating the monitoring plan, implementing its procedures,
monitoring and reporting, verification fees charged by the independent verifier), and the
19
See Annex 18 for more information on these regulated entities
24
timely purchasing and surrendering of allowances (see Annex 5 for further details). The
monitoring and reporting rules would be simpler than those applying to the current
sectors: only sales of largely standardised fuels for combustion purposes would be
monitored and the calculation of associated emissions would rely on emission factors. As
such, the new MRV system would be more similar to the system applicable to aviation,
both in terms of costs and obligations. In addition, no free allocation is envisaged under
EXT1, hence the implementing of corresponding rules does not apply.
Insofar as public authorities are concerned, MS could decide to establish as the
competent authority for the new sectors the same as the one actually responsible for the
current ETS, reducing the administrative burden and benefitting from synergies.
25
Summary of costs and benefits
7.2
The following tables haves been prepared on the basis of the preferred policy options presented in Section 8. With regard to the strengthening of the
existing ETS (and related policies), no preferred package has been identified among the coherent policy packages identified in Section 7. Therefore,
where relevant, this annex refers to all four coherent policy packages.
Some cost and benefits have been quantified in the context of the 2030 Climate Target Plan and refer to the overall effects of an EU-wide, economy-wide
net greenhouse gas emissions reduction target by 2030 compared to 1990 of at least 55% based on the MIX policy mix of carbon pricing, renewables,
energy efficiency and transport decarbonisation policies with either one extended ETS or two separate ETS with caps set reflecting cost-effective
contributions for each of the two ETS segments. Such estimates have been marked in italic in the below tables.
Table 30: Overview of benefits
I. Overview of Benefits (total for all provisions) – Preferred options
Description Amount Comments
Direct benefits
Strengthening of the existing ETS (Packages 1-4)
Reduction in greenhouse gas
emissions
All four packages reach the cost-effective environmental
ambition of -62% in 2030. Compared to the baseline, this
implies an additional reduction of 11% over the period 2021
to 2030 (-17% for 2026-30).
Package 1 (AMB1): cumulative cap over the period 2021 to
2030 is 1185 million ton (8.6%) lower than the current ETS
cumulative cap
Direct benefits to society at large from higher
projected emission reductions in 2021-2030 in close
to all MS.
See Sections 6.1.1.1 and 7.1.2 as well as Annex 13
26
Package 2 (AMB2a): cumulative cap that is about 400
million allowances lower than under Package 1
Package 3 (AMB2c): cumulative cap that is around 750
million allowances smaller than in Package 1 and 350
million allowances lower than in Package 2
Package 4 (AMB3c): in terms of cumulative cap, this
option is comparable to Package 2
Reduced air pollution emissions Packages 1-4: Many installations covered by the ETS also
emit a significant amount of other air pollutants (e.g. NOX,
SOX and dust), which are also expected to decrease with a
decarbonisation of industry and power generation.
Air pollutant emissions in 2030 reduce compared to the
baseline, for example SO2 emissions by 12 % points.
Direct benefits to society at large in close to all MS.
Main beneficiaries are citizens, typically benefitting
those living in urban areas and lower-income and
vulnerable households, who are most affected by air
pollution.
See Section 6.1.1.1
Improvements with regard to
market resilience, carbon price
signal and price volatility (market
stability)
Packages 1+2 (MSR1): Improved market resilience,
stronger carbon price signal, however, threshold effect may
still induce some price volatility
Packages 3+4 (combination of MSR parameters):
Improved market resilience, stronger carbon price signal,
lower price volatility
Direct beneficiaries are ETS installations, as a stable
ETS has a positive effect on competitiveness.
A stable ETS also benefits society at large, as it
provides a clear price signal for long-term investment
in decarbonisation.
See Sections 6.1.2.1 and 7.1.1.2
Higher low-carbon financing Packages 1-4: with an increase in the average carbon price
from EUR 29 under current policies to EUR 50 for the
period 2021 to 2030 under the strengthened ETS, the size of
the IF would increase by at least EUR 14.5 billion.
Direct benefits to ETS installations who receive
funding and improve their competitiveness.
The higher financing for low-carbon technologies will
also benefit society at large in all MS, as it will
27
(The higher carbon price also increases the value of the
other auctioning revenues, i.e. the revenues allocated to the
Modernisation Fund and to MS. However, as these are
defined as a share of the cap, the increase in the carbon price
must be balanced against the lower number of allowances.)
Packages 1-2 (IF2): + 150 million allowances or EUR 7.5
billion (with an average carbon price of EUR 50)
eventually bring about higher emission reductions.
See Sections 5.2.1 and 5.2.2.4
Extension to maritime transport
Reduction in greenhouse gas
emissions
MAR1, the extension of the ETS to the maritime sector
would result in a total reduction of 30 Mt of CO2 emissions
in 2030 if we only cover intra-EEA voyages and at-berth
emissions (MINTRA). That would be equivalent to reducing
the total maritime emissions from the baseline by around
22%. With a broader geographical coverage, MEXTRA50,
the total emissions reduction would result in 45 Mt of CO2
emissions by 2030 compared to the baseline.
Direct benefits to society due to the reduction in GHG
emissions coming either from mitigation measures
implemented in the maritime sector itself (in-sector
abatement), or from the purchase of general ETS
allowances (EUA) leading to abatement actions in
other ETS sectors (out-of-sector abatement).
See Section 6.2.1
Reduced air pollution emissions Positive impact on public health compared to the baseline as
ships would emit less air pollutants, due to improvement in
energy efficiency, the uptake of fuels with lower emission
factors and the use of cleaner energy sources at berth.
Direct benefits to society, in particular port areas.
See Section 6.2.1.2
Generation of auction revenues Additional revenues generated in 2030 are estimated at EUR
1.2 billion for MAR1 with MINTRA scope (EUR 2.4 billion
for MAR1 with MEXTRA50).
Extension of emissions trading to road transport and buildings (EXT1)
Reduction in greenhouse gas
emissions
The two sectors’ cost-effective emission reduction is 43% in
2030 (compared to 2005). Compared to the baseline (-34%),
this implies an additional reduction of almost 10%.
Direct benefits to society at large from higher
projected emission reductions in 2021-2030 in close
to all MS
28
Covering the new sectors under an emissions trading system
provides for increased certainty in delivering the greenhouse
gas emissions reductions.
See Section 6.3.1.1
Reduced air pollution emissions The road transport and buildings sectors also emit a
significant amount of other air pollutants (e.g. PM2.5 and
NOX,), which are also projected to decrease with a
decarbonisation of these sectors.
Direct benefits to society at large in close to all MS.
Main beneficiaries are citizens, typically benefitting
those living in urban areas and lower-income and
vulnerable households, who are most affected by air
pollution.
See Section 6.3.3.3
Generation of auction revenues and
higher low-carbon financing
Average annual revenue of EUR 47 billion in period 2026-
2030
of which the following revenues would be used for the
Innovation Fund:
Package 1-2 (IF2): +200 million allowances or +EUR 10
billion (with an average carbon price of EUR 50)
Package 3-4 (IF1): +100 million allowances or +EUR 5
billion (with an average carbon price of EUR 50)
ETS auctioning revenues are expected to benefit to the
society at large, as MS increase their government
expenditure, in particular for green investment, or
reduce taxes. The revenue could also be used to
address social and distributional concerns.
Direct benefits to ETS installations who receive
funding and improve their competitiveness.
The higher financing for low-carbon technologies will
also benefit society at large in all MS, as it will
eventually bring about higher emission reductions.
See Section 7.3.1.2 and Annex 13
Indirect benefits of strengthening and extending the ETS
Improved energy security The savings of fossil fuel imports contribute to
improvements of energy security by reducing the energy
dependency ratio in 2030 from 54.5% in the baseline to
52.9% (MIX-CP) and 52.5% (MIX).
Indirect benefits to society at large
See Section 6.3.2.
29
Employment Limited effects. The employment impact is positive if carbon
pricing revenues are recycled to lower other taxes or to
support green investment.
Possible indirect benefits to society at large, but
significant shifts in sectoral composition expected.
See Sections 6.1.3.1 and 6.3.3.2
Reduction in healthcare costs Health damages in 2030 reduce by EUR 17.6 to 35.2 billion
compared to the baseline due to reduced air pollution.
Annex 3 of the Effort Sharing Regulation impact assessment
analyses benefits per Member State groups.
Indirect benefits to society at large
See Sections 6.1.3.2 and 6.3.3.3
Table 31: Overview of costs
II. Overview of costs – Preferred options
Citizens/Consumers Businesses Administrations
Recurrent One-off Recurrent One-off Recurrent
Strengthenin
g of the ETS
target/cap
(incl. MSR)
Direct and
indirect
costs
Indirect costs
Average carbon price
for period 2021-2030
increases from EUR 29
to EUR 50 with partial
cost pass-through to
consumers
Compliances costs for
regulated entities
Average carbon price
for period 2021-2030
increases from EUR 29
to EUR 50 with partial
cost pass-through to
consumers
Reduced free allocation
Package 1
(AMB1+CL1): no
triggering of CSCF
30
Package 2 (AMB2a +
CL1): no triggering of
CSCF
Package 3
(AMB2c+CL2): CSCF
applied as of 2029, on
average 0.88 for period
2026-2030
Package 4
(AMB3c+CL2): CSCF
applied in 2030, on
average 0.96 for period
2026-2030
See Section 6.1.2.2.1
Higher low-
carbon
financing
Direct and
indirect
costs
Admin costs for the
European Commission
Packages 1-2 (IF2):
Risk of administrative
challenges due to
significantly bigger
calls
Packages 3-4 (IF1):
Additional
administrative burden
of running slightly
31
bigger calls can be
manageable or easy to
address
See Section 7.1.1.4
Extension to
road
transport and
buildings
Direct and
indirect
costs
Indirect costs
Household annual
investment
expenditures: + 0.38 to
0.71 percentage point
in 2030 compared to
the baseline
Household fuel
expenditures: - 0.12 to
+0.06 percentage point
(as a consequence of
investments)
However, there are
differences between
low- and high-income
households and MS.
See Sections 6.3.2.1.1
and 6.3.3.1.1
Admin costs for
regulated entities
Initial setting up to
comply with MRV
system (human
resources, IT)
See Annex 5 showing a
(high-end) estimated
one-off cost of 6085 to
8590 EUR per entity
Compliances costs for
regulated entities
Negligible (cost-pass
through to end-
consumers)
Admin costs for
regulated entities
Continued compliance
with MRV system
(human resources, IT)
See Annex 5, showing
estimated (high end)
recurring
administrative costs of
4900 EUR to 6350
EUR per entity
Admin costs for
national public
authorities
Initial setting up of the
MRV system (human
resources, IT) etc
See Annex 5 showing
one-off costs of 9.6
million on aggregate
basis for all MS
Admin costs for the
European Commission
Initial setting up of the
MRV rules, registry,
auctioning provisions
(largely following
framework of existing
ETS)
See Section 6.3.4
Admin costs for
national public
authorities
Continued operation of
the MRV system
(human resources, IT)
See Annex 5 showing
estimated recurring
costs for MS of 1000-
1400 EUR per entity
Admin costs for the
European Commission
Continued operation of
the registry and
organisation of
auctioning
(largely following
framework of existing
ETS)
See section 6.3.4
Extension to
maritime
transport
Direct and
indirect
costs
Admin costs for
regulated entities
(estimated at around
Admin costs for
regulated entities
 Management of the
Admin costs for
national public
authorities (estimated
Admin costs for
national public
authorities (estimated
32
EUR 8 000-20 000)20
per entity:
 Familiarisation with
the ETS,
communication
with public
authorities, setting
up carbon
management
functions (ten man-
days per ten-year
period )
 Application fee in
the Union Registry
(300 – 870 €)21
See Section 6.2.2
registry account,
purchase and
surrender
allowances
(estimated at 1100-
5600€ per entity)22
 Account annual
fees (EUR 300 – 3
700 per entity)
 Supporting
regulator requests
Compliances costs for
regulated entities
If the ETS extension is
applied to intra-EEA
emissions, the
estimated ETS
payment would
represent an amount of
at EUR 0.5 to 1.5
million per period for
all national competent
authorities):
 Preparation and
implementation of
national legislation
and guidelines,
 Information and
communication
tasks.
 ETS specific
communication
Admin costs for the
European Commission
 Updating the IT
system behind the
EU maritime
transport MRV
at EUR 0.5 to 6.4
million per year for all
national competent
authorities):
 Approval of
monitoring plans
and review of
verified emission
reports
 Registry operations
 Monitor
compliance and
enforcement actions
Admin costs for the
European Commission
 Administer the EU
registry (create new
allowances)
20
estimation by Ricardo AEA, 2021
21
The registry fees to the Union Registry depend on the Member State and the type of operator but expected ranges have been estimated based on available information from relevant
authorities.
22
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/799575/Cost_of_Compliance_Report.pdf
33
around EUR 1.9 billion
in 2030.
See Section 6.2.2
However, from a
society perspective the
ETS payments do not
represent a net cost, as
there are corresponding
auctioning revenues
(see section 6.3.2.3 and
table on benefits
above).
Regulation
 Transposition and
conformity checks
of national
legislation
See Section 6.2.2
See Section 6.2.2
34
Annex 4: Analytical methods
8 COMMON ANALYTICAL FRAMEWORK FOR THE IMPACT ASSESSMENTS OF THE
REVISION OF ESR, ETS, CO2 STANDARDS, LULUCF, RED AND EED
Introduction
8.1
Aiming at covering the entire GHG emissions from the EU economy, and combining
horizontal and sectoral instruments, the various pieces of legislation under the “Fit for
55” package strongly interlink, either because they cover common economic sectors (e.g.
buildings sector is currently addressed by energy efficiency and renewables polices but
would be also falling in the scope of extended ETS) or by the direct and indirect
interactions between these sectors (e.g. electricity supply sector and final demand sectors
using electricity).
As a consequence, it is crucial to ensure consistency of the analysis across all initiatives.
For this purpose, the impact assessments underpinning the “Fit for 55” policy package
are using a collection of integrated modelling tools covering the entire GHG emissions of
the EU economy.
These tools are used to produce a common Baseline and a set of core scenarios reflecting
internally coherent policy packages aligned with the revised 2030 climate target, key
policy findings of the CTP (see annex 1) and building on the Reference Scenario 2020, a
projection of the evolution of EU and national energy systems and GHG emissions under
the current policy framework23
. These core scenarios serve as a common analytical basis
for use across different “Fit for 55” policy initiatives, and are complemented by specific
variants as well as additional tools and analyses relevant for the different initiatives.
This Annex describes the tools used to produce the common baseline (the Reference
Scenario 2020) and the core policy scenarios, the key assumptions underpinning the
analysis, and the policy packages reflected in the core policy scenarios.
23
The “current policy framework” includes EU initiatives adopted as of end of 2019 and the national
objectives and policies and measures as set out in the final National Energy and Climate Plans – see the
EU Reference Scenario 2020 publication.
35
Modelling tools for assessments of policies
8.2
8.2.1 Main modelling suite
The main model suite used to produce the scenarios presented in this impact assessment
has a successful record of use in the Commission's energy, transport and climate policy
assessments. In particular, it has been used for the Commission’s proposals for the
Climate Target Plan24
to analyse the increased 2030 mitigation target, the Sustainable
and Smart Mobility Strategy25
, the Long Term Strategy26
as well as for the 2020 and
2030 EU’s climate and energy policy framework.
The PRIMES and PRIMES-TREMOVE models are the core elements of the modelling
framework for energy, transport and CO2 emission projections. The GAINS model is
used for non-CO2 greenhouse gas emission projections, the GLOBIOM-G4M models for
projections of LULUCF emissions and removals and the CAPRI model is used for
agricultural activity projections.
The model suite thus covers:
 The entire energy system (energy demand, supply, prices and investments
to the future) and all GHG emissions and removals from the EU economy.
 Time horizon: 1990 to 2070 (5-year time steps).
 Geography: individually all EU Member States, EU candidate countries and,
where relevant the United Kingdom, Norway, Switzerland and Bosnia and
Herzegovina.
 Impacts: energy system (PRIMES and its satellite model on biomass),
transport (PRIMES-TREMOVE), agriculture, waste and other non-CO2
emissions (GAINS), forestry and land use (GLOBIOM-G4M), atmospheric
dispersion, health and ecosystems (acidification, eutrophication) (GAINS).
The modelling suite has been continuously updated over the past decade. Updates
include the addition of a new buildings module in PRIMES, improved representation of
the electricity sector, more granular representation of hydrogen (including cross-border
trade27
) and other innovative fuels, improved representation of the maritime transport
sector, as well updated interlinkages of the models to improve land use and non-CO2
modelling. Most recently a major update was done of the policy assumptions, technology
24
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020SC0176
25
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020SC0331
26
https://ec.europa.eu/clima/sites/clima/files/docs/pages/com_2018_733_analysis_in_support_en_0.pdf
27
While cross-border trade is possible, the assumption is that there are no imports from outside EU as the
opposite would require global modelling of hydrogen trade.
36
costs and macro-economic assumptions in the context of the Reference scenario 2020
update.
The models are linked with each other in such a way to ensure consistency in the
building of scenarios (Figure 15). These inter-linkages are necessary to provide the core
of the analysis, which are interdependent energy, transport and GHG emissions trends.
Figure 15: Interlinkages between models
8.2.2 Energy: the PRIMES model
The PRIMES model (Price-Induced Market Equilibrium System)28
is a large scale
applied energy system model that provides detailed projections of energy demand,
supply, prices and investment to the future, covering the entire energy system including
emissions. The distinctive feature of PRIMES is the combination of behavioural
modelling (following a micro-economic foundation) with engineering aspects, covering
all energy sectors and markets.
The model has a detailed representation of policy instruments related to energy markets
and climate, including market drivers, standards, and targets by sector or overall. It
simulates the EU Emissions Trading System. It handles multiple policy objectives, such
as GHG emissions reductions, energy efficiency, and renewable energy targets, and
provides pan-European simulation of internal markets for electricity and gas.
28
More information and model documentation: https://e3modelling.com/modelling-tools/primes/
37
The model covers the horizon up to 2070 in 5-year interval periods and includes all
Member States of the EU individually, as well as neighbouring and candidate countries.
PRIMES offer the possibility of handling market distortions, barriers to rational
decisions, behaviours and market coordination issues and it has full accounting of costs
(CAPEX and OPEX) and investment on infrastructure needs.
PRIMES is designed to analyse complex interactions within the energy system in a
multiple agent – multiple markets framework. Decisions by agents are formulated based
on microeconomic foundation (utility maximization, cost minimization and market
equilibrium) embedding engineering constraints and explicit representation of
technologies and vintages, thus allowing for foresight for the modelling of investment in
all sectors.
PRIMES allows simulating long-term transformations/transitions and includes non-linear
formulation of potentials by type (resources, sites, acceptability etc.) and technology
learning. Figure 2 shows a schematic representation of the PRIMES model.
Figure 16: Schematic representation of the PRIMES model
38
It includes a detailed numerical model on biomass supply, namely PRIMES-Biomass,
which simulates the economics of current and future supply of biomass and waste for
energy purposes. The model calculates the inputs in terms of primary feedstock of
biomass and waste to satisfy a given demand for bio-energy and provides quantification
of the required capacity to transform feedstock into bioenergy commodities. The
resulting production costs and prices are quantified. The PRIMES-Biomass model is a
key link of communication between the energy system projections obtained by the core
PRIMES energy system model and the projections on agriculture, forestry and non-CO2
emissions provided by other modelling tools participating in the scenario modelling suite
(CAPRI, GLOBIOM/G4M, GAINS).
It also includes a simple module which projects industrial process GHG emissions.
PRIMES is a private model maintained by E3Modelling29
, originally developed in the
context of a series of research programmes co-financed by the European Commission.
The model has been successfully peer-reviewed, last in 201130
; team members regularly
participate in international conferences and publish in scientific peer-reviewed journals.
Sources for data inputs
A summary of database sources, in the current version of PRIMES, is provided below:
• Eurostat and EEA: Energy Balance sheets, Energy prices (complemented by
other sources, such IEA), macroeconomic and sectoral activity data (PRIMES
sectors correspond to NACE 3-digit classification), population data and
projections, physical activity data (complemented by other sources), CHP
surveys, CO2 emission factors (sectoral and reference approaches) and EU
ETS registry for allocating emissions between ETS and non ETS
• Technology databases: ODYSSEE-MURE31
, ICARUS, Eco-design, VGB
(power technology costs), TECHPOL – supply sector technologies, NEMS
model database32
, IPPC BAT Technologies33
• Power Plant Inventory: ESAP SA and PLATTS
• RES capacities, potential and availability: JRC ENSPRESO34
, JRC
EMHIRES35
, RES ninja36
, ECN, DLR and Observer, IRENA
29
E3Modelling (https://e3modelling.com/) is a private consulting, established as a spin-off inheriting staff,
knowledge and software-modelling innovation of the laboratory E3MLab from the National Technical
University of Athens (NTUA).
30
SEC(2011)1569 : https://ec.europa.eu/energy/sites/ener/files/documents/sec_2011_1569_2.pdf
31
https://www.odyssee-mure.eu/
32
Source: https://www.eia.gov/outlooks/aeo/info_nems_archive.php
33
Source: https://eippcb.jrc.ec.europa.eu/reference/
39
• Network infrastructure: ENTSOE, GIE, other operators
• Other databases: EU GHG inventories, district heating surveys (e.g. from
COGEN), buildings and houses statistics and surveys (various sources,
including ENTRANZE project37
, INSPIRE archive, BPIE38
), JRC-IDEES39
,
update to the EU Building stock Observatory40
8.2.3 Transport: the PRIMES-TREMOVE model
The PRIMES-TREMOVE transport model projects the evolution of demand for
passengers and freight transport, by transport mode, and transport vehicle/technology,
following a formulation based on microeconomic foundation of decisions of multiple
actors. Operation, investment and emission costs, various policy measures, utility factors
and congestion are among the drivers that influence the projections of the model. The
projections of activity, equipment (fleet), usage of equipment, energy consumption and
emissions (and other externalities) constitute the set of model outputs.
The PRIMES-TREMOVE transport model can therefore provide the quantitative analysis
for the transport sector in the EU, candidate and neighbouring countries covering
activity, equipment, energy and emissions. The model accounts for each country
separately which means that the detailed long-term outlooks are available both for each
country and in aggregate forms (e.g. EU level).
In the transport field, PRIMES-TREMOVE is suitable for modelling soft measures (e.g.
eco-driving, labelling); economic measures (e.g. subsidies and taxes on fuels, vehicles,
emissions; ETS for transport when linked with PRIMES; pricing of congestion and other
externalities such as air pollution, accidents and noise; measures supporting R&D);
regulatory measures (e.g. CO2 emission performance standards for new light duty
vehicles and heavy duty vehicles; EURO standards on road transport vehicles;
technology standards for non-road transport technologies, deployment of Intelligent
Transport Systems) and infrastructure policies for alternative fuels (e.g. deployment of
refuelling/recharging infrastructure for electricity, hydrogen, LNG, CNG). Used as a
module that contributes to the PRIMES model energy system model, PRIMES-
34
Source: https://data.jrc.ec.europa.eu/collection/id-00138
35
Source: https://data.jrc.ec.europa.eu/dataset/jrc-emhires-wind-generation-time-series
36
Source: https://www.renewables.ninja/
37
Source: https://www.entranze.eu/
38
Source: http://bpie.eu/
39
Source: https://ec.europa.eu/jrc/en/potencia/jrc-idees
40
Source: https://ec.europa.eu/energy/en/eubuildings
40
TREMOVE can show how policies and trends in the field of transport contribute to
economy-wide trends in energy use and emissions. Using data disaggregated per Member
State, the model can show differentiated trends across Member States.
The PRIMES-TREMOVE has been developed and is maintained by E3Modelling, based
on, but extending features of, the open source TREMOVE model developed by the
TREMOVE41
modelling community. Part of the model (e.g. the utility nested tree) was
built following the TREMOVE model.42
Other parts, like the component on fuel
consumption and emissions, follow the COPERT model.
Data inputs
The main data sources for inputs to the PRIMES-TREMOVE model, such as for activity
and energy consumption, comes from EUROSTAT database and from the Statistical
Pocketbook "EU transport in figures43
. Excise taxes are derived from DG TAXUD excise
duty tables. Other data comes from different sources such as research projects (e.g.
TRACCS project) and reports.
In the context of this exercise, the PRIMES-TREMOVE transport model is calibrated to
2005, 2010 and 2015 historical data. Available data on 2020 market shares of different
powertrain types have also been taken into account.
8.2.4 Maritime transport: PRIMES-maritime model
The maritime transport model is a specific sub-module of the PRIMES and PRIMES-
TREMOVE models aiming to enhance the representation of the maritime sector within
the energy-economy-environment modelling nexus. The model, which can run in stand-
alone and/or linked mode with PRIMES and PRIMES-TREMOVE, produces long-term
energy and emission projections, until 2070, separately for each EU Member-State.
41
Source: https://www.tmleuven.be/en/navigation/TREMOVE
42
Several model enhancements were made compared to the standard TREMOVE model, as for example:
for the number of vintages (allowing representation of the choice of second-hand cars); for the
technology categories which include vehicle types using electricity from the grid and fuel cells. The
model also incorporates additional fuel types, such as biofuels (when they differ from standard fossil
fuel technologies), LPG, LNG, hydrogen and e-fuels. In addition, representation of infrastructure for
refuelling and recharging are among the model refinements, influencing fuel choices. A major model
enhancement concerns the inclusion of heterogeneity in the distance of stylised trips; the model
considers that the trip distances follow a distribution function with different distances and frequencies.
The inclusion of heterogeneity was found to be of significant influence in the choice of vehicle-fuels
especially for vehicles-fuels with range limitations.
43
Source: https://ec.europa.eu/transport/facts-fundings/statistics_en
41
The coverage of the model includes the European intra-EU maritime sector as well as the
extra-EU maritime shipping. The model covers both freight and passenger international
maritime. PRIMES-maritime focuses only on the EU Member State, therefore trade
activity between non-EU countries is outside the scope of the model. The model
considers the transactions (bilateral trade by product type) of the EU-Member States with
non-EU countries and aggregates these countries in regions. Several types and sizes of
vessels are considered.
PRIMES-maritime features a modular approach based on the demand and the supply
modules. The demand module projects maritime activity for each EU Member State by
type of cargo and by corresponding partner. Econometric functions correlate demand for
maritime transport services with economic indicators considered as demand drivers,
including GDP, trade of energy commodities (oil, coal, LNG), trade of non-energy
commodities, international fuel prices, etc. The supply module simulates a representative
operator controlling the EU fleet, who offers the requested maritime transport services.
The operator of the fleet decides the allocation of the vessels activity to the various
markets (representing the different EU MS) where different regulatory regimes may
apply (e.g. environmental zones). The fleet of vessels disaggregated into several
categories is specific to cargo types. PRIMES maritime utilises a stock-flow relationship
to simulate the evolution of the fleet of vessels throughout the projection period and the
purchasing of new vessels.
PRIMES-maritime solves a virtual market equilibrium problem, where demand and
supply interact dynamically in each consecutive time period, influenced by a variety of
exogenous policy variables, notably fuel standards, pricing signals (e.g. ETS),
environmental and efficiency/operational regulations and others. The PRIMES maritime
model projects energy consumption by fuel type and purpose as well as CO2, methane
and N2O and other pollutant emissions. The model includes projections of costs, such as
capital, fuel, operation costs, projections of investment expenditures in new vessels and
negative externalities from air pollution.
The model serves to quantify policy scenarios supporting the transition towards carbon
neutrality. It considers the handling of a variety of fuels such as fossil fuels, biofuels
(bioheavy44
, biodiesel, bio-LNG), synthetic fuels (synthetic diesel, fuel oil and gas, e-
ammonia and e-methanol) produced from renewable electricity, hydrogen produced from
renewable electricity (for direct use and for use in fuel cell vessels) and electricity for
electric vessels. Well-to-Wake emissions are calculated thanks to the linkage with the
PRIMES energy systems model which derives ways of producing such fuels. The model
also allows to explore synergies with Onshore Power Supply systems. Environmental
regulation, fuel blending mandates, GHG emission reduction targets, pricing signals and
44
Bioheavy refers to bio heavy fuel oil.
42
policies increasing the availability of fuel supply and supporting the alternative fuel
infrastructure are identified as drivers, along fuel costs, for the penetration of new fuels.
As the model is dynamic and handles vessel vintages, capital turnover is explicit in the
model influencing the pace of fuel and vessel substitution.
Data inputs
The main data sources for inputs to the PRIMES-maritime model, such as for activity
and energy consumption, comes from EUROSTAT database and from the Statistical
Pocketbook "EU transport in figures45
. Other data comes from different sources such as
research projects (e.g. TRACCS project) and reports. PRIMES-maritime being part of the
overall PRIMES model is it calibrated to the EUROSTAT energy balances and transport
activity; hence the associated CO2 emissions are assumed to derive from the combustion
of these fuel quantities. The model has been adapted to reflect allocation of CO2
emissions into intra-EU, extra-EU and berth, in line with data from the MRV database.46
For air pollutants, the model draws on the EEA database.
In the context of this exercise, the PRIMES-maritime model is calibrated to 2005, 2010
and 2015 historical data.
8.2.5 Non-CO2 GHG emissions and air pollution: GAINS
The GAINS (Greenhouse gas and Air Pollution Information and Simulation) model is an
integrated assessment model of air pollutant and greenhouse gas emissions and their
interactions. GAINS brings together data on economic development, the structure,
control potential and costs of emission sources and the formation and dispersion of
pollutants in the atmosphere.
In addition to the projection and mitigation of non-CO2 greenhouse gas emissions at
detailed sub-sectorial level, GAINS assesses air pollution impacts on human health from
fine particulate matter and ground-level ozone, vegetation damage caused by ground-
level ozone, the acidification of terrestrial and aquatic ecosystems and excess nitrogen
deposition of soils.
Model uses include the projection of non-CO2 GHG emissions and air pollutant
emissions for the EU Reference Scenario and policy scenarios, calibrated to UNFCCC
emission data as historical data source. This allows for an assessment, per Member State,
of the (technical) options and emission potential for non-CO2 emissions. Health and
45
Source: https://ec.europa.eu/transport/facts-fundings/statistics_en
46
https://mrv.emsa.europa.eu/#public/eumrv
43
environmental co-benefits of climate and energy policies such as energy efficiency can
also be assessed.
The GAINS model is accessible for expert users through a model interface47
and has
been developed and is maintained by the International Institute of Applied Systems
Analysis48
. The underlying algorithms are described in publicly available literature.
GAINS and its predecessor RAINS have been peer reviewed multiple times, in 2004,
2009 and 2011.
Sources for data inputs
The GAINS model assesses emissions to air for given externally produced activity data
scenarios. For Europe, GAINS uses macroeconomic and energy sector scenarios from the
PRIMES model, for agricultural sector activity data GAINS adopts historical data from
EUROSTAT and aligns these with future projections from the CAPRI model. Projections
for waste generation, organic content of wastewater and consumption of F-gases are
projected in GAINS in consistency with macroeconomic and population scenarios from
PRIMES. For global scenarios, GAINS uses macroeconomic and energy sector
projections from IEA World Energy Outlook scenarios and agricultural sector projections
from FAO. All other input data to GAINS, i.e., sector- and technology- specific emission
factors and cost parameters, are taken from literature and referenced in the
documentation.
8.2.6 Forestry and land-use: GLOBIOM-G4M
The Global Biosphere Management Model (GLOBIOM) is a global recursive dynamic
partial equilibrium model integrating the agricultural, bioenergy and forestry sectors with
the aim to provide policy analysis on global issues concerning land use competition
between the major land-based production sectors. Agricultural and forestry production as
well as bioenergy production are modelled in a detailed way accounting for about 20
globally most important crops, a range of livestock production activities, forestry
commodities as well as different energy transformation pathways.
GLOBIOM covers 50 world regions / countries, including the EU27 Member States.
Model uses include the projection of emissions from land use, land use change and
forestry (LULUCF) for EU Reference Scenario and policy scenarios. For the forestry
sector, emissions and removals are projected by the Global Forestry Model (G4M), a
47
Source: http://gains.iiasa.ac.at/models/
48
Source: http://www.iiasa.ac.at/
44
geographically explicit agent-based model that assesses afforestation, deforestation and
forest management decisions. GLOBIOM-G4M is also used in the LULUCF impact
assessment to assess the options (afforestation, deforestation, forest management, and
cropland and grassland management) and costs of enhancing the LULUCF sink for each
Member State.
The GLOBIOM-G4M has been developed and is maintained by the International
Institute of Applied Systems Analysis49
.
Sources for data inputs
The main market data sources for GLOBIOM-EU are EUROSTAT and FAOSTAT,
which provide data at the national level and which are spatially allocated using data from
the SPAM model50
. Crop management systems are parameterised based on simulations
from the biophysical process-based crop model EPIC. The livestock production system
parameterization relies on the dataset by Herrero et al51
. Further datasets are
incorporated, coming from the scientific literature and other research projects.
GLOBIOM is calibrated to FAOSTAT data for the year 2000 (average 1998 - 2002) and
runs recursively dynamic in 10-year time-steps. In the context of this exercise, baseline
trends of agricultural commodities are aligned with FAOSTAT data for 2010/2020 and
broadly with AGLINK-COSIMO trends for main agricultural commodities in the EU
until 2030.
The main data sources for G4M are CORINE, Forest Europe (MCPFE, 2015)52
,
countries’ submissions to UNFCCC and KP, FAO Forest Resource Assessments, and
national forest inventory reports. Afforestation and deforestation trends in G4M are
calibrated to historical data for the period 2000-2013.
8.2.7 Agriculture: CAPRI
CAPRI is a global multi-country agricultural sector model, supporting decision making
related to the Common Agricultural Policy and environmental policy and therefore with
far greater detail for Europe than for other world regions. It is maintained and developed
49
Source : http://www.iiasa.ac.at/
50
See You, L., Wood, S. (2006). An Entropy Approach to Spatial Disaggregation of Agricultural
Production, Agricultural Systems 90, 329–47 and http://mapspam.info/ .
51
Herrero, M., Havlík, P., et al. (2013). Biomass Use, Production, Feed Efficiencies, and Greenhouse Gas
Emissions from Global Livestock Systems, Proceedings of the National Academy of Sciences 110,
20888–93.
52
MCPFE (2015). Forest Europe, 2015: State of Europe's Forests 2015. Madrid, Ministerial Conference on
the Protection of Forests in Europe: 314.
45
in a network of public and private agencies including the European Commission (JRC),
Universities (Bonn University, Swedish University of Agricultural Sciences, Universidad
Politécnica de Madrid), research agencies (Thünen Institute), and private agencies
(EuroCARE), in charge for use in this modelling cluster). The model takes inputs from
GEM-E3, PRIMES and PRIMES Biomass model, provides outputs to GAINS, and
exchanges information with GLOBIOM on livestock, crops, and forestry as well as
LULUCF effects.
The CAPRI model provides the agricultural outlook for the Reference Scenario, in
particular on livestock and fertilisers use, further it provides the impacts on the
agricultural sector from changed biofuel demand. It takes into account recent data and
builds on the 2020 EU Agricultural Outlook53
. Depending on the need it may also be
used to run climate mitigation scenarios, diet shift scenarios or CAP scenarios.
Cross checks are undertaken ex-ante and ex-post to ensure consistency with GLOBIOM
on overlapping variables, in particular for the crop sector.
Sources for data inputs
The main data source for CAPRI is EUROSTAT. This concerns data on production,
market balances, land use, animal herds, prices, and sectoral income. EUROSTAT data
are complemented with sources for specific topics (like CAP payments or biofuel
production). For Western Balkan regions a database matching with the EUROSTAT
inputs for CAPRI has been compiled based on national data. For non-European regions
the key data source is FAOSTAT, which also serves as a fall back option in case of
missing EUROSTAT data. The database compilation is a modelling exercise on its own
because usually several sources are available for the same or related items and their
reconciliation involves the optimisation to reproduce the hard data as good as possible
while maintaining all technical constraints like adding up conditions.
In the context of this exercise, the CAPRI model uses historical data series at least up to
2017, and the first simulation years (2010 and 2015) are calibrated on historical data.
53
EU Agricultural Outlook for markets, income and environment 2020-2030,
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/agricultural-outlook-
2020-report_en.pdf
46
Assumptions on technology, economics and energy prices
8.3
In order to reflect the fundamental socio-economic, technological and policy
developments, the Commission prepares periodically an EU Reference Scenario on
energy, transport and GHG emissions. The scenarios assessment used for the “Fit for 55”
policy package builds on the latest “EU Reference Scenario 2020” (REF2020)54
.
The main assumptions related to economic development, international energy prices and
technologies are described below.
8.3.1 Economic assumptions
The modelling work is based on socio-economic assumptions describing the expected
evolution of the European society. Long-term projections on population dynamics and
economic activity form part of the input to the energy model and are used to estimate
final energy demand.
Population projections from Eurostat55
are used to estimate the evolution of the European
population, which is expected to change little in total number in the coming decades. The
GDP growth projections are from the Ageing Report 202156
by the Directorate General
for Economic and Financial Affairs, which are based on the same population growth
assumptions.
Table 32: Projected population and GDP growth per Member State
Population GDP growth
2020 2025 2030 2020-‘25 2026-‘30
EU27 447.7 449.3 449.1 0.9% 1.1%
Austria 8.90 9.03 9.15 0.9% 1.2%
Belgium 11.51 11.66 11.76 0.8% 0.8%
Bulgaria 6.95 6.69 6.45 0.7% 1.3%
54
See EU Reference Scenario 2020 publication.
55
EUROPOP2019 population projections
https://ec.europa.eu/eurostat/web/population-demography-migration-projections/population-projections-
data
56
The 2021 Ageing Report : Underlying assumptions and projection methodologies
https://ec.europa.eu/info/publications/2021-ageing-report-underlying-assumptions-and-projection-
methodologies_en
47
Croatia 4.06 3.94 3.83 0.2% 0.6%
Cyprus 0.89 0.93 0.96 0.7% 1.7%
Czechia 10.69 10.79 10.76 1.6% 2.0%
Denmark 5.81 5.88 5.96 2.0% 1.7%
Estonia 1.33 1.32 1.31 2.2% 2.6%
Finland 5.53 5.54 5.52 0.6% 1.2%
France 67.20 68.04 68.75 0.7% 1.0%
Germany 83.14 83.48 83.45 0.8% 0.7%
Greece 10.70 10.51 10.30 0.7% 0.6%
Hungary 9.77 9.70 9.62 1.8% 2.6%
Ireland 4.97 5.27 5.50 2.0% 1.7%
Italy 60.29 60.09 59.94 0.3% 0.3%
Latvia 1.91 1.82 1.71 1.4% 1.9%
Lithuania 2.79 2.71 2.58 1.7% 1.5%
Luxembourg 0.63 0.66 0.69 1.7% 2.0%
Malta 0.51 0.56 0.59 2.7% 4.1%
Netherlands 17.40 17.75 17.97 0.7% 0.7%
Poland 37.94 37.57 37.02 2.1% 2.4%
Portugal 10.29 10.22 10.09 0.8% 0.8%
Romania 19.28 18.51 17.81 2.7% 3.0%
Slovakia 5.46 5.47 5.44 1.1% 1.7%
Slovenia 2.10 2.11 2.11 2.1% 2.4%
Spain 47.32 48.31 48.75 0.9% 1.6%
Sweden 10.32 10.75 11.10 1.4% 2.2%
48
Beyond the update of the population and growth assumptions, an update of the
projections on the sectoral composition of GDP was also carried out using the GEM-E3
computable general equilibrium model. These projections take into account the potential
medium- to long-term impacts of the COVID-19 crisis on the structure of the economy,
even though there are inherent uncertainties related to its eventual impacts. Overall,
conservative assumptions were made regarding the medium-term impacts of the
pandemic on the re-localisation of global value chains, teleworking and teleconferencing
and global tourism.
8.3.2 International energy prices assumptions
Alongside socio-economic projections, EU energy modelling requires projections of
international fuel prices. The 2020 values are estimated from information available by
mid-2020. The projections of the POLES-JRC model – elaborated by the Joint Research
Centre and derived from the Global Energy and Climate Outlook (GECO57
) – are used to
obtain long-term estimates of the international fuel prices.
Table 33 shows the international fuel prices assumptions of the REF2020 and of the
different scenarios and variants used in the “Fit for 55” policy package impact
assessments.
Table 33: International fuel prices assumptions
Source: Derived from JRC, POLES-JRC model, Global Energy and Climate Outlook (GECO)
57
https://ec.europa.eu/jrc/en/geco
in $'15 per boe 2000 ‘05 ‘10 ‘15 ‘20 ‘25 ‘30 ‘35 ‘40 ‘45 ‘50
Oil 38.4 65.4 86.7 52.3 39.8 59.9 80.1 90.4 97.4 105.6 117.9
Gas (NCV) 26.5 35.8 45.8 43.7 20.1 30.5 40.9 44.9 52.6 57.0 57.8
Coal 11.2 16.9 23.2 13.1 9.5 13.6 17.6 19.1 20.3 21.3 22.3
in €'15 per boe 2000 2005 ‘10 ‘15 ‘20 ‘25 ‘30 ‘35 ‘40 ‘45 ‘50
Oil 34.6 58.9 78.2 47.2 35.8 54.0 72.2 81.5 87.8 95.2 106.3
Gas (NCV) 23.4 31.7 40.6 38.7 17.8 27.0 36.2 39.7 46.6 50.5 51.2
Coal 9.9 15.0 20.6 11.6 8.4 12.0 15.6 16.9 18.0 18.9 19.7
49
The COVID crisis has had a major impact on international fuel prices58
. The lost demand
cause an oversupply leading to decreasing prices. The effect on prices compared to pre-
COVID estimates is expected to be still felt up to 2030. Actual development will depend
on the recovery of global oil demand as well as supply side policies59
.
8.3.3 Technology assumptions
Modelling scenarios on the evolution of the energy system is highly dependent on the
assumptions on the development of technologies - both in terms of performance and
costs. For the purpose of the impact assessments related to the “Climate Target Plan” and
the “Fit for 55” policy package, these assumptions have been updated based on a
rigorous literature review carried out by external consultants in collaboration with the
JRC60
.
Continuing the approach adopted in the long-term strategy in 2018, the Commission
consulted on the technology assumption with stakeholders in 2019. In particular, the
technology database of the main model suite (PRIMES, PRIMES-TREMOVE, GAINS,
GLOBIOM, and CAPRI) benefited from a dedicated consultation workshop held on 11th
November 2019. EU Member States representatives also had the opportunity to comment
on the costs elements during a workshop held on 25th
November 2019. The updated
technology assumptions are published together with the EU Reference Scenario 2020.
The existing 2030 framework: the EU Reference Scenario 2020
8.4
8.4.1 The EU Reference Scenario 2020 as the common baseline
The EU Reference Scenario 2020 (REF2020) provides projections for energy demand
and supply, as well as greenhouse gas emissions in all sectors of the European economy
under the current EU and national policy framework. It embeds in particular the EU
legislation in place to reach the 2030 climate target of at least 40% compared to 1990, as
well as national contributions to reaching the EU 2030 energy targets on Energy
efficiency and Renewables under the Governance of the Energy Union. It thus gives a
detailed picture of where the EU economy and energy system in particular would stand in
terms of GHG emission if the policy framework were not updated to enable reaching the
58
IEA, Global Energy Review 2020, June 2020
59
IEA, Oil Market Report, June 2020 and US EIA, July 2020.
60
JRC118275
50
revised 2030 climate target to at least -55% compared to 1990 proposed under the
Climate Target Plan61
.
The Reference Scenario serves as the common baseline shared by all the initiatives of the
“Fit for 55” policy package to assess options in their impact assessments:
- updating the Effort Sharing Regulation,
- updating the Emission Trading System,
- revision of the Renewables Energy Directive,
- revision of the Energy Efficiency Directive,
- revision of the Regulation setting CO2 emission performance standards for cars
and light commercial vehicles,
- review of the LULUCF EU rules.
8.4.2 Difference with the CTP “BSL” scenario
The REF2020 embeds some differences compared to the baseline used for the CTP
impact assessment. While the technology assumptions (consulted in a workshop held on
11th
November 2019) were not changed, the time between CTP publication and the
publication of the “Fit for 55” package allowed updating some other important
assumptions:
 GDP projections, population projections and fossil fuel prices were updated, in
particular to take into account the impact of the COVID crisis through an
alignment with the 2021 Ageing Report62
and an update of international fossil
fuel prices notably on the short run.
 While the CTP baseline aimed at reaching the current EU 2030 energy targets (on
energy efficiency and renewable energy), the Reference Scenario 2020, used as
the baseline for the “Fit for 55” package, further improved the representation of
the National Energy Climate Plans (NECP). In particular it aims at reaching the
national contributions to the EU energy targets, and not at respecting these EU
targets themselves.
61
COM/2020/562 final
62
The 2021 Ageing Report : Underlying assumptions and projection methodologies
https://ec.europa.eu/info/publications/2021-ageing-report-underlying-assumptions-and-projection-
methodologies_en
51
8.4.3 Reference scenario process
The REF2020 scenario has been prepared by the European Commission services and
consultants from E3Modelling, IIASA and EuroCare, in coordination with Member
States experts through the Reference Scenario Experts Group.
It benefitted from a stakeholders consultation (on technologies) and is aligned with other
outlooks from Commission services, notably DG ECFIN’s Ageing Report 2021 (see
Section 8.3.1), as well as, to the extent possible, the 2020 edition of the EU Agricultural
Outlook 2020-2030 published by DG AGRI in December 202063
.
8.4.4 Policies in the Reference scenario
The REF2020 also takes into account the still-unfolding effects of the COVID-19
pandemic, to the extent possible at the time of the analysis. According to the GDP
assumptions of the Ageing Report 2021, the pandemic is followed by an economic
recovery resulting in moderately lower economic output in 2030 than pre-COVID
estimates.
The scenario is based on existing policies adopted at national and EU level at the
beginning of 2020. In particular, at EU level, the REF2020 takes into account the
legislation adopted in the Clean Energy for All European Package64
. At national level,
the scenario takes into account the policies and specific targets, in particular in relation
with renewable energy and energy efficiency, described in the final National Energy and
Climate Plans (NECPs) submitted by Member States at the end of 2019/beginning of
2020.
The REF2020 models the policies already adopted, but not the target of net-zero
emissions by 2050. As a result, there are no additional policies introduced driving
decarbonisation after 2030. However, climate and energy policies are not rolled back
after 2030 and several of the measures in place today continue to deliver emissions
reduction in the long term. This is the case, for example, for products standards and
building codes and the ETS Directive (progressive reduction of ETS allowances is set to
continue after 2030).
Details on policies and measures represented in the REF2020 can be found in the
dedicated “EU Reference Scenario 2020” publication.
63
https://ec.europa.eu/info/news/eu-agricultural-outlook-2020-30-agri-food-sector-shown-resilience-still-
covid-19-recovery-have-long-term-impacts-2020-dec-16_en
64
COM(2016) 860 final.
52
8.4.5 Reference Scenario 2020 key outputs
For 2030, the REF2020 scenario mirrors the main targets and projections submitted by
Member States in their final NECPs. In particular, aggregated at the EU level, the
REF2020 projects a 33.2% share of renewable energy in Gross Final Energy
Consumption. Final energy consumption is 823 Mtoe, which is 29.6% below the 2007
PRIMES Baseline.
In the REF2020, GHG emissions from the EU in 2030 (including all domestic emissions
& intra EU aviation and maritime) are 43.8% below the 1990 level. A carbon price of 30
EUR/tCO2eq. in 2030 drives emissions reduction in the ETS sector. Table 4 shows a
summary of the projections for 2030. A detailed description of the REF2020 can be
found in a separate report published by the Commission65
.
Table 34: REF2020 summary energy and climate indicators
EU 2030 REF2020
GHG reductions (incl. Domestic emissions & intra EU aviation and maritime) vs
1990 -43.8%
RES share 33.2%
PEC energy savings -32.7%
FEC energy savings -29.6%
Environmental impacts
GHG emissions reduction in current ETS sectors vs 2005 -48.2%
GHG emissions reduction in current non-ETS sectors vs 2005 -30.7%
Energy system impacts
GIC (Mtoe) 1224.2
- Solid fossil fuels 9.3%
- Oil 31.9%
- Natural gas 22%
- Nuclear 11%
65
See “EU Reference Scenario 2020” publication.
53
- Renewables 25.8%
Final Energy Demand (Mtoe) 822.6
RES share in heating & cooling 32.8%
RES share in electricity 58.5%
RES share in transport 21.2%
Economic and social impacts
System costs (excl. auction payment) (average 2021-30) as % of GDP 10.9%
Investment expenditures (incl. transport) average annual (2021-30) vs (2011-20)
(bn€)
285
EU ETS carbon price (€/ton, 2030) 30
Energy- expenditures (excl. transport) of households as % of total consumption 7.0%
Source: PRIMES model
The system costs (excluding ETS carbon-related payments) reaches close to 11% of the
EU’s GDP on average over 2021-2030. This cost66
is calculated ex-post with a private
sector perspective applying a flat 10% discount rate67
over the simulation period up to
2050 to compute investment-related annualized expenditures.
By 2050, final energy consumption is projected at around 790 Mtoe and approximately
74% of the European electricity is generated by renewable energy sources. GHG
emissions in the EU are projected to be about 60% lower than in 1990: the REF2020 thus
falls short of the European goal of climate neutrality by 2050.
66
Energy system costs for the entire energy system include capital costs (for energy installations such as
power plants and energy infrastructure, energy using equipment, appliances and energy related costs of
transport), energy purchase costs (fuels + electricity + steam) and direct efficiency investment costs, the
latter being also expenditures of capital nature. For transport, only the additional capital costs for energy
purposes (additional capital costs for improving energy efficiency or for using alternative fuels,
including alternative fuels infrastructure) are covered, but not other costs including the significant
transport related infrastructure costs e.g. related to railways and roads. Direct efficiency investment
costs include additional costs for house insulation, double/triple glazing, control systems, energy
management and for efficiency enhancing changes in production processes not accounted for under
energy capital and fuel/electricity purchase costs. Energy system costs are calculated ex-post after the
model is solved.
67
See the EU Reference Scenario 2020 publication for a further discussion on the roles and levels of
discount rates in the modelling, which also represent risk and opportunity costs associated with
investments.
54
Focusing on the energy system, REF2020 shows that in 2030 fuel mix would still be
dominated by fossil fuels. While the renewables grow and fossil fuels decline by 2050,
the substitution is not sufficient for carbon neutrality. It also has to be noted that there is
no deployment of e-fuels that are crucial for achievement of carbon neutrality as analysed
in the Long Term Strategy68
and in the CTP.
Figure 17: Fuel mix evolution of the Reference Scenario 2020
Source: Eurostat, PRIMES model
Figure 18: Share of energy carriers in final energy consumption in the Reference
Scenario 2020
Note: * includes peat and oil shale; ** includes manufactured gases, *** includes waste
Source: Eurostat, PRIMES model
68
COM(2018) 773
0
200
400
600
800
1000
1200
1400
1600
1800
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Mtoe
Other renewables***
Bioenergy**
Solar
Wind
Nuclear
Natural gas
Oil
Coal*
0
100
200
300
400
500
600
700
800
900
1000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Mtoe
Electricity
Other RES
Bioenergy***
Heat distributed
Hydrogen
Natural gas**
Oil
Coal*
55
Coal use in power generation decrease by 62% by 2030 and almost completely disappear
by 2050. Also demand for oil sees a significant decrease of 54% over the entire period –
the most important in absolute terms. Electricity generation grows by 24% by 2050.
Figure 19: Final energy demand by sector in the Reference Scenario 2020
Source: Eurostat, PRIMES model
Despite continued economic growth, final energy demand decreases by 18% between
2015 and 2050 (already by 2030 it decreases by more than 8%).
Scenarios for the “Fit for 55” policy analysis
8.5
8.5.1 From the Climate Target Plan scenarios to “Fit for 55” core scenarios
In the Climate Target Plan (CTP) impact assessment, the increase of efforts needed for
the GHG 55% target was illustrated by policy scenarios (developed with the same
modelling suite as the scenarios done for the “Fit for 55” package) showing increased
ambition (or stringency) of climate, energy and transport policies and, consequently,
leading to a significant investment challenge.
The first key lesson from the CTP exercise was that while the tools are numerous and
have a number of interactions (or even sometimes trade-offs) a complete toolbox of
climate, energy and transport policies is needed for the increased climate target as all
sectors would need to contribute effectively towards the GHG 55% target.
0
100
200
300
400
500
600
700
800
900
1000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Mtoe
Transport
Residential
Services &
agri
Industry
56
The second key lesson was that even though policy tools chosen in the CTP scenarios
were different - illustrating in particular the fundamental interplay between the strength
of the carbon pricing and intensity of regulatory measures - the results achieved were
convergent. All CTP policy scenarios that achieved a 55% GHG target69
showed very
similar levels of ambition for energy efficiency, renewables (overall and on sectoral
level) and GHG reductions across the sectors indicating also the cost-effective pathways.
The third lesson was that carbon pricing working hand in hand with regulatory measures
helps avoid “extreme” scenarios of either:
 a very high carbon price (in absence of regulatory measures) that will translate
into increased energy prices for all consumers,
 very ambitious policies that might be difficult to be implemented (e.g. very high
energy savings or renewables obligations) because they would be costly for
economic operators or represent very significant investment challenge.
The Figure 20 below illustrates the interactions between different policy tools relevant to
reach the EU’s climate objectives.
Figure 20: Interactions between different policy tools
69
A 50% GHG target was also analysed
57
With the 55% GHG target confirmed by EU leaders in the December 2020 EUCO
Conclusions70
and the 2021 Commission Work Programme71
(CWP 2021) that puts
forward the complete toolbox to achieve the increased climate target (so-called “Fit for
55” proposals), the fundamental set-up of the CTP analysis was confirmed. This set-up is
still about the interplay between carbon pricing and regulatory measures as illustrated
above, and the extension of the ETS is the central policy question.
As described above, the policy scenarios of the CTP assessment are cost-effective
pathways that capture all policies needed to achieve the increased climate target of 55%
GHG reductions. This fundamental design remains robust and the CTP scenarios were
thus used as the basis to define the “Fit for 55” policy scenarios.
In the context of the agreed increased climate target of a net reduction of 55% GHG
compared to 1990, the 50% GHG scenario (CTP MIX-50) explored in the CTP has been
discarded since no longer relevant. The contribution of extra EU aviation and maritime
emissions in the CTP ALLBNK scenario was assessed in the respective sector specific
impact assessments and was not retained as a core scenario. This leaves the following
CTP scenarios in need of further revisions and updates in the context of preparing input
in a coherent manner for the set of IAs supporting the “Fit for 55” package, ensuring the
achievement of the overall net 55% GHG reduction ambition with similar levels of
renewable energy and energy efficiency deployment as in CTP:
 CTP REG (relying only on intensification of energy and transport policies in
absence of carbon pricing beyond the current ETS sectors);
 CTP MIX (relying on both carbon price signal extension to road transport and
buildings and intensification of energy and transport policies);
 CTP CPRICE (relying chiefly on carbon price signal extension, and more limited
additional sectoral policies).
8.5.2 Scenarios for the “Fit for 55”package
Based on the Climate Target Plan analysis, some updates were needed though for the
purpose of the “Fit for 55” assessment, in terms of:
 Baseline:
o to reflect the most recent statistical data available, notably in terms of
COVID impacts,
70
https://www.consilium.europa.eu/media/47328/1011-12-20-euco-conclusions-fr.pdf
71
COM(2020) 690 final
58
o to capture the objectives and policies put forward by Member States in
the NECPs, which were not all available at the time of the CTP analysis,
The baseline used in the Fit for 55 package is thus the “Reference Scenario 2020”, as
described in Section 8.4.
 Scenario design in order to align better with policy options as put forward in the
CWP 2021 and respective Inception Impact Assessments72
.
As a consequence, the three following core policy scenarios were defined to serve as
common policy package analysis across the various initiatives of the “Fit for 55” policy
assessments:
 REG: an update of the CTP REG case (relying only on very strong intensification
of energy and transport policies in absence of carbon pricing beyond the current
ETS sectors).
 MIX: reflecting an update of the CTP MIX case (relying on both carbon price
signal extension to road transport and buildings and strong intensification of
energy and transport policies). With its uniform carbon price (as of 2025), it
reflects either an extended and fully integrated EU ETS or an existing EU ETS
and new ETS established for road transport and buildings with emission caps set
in line with cost-effective contributions of the respective sectors.
 MIX-CP: representing a more carbon price driven policy mix, combining thus
the general philosophy of the CTP CPRICE scenario with key drivers of the MIX
scenario albeit at a lower intensity. It illustrates a revision of the EED and RED
but limited to a lower intensification of current policies in addition to the carbon
price signal applied to new sectors.
Unlike MIX, this scenario allows to separate carbon price signals of “current” and
“new” ETS. The relative split of ambition in GHG reductions between “current”
ETS and “new ETS” remains, however, close in MIX-CP to the MIX scenario
leading to differentiated carbon prices between “current” ETS and “new” ETS73
.
72
Importantly, all “Fit for 55” core scenarios reflect the Commission Work Programme (CWP) 2021 in terms of
elements foreseen. This is why assumptions are made about legislative proposals to be made later on - by Quarter 4
2021. On the energy side, the subsequent proposals are: the revision of the EPBD, the proposal for Decarbonised Gas
Markets and the proposal for reducing methane emissions in the energy sector. For transport they refer to the revision
of the TEN-T Regulation and the revision of the ITS Directive. In addition, other policies that are planned for 2022 are
also represented in a stylised way in these scenarios, similar to the CTP scenarios. In this way, core scenarios represent
all key policies needed to deliver the increased climate target.
73
This is a feature not implemented in the CTP CPRICE scenario.
59
These three “Fit for 55” core policy scenarios have been produced starting from the
Reference Scenario 2020 and thus use the same updated assumptions on post-COVID
economics and international fuel prices.
Table 5 provides an overview of the policy assumptions retained in the three core policy
scenarios. It refers in particular to different scopes of emissions trading system (“ETS”):
- “current+”: refers to the current ETS extended to cover also national and
international intra-EU maritime emissions74
: this scope applies to all scenarios,
- “new”: refers to the new ETS for buildings and road transport emissions: this
scope applies in MIX and MIX-CP up to 2030,
- “large”: refers to the use of emissions trading systems covering the “current”
scope ETS, intra-EU maritime, buildings and road transport (equivalent to
“current+” + “new”): this scope applies in MIX and MIX-CP after 2030.
The scenarios included focus on emissions within the EU, including intra-EU navigation
and intra-EU aviation emissions. The inclusion or not of extra-EU navigation and extra-
EU maritime emissions is assessed in the relevant sector specific Impact Assessments..
74
For modelling purposes “national maritime” is considered as equal to “domestic navigation”, i.e. also
including inland navigation.
60
Table 35: Scenario assumptions description (scenarios produced with the PRIMES-GAINS-GLOBIOM modelling suite)
Scenario REG MIX MIX-CP
Brief
description:
ETS
Extension of “current” ETS to
also cover intra-EU maritime
navigation75
Strengthening of “current+”
ETS in line with -55%
ambition
By 2030: 2 ETS systems:
- one “current+” ETS (current extended to intra-EU maritime)
- one “new” ETS applied to buildings and road transport
After 2030: both systems are integrated into one “large” ETS
Relevant up to 2030: the 2 ETSs are
designed so that they have the same
carbon price, in line with -55%
ambition
Relevant up to 2030: “current+” ETS
reduces emissions comparably to MIX
Lower regulatory intervention resulting in
higher carbon price than in MIX, notably in
the “new” ETS
75
“Intra-EU navigation” in this table includes both international intra-EU and national maritime. Due to modelling limitations, energy consumption by “national maritime” is assumed
to be the same as “domestic navigation”, although the latter also includes inland navigation.
61
Scenario REG MIX MIX-CP
Brief
description:
sectoral policies
High intensity increase of EE,
RES, transport policies versus
Reference
Medium intensity increase of EE,
RES and transport policies versus
Reference
Lower intensity increase of EE and RES
policies versus Reference.
Transport policies as in MIX (except
related to CO2 standards)
Target scope EU27
Aviation Intra-EU aviation included, extra-EU excluded
Maritime
navigation
Intra-EU maritime included, extra-EU excluded
Achieved GHG reduction of the target scope
Including
LULUCF
Around 55% reductions
Excluding
LULUCF
Around 53% reductions
Assumed Policies
Carbon pricing (stylised, for small industry, international aviation and maritime navigation may represent also other instruments than
EU ETS such as taxation or CORSIA for aviation)
Stationary ETS Yes
Aviation-Intra
EU ETS
Yes
Aviation - Extra
EU ETS
Yes: mixture 50/50 carbon pricing (reflecting inclusion in the “current+” / “large” ETS, or taxation, or CORSIA)
and carbon value (reflecting operational and technical measures); total equal to the carbon price of the “current+”
(up to 2030) / “large” ETS
Maritime-Intra
EU ETS
Yes, carbon pricing equal to the price of the “current+” (up to 2030) / “large” EU ETS
62
Scenario REG MIX MIX-CP
Maritime-Extra
EU ETS
As in MIX (but applied to the
“current+” ETS)
Up to 2030: no carbon pricing.
After 2030: 50% of extra-EU MRV76
sees the “large” ETS price, while the
remaining 50% sees a carbon value equal to the “large” ETS carbon price.
Buildings and
road transport
ETS
No Yes (in the “new” ETS up to 2030, and in the “large” ETS after 2030)
CO2 standards
for LDVs and
HDVs
CO2 standards for LDVs and HDVs + Charging and refuelling infrastructure development (review of the Directive
on alternative fuels infrastructure and TEN-T Regulation & funding), including strengthened role of buildings
High ambition increase Medium ambition increase Lower ambition increase
EE policies
overall ambition
High ambition increase Medium ambition increase Lower ambition increase
EE policies in
buildings
High intensity increase (more
than doubling of renovation
rates assumed)
Medium intensity increase (at least
doubling of renovation rates
assumed)
Lower intensity increase, no assumptions
on renovation rates increases
EE policies in
transport
High ambition increase Medium intensity increase As in MIX
RES policies
overall ambition
High ambition increase Medium intensity increase
Lower ambition increase except for
transport (see below)
76
50% of all incoming and all outgoing extra-EU voyages
63
Scenario REG MIX MIX-CP
RES policies in
buildings +
industry
Incentives for uptake of RES in
heating and cooling
Incentives for uptake of RES in
heating and cooling
No increase of intensity of policy
(compared to Reference)
RES policies in
transport and
policies
impacting
transport fuels
Increase of intensity of policies to decarbonise the fuel mix (reflecting ReFuelEU aviation and FuelEU maritime
initiatives).
Origin of electricity for “e-fuels” under the aviation and shipping mandates:
up to 2035 (inclusive) “e-fuels” (e-liquids, e-gas, hydrogen) are produced from renewable electricity, applying
additionality principle.
from 2040 onwards “e-fuels” are produced from “low carbon” electricity (i.e. nuclear and renewable origin). No
application of additionality principle.
CO2 from biogenic sources or air capture.
Taxation
policies
Central option on energy content taxation of the ETD revision
Additional non-
CO2 policies
(represented by
a carbon value)
Medium ambition increase
8.5.3 Quantitative elements and key modelling drivers
Policies and measures are captured in the modelling analysis in different manners. Some
are explicitely represented such as for instance improved product energy performance
standards, fuel mandates or carbon pricing in an emission trading system. Others are
represented by modelling drivers (“shadow values”) used to achieve policy objectives.
The overall need for investment in new or retrofitted equipment depends on expected
future demand and expected scrapping of installed equipment. The economic modelling
of the competition among available investment options is based on:
- the investment cost, to which a “private” discount rate is applied to represent risk
adverseness of the economic agents in the various sectors77
,
- fuel prices (including their carbon price component),
- maintenance costs as well as performance of installations over the potential
lifetime of the installation,
- the relevant shadow values representing energy efficiency or renewable energy
policies.
In particular, carbon pricing instruments impact economic decisions related to operation
of existing equipment and to investment, in the different sectors where they apply. Table
36 shows the evolution of the ETS prices by 2030 in the Reference and core scenarios.
Table 36: ETS prices by 2030 in the difference scenarios (€2015/tCO2)
Scenarios
Car on pri e urrent ETS se tors Car on pri e new ETS se tors
2025 2030 2025 2030
REF2020 27 30 0 0
REG 31 42 0 0
MIX 35 48 35 48
MIX-CP 35 52 53 80
The investment decisions are also taken considering foresight of the future development
of fuel prices, including future carbon values78
post 2030. Investment decisions take into
account expectations about climate and energy policy developments, and this carbon
77
For more information on the roles and levels of discount rates applied per sector, see the EU Reference
Scenario 2020 publication.
78
Post 2030, carbon values should not be seen as a projected carbon price in emissions trading, but as a
shadow value representing a range of policies to achieve climate neutrality that are as yet to be defined.
65
value achieves in 2050 levels between €360/tCO2 (in REG, where energy policy drivers
play comparatively a larger role) and €430/tCO2 (MIX-CP)79
.
In complement to carbon pricing drivers, the modelling uses “shadow values” as drivers
to reach energy policy objectives of policies and measures that represent yet to be
defined policies in the respective fields: the so-called “energy efficiency value” and
“renewable energy value”, which impact investment decision-making in the model.
These values are thus introduced to achieve a certain ambition on energy efficiency, for
instance related to national energy efficiency targets and renewable energy targets in the
NECPs as represented in the Reference Scenario 2020, or increased renovation rates in
buildings and increased sector specific renewable energy ambition related to heating and
cooling in the policy scenarios.
Table 37 shows average 2025-2035 values for the different scenarios. The values in
REF2020 reflect the existing policy framework, to meet notably the national energy
targets (both energy efficiency and renewable energy) as per the NECPs. They are
typically higher in policy scenarios that are based on regulatory approaches than in
scenarios that are more based on carbon pricing. The “energy efficiency value” and
“renewable energy value” also interact with each other through incentivising investment
in options which are both reducing energy demand and increasing the contribution of
renewables, like heat pumps. This is for instance the case in the REG scenario, where the
comparatively higher “energy efficiency value” complements the “renewable energy
value” in contributing to the renewable energy performance of the scenario, notably
through the highest heat pump penetration of all scenarios.
Table 37: Energy efficiency value and renewable energy value (averaged 2025-2035)
Scenarios Average renewables
shadow value
Average energy efficiency
shadow value
€'15/ MWh €'15/ toe
REF2020 62 330
REG 121 1449
MIX 61 1052
MIX-CP 26 350
79
The foresight and the discounting both influence the investment decisions. While in the modelling the
discounting is actually applied to the investment to compute annualised fixed costs for the investment
decision, its effect can be illustrated if applied to the future prices instead: for example, the average
discounted carbon price in 2030 for the period 2030-2050 for renovation of houses and for heating
equipment, applying a 12% discount rate, is €65 in the MIX scenario and €81 in the MIX CP scenario.
66
Specific measures for the transport system
Policies that aim at improving the efficiency of the transport system (corresponding to
row “EE in Transport” in the Table 5), and thus reduce energy consumption and CO2
emissions, are phased-in in scenarios that are differentiated in terms of level of ambition
(low, medium, high ambition increase). All scenarios assume an intensification of such
policies relative to the baseline. Among these policies, the CO2 emission standards for
vehicles are of particular importance. The existing standards80
, applicable from 2025 and
from 2030, set binding targets for automotive manufacturers to reduce emissions and thus
fuel consumption and are included in the Reference Scenario.
Medium ambition increase
In this case, the following policy measures are considered that drive improvements in
transport system efficiency and support a shift towards more sustainable transport modes,
and lead to energy savings and emissions reductions:
- Initiatives to increase and better manage the capacity of railways, inland waterways
and short sea shipping, supported by the TEN-T infrastructure and CEF funding;
- Gradual internalisation of external costs (“smart” pricing);
- Incentives to improve the performance of air navigation service providers in terms of
efficiency and to improve the utilisation of air traffic management capacity;
- Incentives to improve the functioning of the transport system: support to multimodal
mobility and intermodal freight transport by rail, inland waterways and short sea
shipping;
- Deployment of the necessary infrastructure, smart traffic management systems,
transport digitalisation and fostering connected and automated mobility;
- Further actions on clean airports and ports to drive reductions in energy use and
emissions;
- Measures to reduce emissions and air pollution in urban areas;
- Pricing measures such as in relation to energy taxation and infrastructure charging;
- Revision of roadworthiness checks;
80
The existing legislation sets for newly registered passengers cars, an EU fleet-wide average emission
target of 95 gCO2/km from 2021, phased in from 2020. For newly registered vans, the EU fleet-wide
average emission target is 147 gCO2 /km from 2020 onward. Stricter EU fleet-wide CO2 emission
targets, start to apply from 2025 and from 2030. In particular emissions will have to reduce by 15%
from 2025 for both cars and vans, and by 37.5% and 31% for cars and vans respectively from 2030, as
compared to 2021. From 2025 on, also trucks manufacturers will have to meet CO2 emission targets. In
particular, the EU fleet-wide average CO2 emissions of newly registered trucks will have to reduce by
15% by 2025 and 30% by 2030, compared to the average emissions in the reference period (1 July
2019–30 June 2020). For cars, vans and trucks, specific incentive systems are also set to incentivise the
uptake of zero and low-emission vehicles.
67
- Other measures incentivising behavioural change;
- Medium intensification of the CO2 emission standards for cars, vans, trucks and buses
(as of 2030), supported by large scale roll-out of recharging and refuelling
infrastructure. This corresponds to a reduction in 2030 compared to the 2021 target of
around 50% for cars and around 40% for vans.
Low ambition increase
In this case, the same policy measures as in the Medium ambition increase are included.
However, limited increase in ambition for CO2 emission standards for vehicles
(passenger cars, vans, trucks and buses) as of 2030 is assumed, supported by the roll-out
of recharging and refuelling infrastructure. This corresponds to a reduction in 2030
compared to the 2021 target of around 40% for cars and around 35% for vans.
High ambition increase
Beyond measures foreseen in the medium ambition increase case, the high ambition
increase case includes:
- Further measures related to intelligent transport systems, digitalisation, connectivity
and automation of transport - supported by the TEN-T infrastructure;
- Additional measures to improve the efficiency of road freight transport;
- Incentives for low and zero emissions vehicles in vehicle taxation;
- Increasing the accepted load/length for road in case of zero-emission High Capacity
Vehicles;
- Additional measures in urban areas to address climate change and air pollution;
- Higher intensification of the CO2 emission standards for cars, vans, trucks and buses
(as of 2030) as compared to the medium ambition increase case, leading to lower CO2
emissions and fuel consumption and further incentivising the deployment of zero- and
low-emission vehicles, supported by the large scale roll-out of recharging and
refuelling infrastructure. This corresponds to a reduction in 2030 compared to the
2021 target of around 60% for cars and around 50% for vans.
Drivers of reduction in non-CO2 GHG emissions
Non-CO2 GHG emission reductions are driven by both the changes taking place in the
energy system due to the energy and carbon pricing instruments, and further by the
application of a carbon value that triggers further cost-effective mitigation potential
(based on the GAINS modelling tool) in specific sectors such as waste, agriculture or
industry.
68
Table 38: Carbon value applied to non-CO2 emissions in the GAINS model (€2015/tCO2)
Scenarios
Non-CO2 carbon values
2025 2030
REF2020 0 0
REG 4 4
MIX 4 4
MIX-CP 5 10
8.5.4 Key results and comparison with Climate Target Plan scenarios
Table 39: Key results of the “Fit for 55” core scenarios analysis for the EU
2030 unless otherwise stated REF REG MIX MIX-CP
Key results
GHG emissions* reductions (incl.
intra EU aviation and maritime,
incl. LULUCF)
% reduction from 1990 45% 55% 55% 55%
GHG emissions* reductions (incl.
intra EU aviation and maritime,
excl. LULUCF)
% reduction from 1990 43.4% 53.0% 52.9% 52.9%
Overall RES share % 33% 40% 38% 38%
RES-E share % 59% 65% 65% 65%
RES-H&C share % 33% 41% 38% 36%
RES-T share % 21% 29% 28% 27%
PEC energy savings
% reduction from 2007
Baseline
33% 39% 39% 38%
FEC energy savings
% reduction from 2007
Baseline
30% 37% 36% 35%
Environmental impacts
CO2 emissions reductions (intra-EU
scope, excl. LULUCF), of which
(% change from 2015) -30% -43% -42% -42%
Supply side (incl. power
generation, energy branch,
refineries and district heating)
(% change from 2015) -49% -62% -63% -64%
Power generation (% change from 2015) -51% -64% -65% -67%
Industry (incl. process emissions) (% change from 2015) -10% -23% -23% -23%
Residential (% change from 2015) -32% -56% -54% -50%
Services (% change from 2015) -36% -53% -52% -48%
Agriculture (energy) (% change from 2015) -23% -36% -36% -35%
Transport (incl. domestic and intra
EU aviation and navigation)
(% change from 2015) -17% -22% -21% -21%
Non-CO2 GHG emissions reductions
(excl. LULUCF)
(% change from 2015) -22% -32% -32% -33%
Reduced air pollution vs. REF (% change) -10%
69
Reduced health damages and air
pollution control cost vs. REF - Low
estimate
€ billion/year 24.8
Reduced health damages and air
pollution control cost vs. REF - High
estimate
€ billion/year 42.7
Energy system impacts
Primary Energy Intensity toe/M€'13 83 75 76 76
Gross Available Energy (GAE) Mtoe 1,289 1,194 1,198 1,205
- Solids share % 9% 6% 5% 5%
- Oil share % 34% 33% 33% 33%
- Natural gas share % 21% 20% 20% 21%
- Nuclear share % 10% 11% 11% 11%
- Renewables share % 26% 31% 30% 30%
- Bioenergy share % 13% 13% 12% 12%
- Other Renewables share % 13% 18% 18% 18%
Gross Electricity Generation TWh 2,996 3,152 3,154 3,151
- Gas share % 14% 12% 13% 14%
- Nuclear share % 17% 16% 16% 16%
- Renewables share % 59% 65% 65% 65%
Economic impacts
Investment expenditures (excl.
transport) (2021-30)
bn €'15/year 297 417 402 379
Investment expenditures (excl.
transport) (2021-30)
% GDP 2.1% 3.0% 2.9% 2.7%
Additional investments to REF bn €'15/year 120 105 83
Investment expenditures (incl.
transport) (2021-30)
bn €'15/year 944 1068 1051 1028
Investment expenditures (incl.
transport) (2021-30)
% GDP 6.8% 7.7% 7.6% 7.4%
Additional investments to REF bn €'15/year 124 107 84
Additional investments to 2011-20 bn €'15/year 285 408 392 368
Energy system costs excl. carbon
pricing and disutility (2021-30)
bn €'15/year 1518 1555 1550 1541
Energy system costs excl. carbon
pricing and disutility (2021-30)
% GDP 10.9% 11.2% 11.15% 11.1%
Energy system costs incl. carbon
pricing and disutility (2021-30)
bn €'15/year 1535 1598 1630 1647
Energy system costs incl. carbon
pricing and disutility (2021-30)
% GDP 11.0% 11.5% 11.7% 11.8%
ETS price in current sectors (and
maritime)
€/tCO2 30 42 48 52
ETS price in new sectors (buildings
and road transport)
€/tCO2 0 0 48 80
Average Price of Electricity €/MWh 158 156 156 157
Import dependency % 54% 52% 53% 53%
Fossil fuels imports bill savings
compared to REF (2021-30)
bn €'15 136 115 99
70
Energy-related expenditures in
buildings (excl. disutility)
% of private
consumption
6.9% 7.5% 7.5% 7.4%
Energy-related expenditures in
transport (excl. disutility)
% of private
consumption
18.1% 18.1% 18.3% 18.5%
Note: *All scenarios achieve 55% net reductions in 2030 compared to 1990 for domestic EU emissions,
assuming net LULUCF contributions of 255 Mt CO2-eq. in 1990 and 225 Mt CO2-eq. in 2030 and including
national, intra-EU maritime and intra-EU aviation emissions
81
.
Source: PRIMES model, GAINS model
Table 40: Comparison with the CTP analysis
Results for 2030 CTP 55% GHG reductions
scenarios range
(REG, MIX, CPRICE,
ALLBNK)
“Fit for 55” core scenarios
range
(REG, MIX, MIX-CP)
Overall net GHG reduction (w.r.t. 1990)* 55% 55%
Overall RES share 38-40% 38-40%
RES-E 64-67% 65%
RES-H&C 39-42% 36-41%
RES-T 22-26% 27-29%
FEC EE 36-37% 35-37%
PEC EE 39-41% 38-39%
CO2 reduction on the supply side (w.r.t.
2015)
67-73% 62-64%
CO2 reduction in residential sector (w.r.t.
2015)
61-65% 50-56%
CO2 reduction in services sector (w.r.t.
2015)
54-61% 48-53%
CO2 reduction in industry (w.r.t. 2015) 21-25% 23%
81
Emissions estimates for 1990 are based on EU UNFCCC inventory data 2020, converted to IPCC AR5
Global Warming Potentials for notably methane and nitrous oxide. However, international intra-EU
aviation and international intra-EU navigation are not separated in the UNFCCC data from the overall
international bunker fuels emissions. Therefore, 1990 estimates for the intra-EU emissions of these
sectors are based on (a combination of) data analysis for PRIMES modelling and 2018-2019 MRV data
for the maritime sector.
71
CO2 reduction in intra-EU transport (w.r.t.
2015)
16-18% 21-22%
CO2 reduction in road transport (w.r.t. 2015) 19-21% 24-26%
Non-CO2 GHG reductions (w.r.t. 2015, excl.
LULUCF)
31-35% 32-33%
Investments magnitude, excluding transport
(in bn€/per year)
401-438 bn/year 379-417 bn/per year
Energy system costs (excl. auction payments
and disutility) as share of GDP (%, 2021-
2030)
10.9-11.1% 11.1-11.2%
Note: *All scenarios achieve 55% net reductions in 2030 compared to 1990 for domestic EU emissions,
assuming net LULUCF contributions of 255 Mt CO2-eq. in 1990 and 225 Mt CO2-eq. in 2030 and including
national, intra-EU maritime and intra-EU aviation emissions
60
(except the CTP ALLBNK that achieves 55%
net reductions including also emissions from extra-EU maritime and aviation).
Source: PRIMES model, GAINS model
Results per Member State
8.6
This analysis is completed by detailed modelling results at EU and MS level for the
different core policy scenarios82
:
- Energy, transport and overall GHG (PRIMES model)
- Details on non-CO2 GHG emissions (GAINS model)
- LULUCF emissions (GLOBIOM model)
- Air pollution (GAINS model)
82
See the “Technical Note on the Results of the “Fit for 55” core scenarios for the EU Member States”.
72
9 SPECIFIC ANALYTICAL ELEMENTS FOR THIS IMPACT ASSESSMENT
Model used for MSR analysis
9.1
9.1.1 MSR model
The Vivid study83
uses the Vivid EU ETS model, which builds on the modelling
approach from Quemin and Trotignon (2019) that is calibrated to represent the average
EU ETS compliance entity. The model considers the EU ETS as a competitive market
where firms can bank emissions allowances. The model is dynamic as the number of
banked allowances from a given year will affect the total supply of allowances in the
subsequent year. Firms are required to surrender allowances for compliance each year
that match their emissions and bank any remaining allowances that they hold across
years. Since a decentralized competitive market equilibrium can be characterized
indirectly as the solution to joint cost minimization among all firms (e.g. Montgomery,
1972; Rubin, 1996), the model uses a representative firm approach which is well-
documented and widely employed in the literature (e.g. Fell et al., 2012; Kollenberg &
Taschini, 2019). Solving the model would return a series of equilibrium prices, banking,
and emissions within the EU ETS scope on an annual basis.
The representative firm in the model minimises its abatement cost with rolling horizons
and limited foresight. In the model, the firm faces the problem of choosing emissions and
abatement over a given time horizon. The firm takes into account its baseline emissions
forecast and supply of allowances for the next 10 years.84
Baseline emissions in this
model is a theorical construct to represent the emissions in absence of a carbon price. The
supply of allowances is determined by the EU ETS cap and augmented by MSR
dynamics. The difference between the baseline emissions and the supply of allowances
over this time horizon determines the total abatement required from the firm, thus
entering its optimisation problem as a budget constraint. The firm minimises the net
present value of abatement costs over these X years given this budget constraint and a
given interest rate.85
Limited foresight of the firm means that its forecast of baseline
emissions may deviate from the actual baseline emissions. Shocks to the system will
affect the firm’s expectations and therefore its optimal choice of emissions and
83
Vivid Economics (2021) – « Review of the EU ETS Market Stability Reserve », study commissioned by
the European Commission, unpublished.
84
More precisely, the firm decides on emissions in year t after making forecasts of up to year t+9.
85
In addition, there is a borrowing constraint in which the firm can only borrow allowances up to the
number of free allocations in the subsequent year. However, this constraint is not binding over the time
period in 2020-2030.
73
abatement. Finally, equilibrium prices are calculated by mapping the firm’s abatement to
a marginal abatement cost curve.
More specifically, the firm solves for the following constrained optimisation problem in
each year. Given a forward-looking horizon h, the firm in year-t selects year-t emissions
𝑡 and bank the remaining allowances 𝑡 by solving:
min
{𝑒𝜏 }𝜏=𝑡
𝑡+ℎ
∑ 𝛽𝜏−𝑡
𝐶𝜏 ̂𝜏
𝑡
− 𝜏
𝑡+ℎ
𝜏=𝑡
subject to 0 𝜏 ̂𝜏
𝑡
, and 𝜏 = 𝜏−1 + ̂
𝜏
𝑡
+ ̂𝜏
𝑡
+ 𝑜
̂𝜏
𝑡
− 𝜏 − ̂𝜏+1
𝑡
Where ̂
𝜏
𝑡
, ̂𝜏
𝑡
, 𝑜
̂𝜏
𝑡
, ̂𝜏
𝑡
denotes the firm’s year-t forecast of free allocations, auctions,
offsets, and baseline emissions for year 𝜏 . The objective function specifies that the
firm seeks to minimise the net present value of its abatement costs over the time horizon
from year 𝜏 to year 𝜏 + ℎ. Annual abatement cost 𝐶𝜏 𝜏
𝑡
− 𝜏 is a function of abatement,
defined as the difference between baseline emissions 𝜏
𝑡
and actual emissions 𝜏. In the
model, marginal abatement costs are assumed to be linear in the level of abatement. The
discount factor 𝛽 is derived from the interest rate, 𝛽 =
1
1+𝑟
. The firm faces two
constraints in its optimisation problem. First, it must choose an emissions level that is
less than or equal to its baseline emissions. Second, the number of banked allowances in
a given year 𝜏 equals the number of unused allowances from the annual supply facing
the firm ( 𝜏−1 + ̂
𝜏
𝑡
+ ̂𝜏
𝑡
+ 𝑜
̂𝜏
𝑡
− 𝜏). Borrowing (i.e. negative banking) is limited to the
number of free allocations in the subsequent year, ̂𝜏+1
𝑡
. This mimics the fact that firms
within the EU ETS can tap into free allocations distributed in the first quarter in a given
year to meet liabilities for the previous year.
The model is the best-in-class representation of the MSR available in the literature. This
includes explicit representation of MSR intakes, releases, corresponding thresholds, the
invalidation mechanism, and the calculation of TNAC on an annual basis. In particular,
the model captures the fact that the TNAC for a given year is reported in May in the
subsequent year, then affecting auction volumes from September to August. Given the
rules-based nature of the MSR, some other models in the literature estimate the TNAC
simply by taking an exogenous emissions pathway as given. However, the advantage of
optimisation models such as the one used in this assessment is that the emissions
pathway is endogenous to the given policy design. In other words, changes in policy
parameters will affect the perceived scarcity of emissions allowances and therefore the
firm’s behaviour on emissions and abatement. For instance, a higher MSR intake rate
should represent a tightening of future allowance supply and therefore reduce emissions
today and increase TNAC. The model used in this assessment, adapted from Quemin and
Trotignon (2019), is able to model this while capturing realistic aspects of firm behaviour
– limited foresight and rolling horizons, as noted above. These aspects of firm behaviour
74
are taken from the latest academic literature and provides an additional perspective to
explore the impact of the MSR.
Despite its advantages, there are limitations to the model as it abstracts from some
important characteristics of the EU ETS. The modelling outputs are not intended to be
used as forecasts for prices and emissions. However, when combined with qualitative and
quantitative insights, it can provide useful indications of the direction and size of impact.
The key limitations of the model in the context of this study are as follows:
 It draws on a simplified Marginal Abatement Cost Curve (MACC). In the model, the
firm chooses emissions and abatement by optimising intertemporal abatement cost.
Crucial to this optimisation problem is the shape of the MACC, including its
steepness and concavity. While this is calibrated to yield plausible modelling results,
the MACC parameters used for the optimisation are not flexible enough to mirror
MACCs from bottom-up industry research. This also means that the equilibrium price
as described by the model may be inaccurate, particularly when the slope of the
actual MACC may increase at higher levels of abatement.
 The level of abatement and emissions depend critically on the assumed baseline
emissions. Baseline emissions represent the level of emissions without a carbon price,
but incorporating announced policies within covered sectors, such as energy
efficiency measures and regulated coal phase out. Modelling results are sensitive to
both the level and shape of baseline emissions over time because it determines the
total level of abatement required from the firm.
 Calibration of model parameters for the future EU ETS scope is imperfect. The
calibration of the model involves estimating the appropriate interest rate, length of
forward-looking horizon, MACC, and baseline emissions. However, the UK exit
from the EU ETS in 2021, the fungibility of aviation allowances in Phase IV, and the
likely extension to maritime navigation all meant that parameters calibrated from
historical data are not necessarily accurate for the future scope of the EU ETS.
Furthermore, firm behaviour might change going forward with reductions in free
allowances, forcing industrial companies to hedge more.
 It does not model endogenous demand for allowances from non-compliance entities.
The model is designed to investigate the behaviour of a representative firm that faces
the costly behaviour of abatement under a limited supply of emissions allowances.
Other holders of allowances, such as financial entities or national governments, are
not modelled endogenously. The model is therefore unable to analyse how policy
choices may induce speculative demand for allowances.
 There is no endogenous technological progress. Investments in abatement technology
will generally lower future emissions and abatement costs. However, conditional on
the level of banked allowances brought over from the previous year, modelling
outputs in a given year is independent of emissions or abatement in previous years.
75
It should be noted that this model is fundamentally different from energy system models
and their results are not directly comparable. As opposed to optimising energy system
costs, this model abstracts from the different technological conditions for various sectors
and focus on the interaction between MSR dynamics and market equilibrium within the
EU ETS. From a policy perspective, increases in climate ambition within the EU is
represented as either a tightening of the EU ETS cap or changes in the baseline
emissions. This allows the analysis to be more tractable, enabling a clear channel for
MSR options to interact with and affect market outcomes in terms of emissions, banking,
and prices.
9.1.2 Reparameterisation of model
To better handle the requirements of this review, process the parameters have been
updated from the model in Quemin and Trotignon (2019). This is both to reflect the
change of scope of the EU ETS and to include more granular emissions projections in
constructing the baseline emissions pathway. The updated parameters reflect more
realistic firm behaviour and abatement cost functions to give a better sense of the
magnitude of effect on price and emissions from the policy scenarios we analyse. Below
is a summary of the main adjustments to the model.
Baseline emissions
9.1.2.1
Baseline emissions has been adjusted to account for COVID-19, the coal phase-out as
well as more granular emissions trends from the EU commission's ‘with existing
measures’ scenario. As baseline emissions are to represent the emissions of entities
covered by EU ETS in absence of EU ETS, the parameterisation has been updated to
according with the premise that changes to the baseline that already has been planned or
that are already realised should be included. Some changes that are of a more uncertain
nature will be modelled as shocks (discussed further below). The adjustments to baseline
emissions include:
 The COVID-19 pandemic has already had a significant impact on the realised
emissions in 2020, so these estimated impacts are included in the baseline. To
model the magnitude of the effect on baseline emissions the updated model draws
on data from the Price-Induced Market Equilibrium System (PRIMES) energy
model. The gives the size of the effect in 2020 (a reduction of about 155
MtCO2e), to include the potentially lasting effect of the pandemic the model
assumes that the effect of the pandemic will half in 2021, further half in 2022 and
then remain at this level through at the modelled period.
 The baseline is adapted for the already planned phasing-out coal-fired power-
plants. This will shift the demand for allowances downwards – estimates from
Carbon Market Watch gives estimates of the size of this downwards shift.
However, for these estimates, Carbon Market Watch assumes that all the coal-
fired plants that are closed will be replaced with renewable energy sources. As at
76
least some of the phased-out coal is likely to be replaced with gas or other fossil
fuels. Thus, the baseline scenario assumes that only half of the effect of the coal
phase out will make its way to baseline emissions.
 Baseline emissions are adjusted to reflect the effects of policies other than EU
ETS. The baseline has been updated with more granular emissions projections.
For this the year-on-year trend from the EU Commission's ‘with existing
measures scenario’ was used.
The baseline emissions trajectory is shown in Figure 16 below.
Figure 21: Baseline emissions estimates for covered sectors under the central policy
scenario
Source: Vivid Economics
MACC
9.1.2.2
To reflect the changing cost of abatement more accurately the constant MACC parameter
has been replaced with a time-variant one. In the specification of the original model, the
abatement of 1 tonne of carbon is assumed to have uniform cost regardless of the level of
baseline emissions, this is a simplifying assumption that was made to facilitate the
computation of the firm’s optimization and the male interpretation of the results more
straight-forward. However, an assessment of the literature and of existing MACCs shows
that marginal costs tend to increase over time as low-cost abatement options are used up.
This means that in later periods the abatement in absolute terms should be more
expensive. As a starting point, a plausible assumption is that the in-percentage terms
abatement cost is constant (this would mean that abating x% of your baseline emissions
would always have the same cost). But in addition to the marginal cost increase it is
likely that abatement technology will gradually improve as time goes by, thus the
0
500
1000
1500
2000
2500
2010 2015 2020 2025 2030 2035 2040 2045 2050
Emissions,
MtCO2e
77
updated model uses a parametrisation that constitutes a compromise between the two
extremes (one being that abatement cost is exactly proportional the other one being that it
is constant).
Interest rate and anticipation period
9.1.2.3
The model includes an increased interest rate and shortened the planning horizons for the
firm. As opposed to the assumed interest rate of 3% in the original model, there as
evidence that real firms use interest rate much higher than this. Because of this, the
model uses an increased interest rate or 8%. This is also aligned with the assumptions in
the PRIMES energy model. Further to this, the firms planning horizon has been slightly
shortened from 12 to 10 years. This is because the firm displayed unrealistically forward-
looking behaviour. In particulars in terms of high levels of banking.
Growth rates
9.1.2.4
The firm's growth rate projections have been lowered to better align with the growth rate
of the industries covered by the EU ETS. The original model assumes a 2% real GDP
growth rate, while this might be a plausible forecast for the economy, the sectors covered
by EU ETS have historically displayed a lower growth rate, as such this is adjusted to
1%.
Adjustments to EU ETS scope
9.1.2.5
The model has been further adapted to examine the sectoral and country coverage most
relevant to the EU ETS in the near term. This represents three main departures from the
original calibration from Quemin and Trotignon (2019).
1. UK exit of the EU ETS
2. Domestic and intra-EEA aviation participating in the EU ETS
3. Domestic and intra-EEA maritime navigation assumed to participate in the EU
ETS
Due to the nature of the model, it cannot accommodate scope changes in the EU ETS that
occur in the middle of the time horizon. This is because the exit or entry of market
participants represent a fundamental change to the size and behaviour of the
representative firm, complicating the firm’s intertemporal optimisation process.
Throughout this impact assessment, we implement the model by treating all three scope
changes as present from the beginning of time. In other words, the model simulates EU
ETS emissions, banking and price paths as if the UK has never been part of the system,
and that domestic and intra-EEA aviation and maritime navigation has always been part
of the system, which begins in 2008 in the model. As a result, the modelling results
presented for 2008-2020 are not directly comparable with historical figures.
78
The three scope changes imply adjustments to the level of the cap (and the absolute
reduction represented by the LRF) as well as baseline emissions. First in terms of the cap,
the historical EU ETS cap for stationary installations and aviation serves as an anchor
from 2008 to 2020, in which the aviation cap was extended backwards from 2012 to
2008. Then, the UK share of the cap was removed. A hypothetical cap was constructed
for maritime navigation (for the specified MRV scope) using 2005 historical emissions
from the PRIMES model and assumed constant throughout 2008 to 2020. The model
sums up the cap for stationary installations, aviation and maritime without distinguishing
them further. From 2021 onwards, a common LRF is applied across the sectors. As for
the baseline emissions, the original baseline emissions series for EU ETS stationary
installations from Quemin and Trotignon were augmented by removing the UK
component. Next, baseline emissions for aviation and maritime navigation for 2005 and
2010 were obtained from the reference case in PRIMES and then extrapolated into the
future using IEA’s reference technology scenario. The sum of baseline emissions for
stationary installations, aviation and maritime navigation then results in the baseline
emissions for the representative firm in this model.
9.1.3 Quantification of magnitude and direction of shocks
The shocks analysed have been quantified using readily available data and analyst
judgement of plausible risks to the EU ETS. To ensure shock analysis is representative of
risks faced by the EU ETS, we have quantified the shocks within each identified potential
stress test based on the largest likely risk. Determining likelihood of different shocks has
been informed through literature review and interviews with industry and market experts,
while quantification has been informed by estimates from published analysis and internal
calculations.
9.1.4 Guidance on interpreting modelling results
Key assumptions to keep in mind while interpreting the modelling results include:
 Imperfect foresight with a 10-year forward looking horizon: the market is assumed to
forecast the (MSR-adjusted) supply of allowances and baseline emissions for the next
10 years. This means, for instance, that an anticipated tightening of the cap between
2024-2030 can influence emissions and banking patterns in 2021. If post-2030 cap
trajectories differ, the model would show different pre-2030 emissions, banking, and
prices. Therefore, the comparisons of different 2024-2030 cap trajectories have been
aligned post-2030 to a common LRF of 5.04% like in AMB2a.
 The model should not be used directly to estimate future carbon prices. The
modelling outputs are not intended to be used as forecasts for prices and emissions.
However, when combined with qualitative and quantitative insights, it can provide
useful indications of the direction and size of impact.
79
 Price acts as an indicator of the scarcity of future supply of allowances: with the
forward looking behaviour described above, prices respond more to the tightness of
supply relative to demand in the medium/long term instead of the short term. As
such, temporary shocks limited to a given year has limited impact on modelling
results. Meanwhile, changes in overall EU ETS policy ambition can significantly
affect the price path.
 The presence of an MSR tightens future auction supply, increasing abatement and
prices: while different MSR designs vary in the timing and size of intakes, they all
significantly reduce the supply of allowances as given from the cap.
 Modelling at an annual resolution does not examine short term volatility: the model is
not designed to investigate short term shocks or changes to the system.
 Results are not comparable to energy system models due to fundamentally different
approaches to modelling.
The regulated phase out of coal power
9.1.4.1
The regulated phase out of coal power represents a significant potential source of excess
EUAs and reduction in EUA demand. We have used estimates from Carbon Market
Watch to estimate the size of this downwards shift. However, we have estimated that
around half of the emissions reduction associated with the coal phase will make its way
into baseline emissions, with the additional reduction included as potential shocks.
The estimated magnitude of the EU coal phase out is used to inform:
 The anticipated reduction in EUA demand. The coal phase out is expected to
reduce EUA demand by up to 277 m by 2030. As half of this reduction is built
into baseline emissions, the shock size used for an anticipated reduction in EUA
demand increases from 27 m in 2021 to reach 138.5 m by 2030. This is expected
to be larger than other sources of anticipated reduction in EUA demand seemed
likely, such as other policy measures or significant progress in industrial
abatement technologies.
 The induced holdings shock. The coal phase out is expected to be the largest
source of potential induced holdings. The shock used assumes that the EUAs
associated with Germany’s coal phase out commitments between 2021 and 2025
are held, without cancellation. This leads to around 630 m allowances being held
by non-compliance entities from 2025, driving up TNAC and prices in the ETS.
However, there are various potential sources of induced holdings, for instance
long term investors may benefit from holding a large share of available
allowances or environmental NGOs may choose to hold allowances as a means of
driving additional climate action.
80
The impact of COVID-19 on emissions
9.1.4.2
The COVID-19 shock represented the largest shock to economic and environmental
outcomes in recent years. To estimate the magnitude of the shock, we have analysed
2020 estimates of emissions in covered sectors under scenarios with and without the
COVID impact, taken from the EU’s Price-Induced Market Equilibrium System
(PRIMES) energy modelling. The gives an estimate of the size of the effect of about 155
MtCO2e in 2020.
The estimate magnitude of the COVID-19 shock is used to inform:
Baseline emissions trajectory. COVID-19 has resulted in a significant downturn in
economic activity and emissions since the start of the pandemic in 2020. It is unclear
whether this shock is temporary or will have a long-lasting impact on emissions. We
assume that the shock reduces baseline emissions by 155 MtCO2e in 2020, 78 MtCO2e in
2021 and 39 MtCO2e from 2022 onwards, signifying some level of persistence in the
emissions reductions associated with the shock.
Unexpected increases or decreases in EU allowance demand. As a historically
unprecedented shock, this represents a large tail risk to EUA demand. This is expected to
be larger than other short-term impacts on emissions, such as changes in abatement costs
due to technological progress or a shift in nuclear usage. The 155 Mt emissions impact is
used to estimate both an increase and a decrease in EUA demand, before returning to
previous emissions levels to analyse the performance of the MSR under a temporary
shock.
Limitations of the approach
9.1.4.3
Modelling the MSR is a challenging exercise, and there is limited literature pertaining to
its operation that is of sufficient detail to provide confidence in projecting its operation
under different policies designs and market circumstances. The model utilized is the best
available for considering the parameterisation of the MSR, based on an extensive review
of the literature available. Nonetheless it has several limitations that mean that its results
must be interpreted with care. For instance, the model uses a relatively simple
representation of abatement costs, results are contingent on assumptions around
emissions in a counterfactual scenario without a carbon price, and it is unable to depict
heterogeneous firm behaviour. While these are standard assumptions in modelling
secondary markets, it is still important to focus on relative results rather than absolute
values when interpreting results.
The appropriate parameters for the MSR remain a function of the behaviour of
participants in the EU allowance market, which may change over this period. To support
the robust functioning of the MSR in the case of unexpected events or changes in the
policy context, the IA also considers a range of scenarios for future exogenous market
shocks, induced imbalances that could be exacerbated by the MSR design, and policy
81
changes that could affect its operation. However, the sensitivity of the MSR’s operation
to these changing circumstances may mean that future reviews of its operation are needed
to ensure it remains fit for purpose.
There remains uncertainty regarding several aspects of market response that would are
relevant for MSR design. For instance, the likely hedging behaviour of market
participants, and its implications for the setting of thresholds remains uncertain. Hedging
behaviour has changed over time in response to the decarbonisation of the electricity
sector, the recent increase in prices in the EU ETS, and the evolution of net holding
positions of industrial installations. Significant uncertainty also remains regarding
potential policy changes that could change the composition of participants in the EU ETS
and their responses to market signals. For instance, the expansion of the EU ETS to new
sectors will bring new participants into the market and while educated assumptions
regarding their likely hedging demand is possible, they remain uncertain. Similarly, the
potential removal of free allocations from certain industrial sectors is also likely to
change the behaviour of facilities and companies operating in these sectors, with likely
increased hedging, the scale of which is difficult to predict.
Models used for carbon leakage analysis
9.2
9.2.1 Calculation of free allocation
To model the availability of free allowances in Phase 4 of the EU ETS, the following
two-step approach was used:
1) Calculation of preliminary free allocation: The allocation of free allowances
to individual installations was estimated based on the free allocation formula
that takes into account the benchmark, the historic activity level and the
carbon leakage exposure factor (CLEF) (see Annex 9).
2) Calculation of final free allocation: The preliminary free allocation was then
compared with the total amount available for free allocation. This amount is
determined by the ETS cap trajectory, the mandatory auction share and the
amount earmarked for the innovation fund. If the preliminary free allocation
exceeded the total amount available for free allocation in a given year, then a
cross-sectoral correction factor (CSCF) was applied (see Annex 9).
The scope of the estimation of free allocation in phase 4 includes all ETS countries (i.e.
EU-27 and EEA, excluding the United Kingdom).
The free allocation of allowances for phase 4 was modelled based on a ‘bottom-up’
approach using data from the preliminary national implementation measures (NIMs) at
sub-installation level. These data had been submitted to the Commission by the
competent authorities in the ETS countries by 30 September 2019.
82
Furthermore, a number of assumptions were made for the modelling:
 For the period from 2021 to 2025, the updated benchmark values from
Commission Implementing Regulation (EU) 2021/447 were used.
For the period from 2026 to 2030, the benchmark values were estimated using the
same annual update rates that were used to determine the revised benchmark
values for the period from 2021 to 2025. For example, annual update rates of
0.2%, 0.9% and 1.6% thus meant that the benchmark values for the period from
2026 to 2030 would decrease by 4%, 18% and 32%, respectively, compared to
the benchmark values used in phase 3. The latter values reflect the 20-year period
between 2007/2008, the reference year for the benchmarks used in phase 3, and
2027/2028. Therefore, the model assumed a continued improvement in the
performance of the best installations.
 The free allocation for process emissions not covered by product benchmarks was
set at 0.97 EUAs/t CO2 equivalents.
 The activity levels were estimated based on the reported average levels for 2017
and 2018 which were then extrapolated year by year using annual average growth
rates at NACE 4-digit sector. The annual average growth rates were calculated
from activity level data given in thousand tonnes obtained from PRIMES
modelling (MIX scenario with -55% overall ambition level). PRIMES data for the
years 2015, 2020, 2025 were used to calculate a weighted average growth rate for
the period from 2019 to 2025. The calculated rates took into consideration the
2020 drop in activity levels due to the COVID-19 crisis. PRIMES data for 2026
and 2030 were used to calculate an average annual growth rate for the period
from 2026 to 2030. As a consequence of the averaging, activity levels for the year
2020 are largely overestimated while the activity levels of all other year are
slightly underestimated. These two effects compensate each other.
For district heating, the projected changes in emissions calculated from PRIMES
data were taken as a proxy for the yearly changes in activity levels. For refineries,
no activity level data were obtained from PRIMES modelling. For this sector, a
constant production was assumed. Finally, PRIMES activity categories were
matched to NACE categories. The assumed annual growth rates are given in
Table 36.
Table 41: Assumed annual average growth rates for the modelling of free allocation
Sector Subsector NACE codes
Assumed annual
average growth rates
2019 –
2025
2026 –
2030
Cement — 23.51 0.44% 1.04%
Lime — 23.52 0.36% 1.09%
Refineries — 19.20 0.00% 0.00%
Iron and
steel
— 24.10 -0.35% 0.37%
Fertilisers — 20.15 0.13% 1.50%
Ceramics — 23.31 0.73% 1.54%
Non-ferrous
metals
Precious metals and others 24.41, 24.45 0.80% 0.51%
Aluminium 24.42 1.00% 0.55%
Lead, zinc and tin 24.43 0.47% 0.21%
Copper 24.44 0.09% 0.35%
Chemicals
Industrial gases, other
inorganic basic chemicals,
other organic basic chemicals
20.11, 20.13,
20.14
0.13% 1.50%
Dyes and pigments, plastics in
primary forms, synthetic
rubber in primary form
20.12, 20.16,
20.17
2.08% 0.86%
Pulp and
paper
Pulp 17.11 -0.15% 1.26%
Paper 17.12 0.41% 1.18%
Glass —
23.11, 23.12,
23.13, 23.14,
23.19
-0.11% 0.83%
Other
industry
— Various 1.10% 1.51%
District
heating
— 35.30 -2.99% -12.7%
Source: Calculations based on PRIMES activity data.
 Following Regulation (EU) 2019/1842, the historic activity level of an
installation for the purposes of free allocation was adjusted when the rolling
average of the activity levels of two consecutive years differed by more than 15%
compared to the historical activity level of the period 2014 to 2018. The
implementation of this rule adjusted the preliminary allocation within the
modelling for some installations in the period from 2021 to 2025 allocation. This
resulted in an overall increase in preliminary allocation to reflect an increase in
production over the time period compared to the historical activity level in the
period from 2014 to 2018. However, there was no adjustment of the preliminary
allocation in the period from 2026 to 2030 for any installation, as the updated
historical activity level for the period from 2019 to 2023 was estimated based on
the annual growth rates from PRIMES that did not exceed 2%.
84
 For product benchmarks that include an adjustment for the exchangeability of
fuels and electricity, a factor was derived from the NIMs dataset for the period
2014 to 2018. This factor represents the weighted average ratio of direct to total
emissions (weighting by activity level) (Table 33).
Table 42: Factors used for the adjustment of the exchangeability of fuel and electricity
for the modelling of free allocation
Product benchmark
Factors for the adjustment
of the exchangeability of
fuel and electricity
Refinery products 0.897
EAF carbon steel 0.248
EAF high alloy steel 0.303
Iron casting 0.881
Mineral wool 0.726
Plasterboard 0.98
Carbon black 0.971
Ammonia 0.963
Steam cracking 0.933
Aromatics 0.878
Styrene 0.935
Ethylene oxide / ethylene
glycol
0.821
Hydrogen 0.957
Synthesis gas (syngas) 0.844
Source: Calculations based on NIMs data.
9.2.2 Calculation of projected emissions
The amounts of preliminary and final free allocation of the different sectors were then
compared to the projected emissions.
Some corrections to the assignment of verified emissions to sectors were made so that
free allocation and emissions were comparable with one another. This was necessary as
emissions may be underestimated when related GHGs are emitted in other ETS sectors.
The corrections concerned the following:
 All sectors: Electricity and heat transfers
Free allocation based on product benchmark refers to the product produced. No
free allocation is granted to electricity generation. Therefore, emissions related to
electricity produced within the installation were deducted.
85
As opposed to the rule for electricity, installations do receive free allocation for
heat produced within the same installation but also if imported from other ETS
installations and/or exported for district heating purposes or non-ETS entities.
Therefore, emissions related to heat flows that are relevant for free allocation
were added in the case of imports from other ETS installations and deducted
when exported to ETS installations. Emission data originated from the NIMs.
 Iron and steel: Waste gas transfers
Given that some steel works transfer their waste gases to power plants that
generate electricity for the grid, emissions caused by the combustion of these
waste gases were added. The amount of emissions that were added relates to the
net export of waste gases to installations that are outside of the NACE
code 24.10. When the emissions related to the waste gas transfers were reported,
this information was used. When only the energy content of the waste gases was
reported, average emission factors were used to calculate the emissions. The
average emission factors were based on information in the NIMs from
installations that reported both emissions and energy content. The emission factor
that was calculated for each year was weighted by volume to account for
installations producing different waste gases (i.e. blast furnace gas, basic oxygen
furnace gas and coke oven gas), as the emission factors of these waste gases
differ.
Given that electricity generation does not receive free allocation, a further
deduction was made to this emission factor (that was equivalent to natural gas) so
that any waste gas used for electricity production did not receive free allowances.
 Pulp and paper: Biomass use
The pulp and paper sector is characterised by a large share of biomass input as
well as substantial electricity exports. Following the standard rule outlined above
would result in deducting more emissions than would be realistic. Therefore, a
deviating approach was adopted: Whereas for the other sectors implicitly a
natural gas emission factor was assumed, in the pulp and paper sector the share of
biomass emissions in total emissions of the sector (both stemming from fossil
fuels and biomass) was calculated based on NIMs information. In the pulp sector
(NACE code 17.11) the share of biomass was 94% on average and in the paper
sector (NACE code 17.12) the share was 57%. This fraction was deducted from
emissions related to electricity generation within the sector.
The deduction of verified emissions would have been higher if it had been
assumed that all onsite electricity was produced from natural gas. Alternatively,
no emissions would have been deducted for onsite electricity generation if
biomass was the only fuel input. The fuel input from biomass is a key variable
influencing verified emissions and this makes the results for the sector less certain
than the results of the other sectors assessed.
86
The majority of the corrections to the assignment of verified emissions at sector level
were within 10% of the average value from the EU Transaction Log (EUTL) (Figure 16).
Figure 22: Correction to the assignment of verified emissions at sector level for onsite
electricity generation and heat/waste gas transfers (average for 2014 to 2018)
Source: Calculations based on NIMs data.
In addition to the corrections for the assignment of emissions, assumptions were made on
the future development of the emissions for the period from 2021 to 2030, taking into
consideration activity level changes and GHG efficiency improvements:
 First, it was assumed that emission levels for each NACE 4-digit change at the
same rate as the annual average growth rate derived from the PRIMES modelling.
 Second, it was assumed that, on top, annual GHG emission factors per sector
improve according to Table 34 given below. The abatement potential per sector is
based on data from the Industrial Innovation study prepared by ICF and
87
Fraunhofer ISI86
. For the chemicals and fertilisers sector, a study prepared by
DECHEMA87
for low-carbon energy and feedstock for the European chemical
industry was used. For refineries, a study by CONCAWE was also used88
. In
addition, data gathered in the National Implementation Measures (NIMs)
submitted by MS to the Commission in the context of the ETS implementation
was also used for estimating improvement potentials by comparing the best
installations in the sector with the rest.
Table 43: Assumed annual average improvement in the GHG emission efficiencies per
sector for the modelling of emissions
Sector Annual average GHG emission improvement
Cement 1.0%
Lime 1.0%
Refineries 1.5%
Iron and steel 1.0%
Fertilisers 2.0%
Ceramics 1.0%
Non-ferrous metals 1.5%
Chemicals 1.0%
Pulp and paper 2.0%
Glass 1.0%
Source: Commission assumptions based on Fraunhofer Institut, ICF and DECHEMA studies.
 Cement: The main potentials identified up to 2030 are linked to the use of low-
carbon cement (using less limestone and therefore reducing process emissions)
and to the reduction of the clinker to cement ratio.
 Lime: Abatement options are the use of best available techniques (BAT) as well
as carbon capture and storage (CCS). A conservative assumption has been taken
and it has been assumed that CCS will not play a major role in the abatement of
the sector up to 2030.
 Refineries: The main abatement options identified are increases in process
efficiency and fuel switching. CCS and renewable hydrogen will also play a role
86
ICF and Fraunhofer ISI: Industrial innovation. Pathways to deep decarbonisation of Industry, 2019.
87
DECHEMA: Low-carbon energy and feedstock for the European chemical industry, 2017.
88
Concawe. CO2 reduction technologies. Opportunities within the EU refining system (2030/2050).
Qualitative & Quantitative assessment for the production of conventional fossil fuels, 2019.
88
in the future, but have been disregarded to make a conservative assumption up to
2030.
 Iron and steel: The applied improvement does not consider a shift from primary
to secondary steel production. A 1% annual improvement rate is also in line with
the potential identified based on NIMs data if highly emitting plants were to
improve to a level between the median in the sector and the benchmarks
applicable from 2021 to 2025.
 Fertilisers: Potentials still remain by using BAT options, for instance by abating
nitrous oxide emissions in the nitric acid plants not yet having done it in the same
order of magnitude as the best performers or by improving the efficiency of
highly emitting ammonia plants to levels comparable with the top performers in
the ETS. Initial projects regarding the use of hydrogen produced via electrolysis
using renewable electricity are being implemented and could add some potential
up to 2030.
 Ceramics: The main option identified is the use of BAT which would result in
emission reductions of approximately 0.75% per year, which is in line with the
data received as part of the NIMs. Other technologies deploying a little later (so
lower uptake rates), but with a small contribution, are electrification of furnaces
and microwave / vacuum drying, which could add another 0.25%.
 Non-ferrous metals: The main metals in terms of ETS coverage are aluminium
and copper. The technologies used are different. The abatement potentials for
reducing direct emissions in aluminium production are limited, as the use of inert
electrodes seems to be limited until 2030. The reduction of emissions in copper
production seems to be relatively easier as this is linked to flash smelting and
waste heat recovery.
 Chemicals: Most of the options identified (used of biomethanol, hydrogen-based
methanol, bioethylene) show quite high abatement costs. Up to 2030, the options
with highest improvement potentials are the use of BAT. The reduction of
emissions to levels similar to those of benchmark-setting installations is also
identified as having a relevant abatement potential based on NIMs data.
 Pulp and paper: Only options increasing the efficiency of plants have been
considered. Further use of biomass has not been included in the identified
abatement options. The options identified are the use of BAT, improved drying
techniques, enzymatic pre-treatment and better waste heat integration in the paper
mill.
 Glass: The main improvement options identified are oxy-fuel combustion or
switching to electricity, in addition to some obvious gains such as the phase-out
of fuel oil and coal. Other options identified include the use of biomethane and
the use of hydrogen, but their deployment up to 2030 is more doubtful and they
were thus not considered.
9.2.3 Calculation of economic impacts
The outputs from the previous models to determine the free allocation and the projected
emissions were then used as input data to determine the economic impacts. The potential
carbon costs were calculated for 10 ETS sectors (i.e. cement, lime, refineries, iron and
89
steel, fertilisers, ceramics, non-ferrous metals, chemicals, pulp and paper, glass) by
multiplying the EU allowance price with the difference between projected emissions and
free allocation.
The following assumptions were made:
 Net present value calculation: Future costs were estimated using the net present
value (NPV) for all costs to be incurred between 2021 and 2030. A discount rate
of 4% was used.
 Deflation: All costs were expressed in 2015 Euros. Data expressed in other
monetary units were converted to 2015 Euros, using the indices shown in Table
35.
Table 44: Deflation indices used for the modelling of carbon costs
Year
Deflation
index
2015 1
2016 0.991
2017 0.980
2018 0.967
2019 0.950
2020 0.936
Source: Calculations based on gross domestic product (GDP) deflators of the European Central Bank for
the Eurozone.
 Table 40 shows the EUA prices assumed, in line with Section 5.2.1.
Table 45. EUA prices used for the modelling of carbon costs
Year
EUA price in the given year
(in EUR)
Baseline
(-43% overall ambition)
Strengthened cap
(-55% overall ambition)
2021 26.0 42.0
2022 26.0 43.5
2023 26.5 45.0
2024 27.0 46.5
2025 27.0 48.0
2026 28.0 50.0
2027 28.5 53.0
2028 29.5 55.5
2029 30.0 57.5
2030 31.0 60.0
Source: Commission assumptions.
 Average data for the period from 2016 to 2018 from Eurostat’s Structural
Business Statistics (SBS) were then used to calculate the net direct carbon costs
as % of value added, as % of production value and as % of EBITDA. EBITDA
was calculated as value added at factor cost minus personnel costs. For the
calculated ratios, the NPV of the ETS costs in the period from 2021 to 2030 was
calculated (to take the positive trend in the ETS price into account). This value
was then divided by 10 years, to provide an annual average of costs that is better
relatable to current annual values, but it should be noted that in reality the costs
will vary over time.
Models used for the extension of emissions trading or alternatives for
9.3
maritime emissions
The PRIMES-Maritime module has been used to assess the impact of the various
maritime policy options. It is a specific sub-module of the PRIMES-TREMOVE
transport and the overall PRIMES energy systems model aiming to enhance the
representation of the maritime sector within the energy- economy-environment modelling
nexus. The module, which can run in stand-alone and/ or linked mode with PRIMES,
produces long-term energy and emission projections, until 2050.
The coverage of the module includes the European intra-EU maritime sector as well as
the extra-EU maritime shipping. It covers both freight and passenger international
maritime. It considers the transactions (bilateral trade by product type) of the EU MS
with non-EU countries and aggregates these countries in regions. Several types and sizes
of vessels are considered.
91
PRIMES-Maritime features a modular approach based on the demand and the supply
modules. The demand module projects maritime activity for each EU MS by type of
cargo and by corresponding partner. Econometric functions correlate demand for
maritime transport services with economic indicators considered as demand drivers,
including GDP, trade of energy commodities (oil, coal, LNG), trade of non-energy
commodities, international fuel prices, etc. The supply module simulates a representative
operator controlling the EU fleet, who offers the requested maritime transport services.
The operator of the fleet decides the allocation of the vessels activity to the various
markets (representing the different EU MS) where different regulatory regimes may
apply (e.g. environmental zones). The fleet of vessels disaggregated into several
categories is specific to cargo types. PRIMES-Maritime utilises a stock-flow relationship
to simulate the evolution of the fleet of vessels throughout the projection period and the
purchasing of new vessels.
PRIMES-Maritime solves a market equilibrium problem, where demand and supply
interact dynamically in each consecutive time period, influenced by a variety of
exogenous policy variables, notably fuel standards, pricing signals (e.g. ETS),
environmental and efficiency/operational regulations and others. The PRIMES-Maritime
model projects energy consumption by fuel type and purpose as well as CO2, methane,
nitrous oxide and other pollutant emissions. The model includes projection of costs, such
as capital, fuel, fixed and variable costs, projection of investment expenditures in new
vessels and negative externalities from air pollution.
The module considers the handling of a variety of fuels such as fossil, biofuels
(bioheavy, biodiesel, bio LNG), synthetic fuels (synthetic diesel, fuel oil and gas, e-
ammonia and e-methanol) produced from renewable electricity, hydrogen (mainly for use
in fuel cell vessels) and electricity in electric vessels. Environmental regulation, fuel
blending mandates, GHG emission reduction targets, pricing signals and policies
increasing the availability of fuel supply and supporting the alternative fuel infrastructure
are identified as drivers, along fuel costs, for the penetration of new fuels. As the model
is dynamic and handles vessel vintages, capital turnover is explicit in the model
influencing the pace of fuel and vessel substitution.
PRIMES-Maritime, being part of the overall PRIMES model, is calibrated to the
EUROSTAT energy balances and transport activity; hence the associated CO2 emissions
are assumed to derive from the combustion of these fuel quantities. The model has been
adapted to reflect allocation of CO2 emissions into intra-EEA, extra-EEA and at berth, in
line with data from the EU maritime transport MRV regulation.
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Annex 5: DESIGN ELEMENTS FOR ETS EXTENSION TO
BUILDINGS AND ROAD TRANSPORT OR TO ALL FUELS
EMISSIONS
Main features are referred to Section 5.2.3 and 6.3 of the impact assessment.
10 CAP SETTING AND LINEAR REDUCTION FACTOR
The cap is the maximum absolute quantity of GHGs that can be emitted by the covered
activities to ensure the emission reduction target. It corresponds to the number of
allowances put in circulation over a trading period. For the current EU ETS, a common
EU-wide cap applies. Extension to emissions trading to the road transport and buildings
sectors or all fossil fuel combustion outside the ETS through a separate ETS will require
to set a EU-wide cap for those specific sectors.
The cap and the LRF of the new created ETS would not impact, in a first stage, the
ambition and cap setting for the current EU ETS sectors.
For the impact assessment calculations it is assumed that the new ETS starts with MRV
requirements as early as possible, with complete MRV data being available in 2025 and a
cap applying as from 2026. It is important that the MRV system is working properly
before the operations on this economically large new carbon market start. Applying the
cap and corresponding surrender obligations only from the second full year would allow
that problems emerging in the first submission year of verified data can be sorted out.
This would increase the robustness of the system and would not harm investments in the
necessary emission reductions, as actors know upfront the cap they need to achieve and
anticipation effects can be expected. Other policies like the Effort Sharing Regulation,
energy policies and CO2 vehicle standards apply in the years not yet covered by the cap.
In the absence of verified data for the new sectors, the initial cap and the linear reduction
factor (LRF) necessary to achieve the contribution of the new ETS to the 2030 target
could be calculated using Effort Sharing Regulation rules and data currently applying to
those sectors for determining the starting point of the trajectory defining the cap and the
LRF. Sectoral data from the EU greenhouse gas emission inventory has been recently
comprehensively reviewed for the years 2005 and 2016-2018 as part of the
implementation of the Effort Sharing Regulation. For this impact assessment it is
assumed that the LRF calculation would start from a hypothetical 2024 cap calculated
using the comprehensively reviewed average 2016-18 emissions reported under ESR for
the two sectors (inventory sectors 1.A.3.b Road transport, 1.A.4a Commercial/
Institutional and 1.A.4b Residential) and assuming up to 2024 a trajectory of emission
reductions in line with the current ESR target (-30% by 2030). The end point would be
the cost-effective emission reductions for 2030 as resulting from the MIX scenario, as
illustrated in Figure 7 for option EXT1. The resulting EXT1 LRF is 5.15%. The resulting
93
new ETS ambition level in the first years 2026 and 2027 will be still relatively moderate,
allowing for a smooth start of the system.
Two small adjustments to the inventory data referred are necessary to more accurately
reflect the emission scope of the EXT1. On the one hand, a small amount of heating
emissions reported under inventory sector 1.A.4b for commercial buildings is already
covered by the existing ETS. Based on data reported by MS on the consistency of
inventory data and ETS verified emissions for the years 2016 to 201889
, this can be
estimated as 2.172 Mt, which need to be deducted for the calculation of the cap. On the
other hand, as explained in further detail in Section 14 of this annex, it is appropriate to
cover fossil fuel supplies to small CHP and heat plants providing heat to the district
heating network, that are excluded from the existing ETS. Based on inventory and
Eurostat data for power and heat emissions and the district heating emissions covered by
the existing ETS, this can be estimated as 6.5 Mt90
, representing less than 10% of district
heating emissions. For the cap calculation, the 6.5 Mt need to be added.
Once there is sufficiently accurate verified data on the basis of at least two and ideally
three years of MRV, the cap would be recalculated in 2028 on the basis of the actual
emissions as ascertained through MRV and in case of significant deviations between
2025 inventory data and 2025 cap or large deviations between MRV data for 2025 and
inventory data for 2025 the LRF would be adjusted. Rebasing the cap on at least two
years of MRV data is important given possible temporary effects, such as of COVID and
weather conditions, which may distort the representative emissions from these sectors.
89
According to Article 7(1)(k) of Regulation (EU) No 525/2013 implemented by Article 10 and Annex V
of Commission Implementing Regulation (EU) No 749/2014, all Member States have reported on
consistency of reported emissions with data from the emissions trading system where relevant, including
for sector 1.A.4a Commercial/Institutional. AT, BE, DE, DK, EE, EL, ES, FI, FR, HU, IR, IT, LT, LV,
NL, PL and SK have reported a small share of ETS emissions in this sector between 2016 and 2018. The
ETS emissions reported by Member States are aggregated to an EU-wide estimate.
90
Data on emissions from the non-ETS district heating sector are not readily available and are estimated
following the methodology set out in ICF et al. (2020) and based on data from the EU GHG emission
inventory, Eurostat and the European Energy Agency. Inventory emissions for “public electricity and
heat production” (category 1.A.1.a) cover both heat and electricity generation. To derive separate
emission levels for heat and electricity, the emissions attributable to electricity generation are calculated
based on the carbon intensity factor of electricity generation and the gross electricity generation from
the energy balances (excluding autoproducers in line with the emissions data from category 1.A.1.a).
Accordingly, emissions attributable to derived heat are calculated based on the difference between
“public electricity and heat production” and the derived emissions from electricity generation.
Emissions from ETS-covered district heating (estimated at 76 Mt for average 2016 to 2018 emissions)
are subtracted from total heat emissions to calculate the residual non-ETS district heating emissions.
The resulting estimates are refined based on a comparison of reported heat consumption in buildings and
reported activity levels under the ETS. Non-ETS district heating emissions are scaled down for Member
States with negligible district heating or where the available information suggests that district heating is
fully covered by the ETS. The estimates on Member State level are aggregated to an EU-wide estimate.
94
Figure 23: Illustrating cap setting at the example of option EXT1
Source: Calculations of Commission services
The approach, the results and the underpinning data are presented in Table 41.
Table 46: Overview of relevant data for LRF calculation for options EXT1 and EXT2
EXT1 EXT2
Average 2016-18 emissions 1225.87 Mt 1450,97 Mt
2024 hypothetical cap applying current ESR
rules to these emissions
1105.40 Mt 1306.81 Mt
MIX emissions 2030 763.99 Mt 903.67 Mt
Resulting LRF (compared to 2024) 5.15% 5.14%
2025 value of cap trajectory to 2030 1048.50 Mt 1239.62 Mt
LRF compared to 2025 5.43% 5.42%
Source: Calculations of Commission services
11 MARKET STABILITY FOR THE NEW ETS
In view of the importance of a clear and stable carbon price signal to foster investments,
several features which have contributed to reinforcing the stability of the current carbon
market and in addressing market imbalances can also be used for the new ETS system.
Firstly, the new ETS system should be devised to ensure a smooth start. There is the need
for the regulated entities to hedge and/or buy emission allowances in advance in order to
95
mitigate their economic risk under the new system. Potentially disorderly purchasing
patterns at the start should be avoided.
This can be addressed by auctioning a higher amount of allowances than the cap in the
first year of the start of the system. This additional amount would be deducted from the
auctioning volumes in later years in order to preserve environmental integrity, as was the
case for the “early auctions” at the start of phase 3 of the existing ETS. This additional
volume needed to “kick-start” the system would be determined in consultation with
stakeholders, in order to consider all the relevant demand and supply factors and the
uncertainties of these factors.
Secondly, a Market Stability Reserve could be introduced for the new ETS from the
beginning and could operate in a very similar way to the MSR in the existing ETS. As
discussed in the previous section, in the absence of verified data for the new sectors,
there is a potential risk that the cap may be set too high (as in 2005-7 and 2008-12
phases) or too low. With a too high cap, the surplus of allowances could lead to a too
weak price signal. With a too low cap a shortage of allowances could entail a too strong
price signal, which could lead to challenges in terms of energy poverty and political
acceptance of the system (even with distributional solutions).
Therefore a market stability instrument could be introduced91
. Given the possible
prospect of a future integration of the EU ETS and the new ETS, it would make sense
that this market stability instrument is designed along the same lines as the market
stability reserve under the EU ETS, including the principle of the free setting of the
carbon price by the market, and with features adapted to the new sectors. The initial
thresholds could be set based on estimates of hedging demand in the new sectors, which
are however difficult to anticipate at this stage92
and which would therefore need to be
improved later. Similar to the existing MSR, the thresholds could be volume-based (e.g.
upper and lower thresholds of 440 and 210 million allowances respectively). The
quantity of allowances to be released from the reserve, if triggered, could be aligned with
the rules for the current ETS (i.e. 100 million). As the new ETS would not start with a
91
With respect to an analysis of the German national ETS: see IW, page 28-29: “In order to containing
price volatility, the ability to plan over the long term is important if a system should trigger large
investments in more efficient technology and processes. Drastic price jumps should be avoided for this
reason. A means to achieve this is the creation of certificate reserves that can be released into the market
to smooth out price volatility. This approach contradicts the idea of controlling through annual targets
but is in conformity with the recognition that it is important to meet a running emissions budget over
multiple years.”
92
The hedging needs in the new sectors are quite uncertain. It is not possible at this stage to predict the
likely scale of hedging from these sectors. Factors that are expected to influence the likely hedging
behaviour include: the nature of the actors involved (level of sophistication, scale of emissions and
liabilities, public of private nature, their contracting arrangements and degree to which they forward
trade, the actors’ credit strength and general level of confidence in the market.
96
surplus, the quantity to be taken out from the auctioning volumes if the total number of
allowances in circulation exceeds the maximum threshold could the same as in case of a
release (and not defined a percentage of the outstanding volume as in the current ETS).
Even though price-based triggers would theoretically be a possibility, these would bring a
fundamental change to the EU ETS. In addition, as the IA for the existing ETS had
found, such triggers could be more at risk of market manipulation than volume-triggers,
notably because the EU carbon market is dominated by derivatives93
.
Thirdly, the MSR in the new ETS could initially be endowed with an initial holding of
allowances which may be used to help mitigate the risk of starting the new emissions
trading with a too low Union-wide cap that would not be sufficient to cover the
emissions of the sectors of buildings and road transport. Another justification is the need
for a reserve to mitigate the risk of excessive price increases, which could be caused by
information that emission reductions materialise more slowly than projected or by factors
other than market fundamentals (see below).
Fourthly, an additional provision could address measures to be taken in the event of
excessive short term price fluctuation in the carbon market. Similarly to the market
stability mechanism, allowances would be released from the reserve if certain conditions
are met. However, the triggering conditions for the new mechanism would not be
volume-based as the MSR, but instead based on differences in price levels between two
periods. In addition, this mechanism would be reactive in order to address excessive price
increases as soon as possible.
12 POINT OF REGULATION
The point of regulation is a key issue in establishing the new ETS as it refers to the
obligated party or the entity to whom the emissions are attributed. In the current EU ETS,
the point of regulation are industrial and energy installations, as well as aircraft operators,
i.e. the emitters themselves. Such approach is not feasible for the new ETS given the
large number of small emitters in the road transport and buildings sectors under EXT1
(many of which are private persons) and also in the other sectors under option EXT2. An
upstream approach is more adequate, whereby not the emitters themselves but entities
further up the supply chain, significantly smaller in number than the emitters, are
regulated. The act that triggers a compliance obligation under the new ETS would then
be the putting on the market of fuels for combustion in the covered sectors. As in the
current EU ETS, regulated entities would need to have a permit under the new ETS for
the activity that triggers a compliance obligation.
93
Commission staff working document SWD(2014)17 final.
97
To determine the precise point of regulation in the new ETS, several criteria would need
to be considered. The first one would be the technical feasibility, that is, the regulated
entities must be able to monitor and report per fuel type the fuel volumes and information
on its composition (on the basis of which emissions will be determined) and know, to the
extent necessary, the end use(r) of the fuel. Other criteria to establish the point of
regulation are that the carbon price which provides the incentive to reduce emissions
can be passed on to consumers and that the administrative costs are proportional to the
reduction effect. It is also necessary to consider interactions and consistency with
existing measures deriving from the EU legislative framework on energy (e.g. Article 7
of the Energy Efficiency Directive 2012/27/EU as amended by Directive 2018/2002 on
energy efficiency).
Because of the different supply chains, the analysis of the most appropriate point of
regulation must be done separately for each of the different types of fossil fuel used
(petroleum products, gas and coal). When establishing the point of regulation, it has to be
kept in mind that the model needs to fit the different EU MS.
Technical feasibility
12.1
Regulated entities in an upstream system must be able to monitor and report accurately,
per type of fuel, the fuel volumes put on the market. In option EXT1 (an emissions
trading system for road transport and buildings), it has to be ensured that the regulated
entity is able to distinguish energy flows for road transport and buildings from other
energy flows. The regulated entity therefore needs to know the end-use of the fuel, that
is, whether the fuel is used in road transport and/or it is used in buildings. In option
EXT2 this sectoral distinction is not necessary. In both EXT1 and EXT2 options,
emissions already covered by the EU ETS fall outside the scope of the new ETS. In order
to avoid double coverage, in both options, the regulated entity therefore should be able to
distinguish fuels for use by installations already covered by the EU ETS from those to be
used by entities not covered by the EU ETS. Otherwise alternative solutions (such as
compensation mechanisms) should be foreseen. It is also useful to look at how the point
of regulation is set in other legislative acts concerning fossil fuel supplies:
In the Fuel Quality Directive, fuel suppliers are identified as regulated entities. Suppliers
are identified as “the entity responsible for passing fuel or energy through an excise duty
point or, if no excise is due, any other relevant entity designated by a Member State”.
The Renewable Energy Directive makes MS responsible for achieving targets for the
supply of renewable fuels. MS are required to set obligations on suppliers to deliver an
overall share of fuels from renewable sources. A ‘fuel supplier’ is defined as “an entity
supplying fuel to the market that is responsible for passing fuel through an excise duty
point or, in the case of electricity or where no excise is due or where duly justified, any
other relevant entity designated by a Member State”.
Under Article 7 EED concerning energy efficiency obligation schemes, MS are required
to designate, on the basis of objective and non-discriminatory criteria, obligated parties
98
amongst energy distributors and/or retail energy sales companies operating in their
territory and may include transport fuel distributors or transport fuel retailers. Most MS
have chosen to obligate energy suppliers. However, in Denmark and Italy distribution
companies are obligated, while in Portugal, the obligation is held by a non-profit private
entity with a public function. Several MS employ a threshold above which energy
companies are obligated.
Regulating at the point of the excise duty would in principle be beneficial because of the
already existing monitoring and reporting mechanisms for tax purposes 94
.
In the case of oil, there is a harmonized excise duty system that applies in all MS: excise
duty on oil is levied in tax warehouses in the MS and the point of levying the tax on oil is
the same in all MS. A tax warehouse, under Directive EU 2008/118 (and new Council
Directive (EU) 2020/262), is a term for a premise approved under legislation of the MS
in which the premises are located for the production, processing, holding, receipt or
despatch of excise goods under duty suspension arrangements. Each tax warehouse is
associated with an authorised warehouse keeper who is responsible for the management
of the tax warehouse. Different tax warehouses can be kept by one and the same tax
warehouse keeper. Since tax warehouses are storage premises where excise goods are
held, processed or repackaged, they can be owned by entities along the supply chain,
including refineries and fuel suppliers. 95
Tax warehouses represent the advantage that all transport and heating oil (EXT1) and in
general all oil for combustion (EXT2) pass through them. Moreover, data monitoring is
already available at this stage of the supply chain which is used for tax reasons (energy
tax) and for the excise duty point. The accounting records are subject to strict
requirements and subject to supervision by the tax authorities. There would therefore be a
solid and reliable basis for any monitoring and reporting requirement under the new ETS.
As regards the need under option EXT1 to distinguish oil for the road transport and
buildings sector, it is worth noting that, as the tax rates for the use of oil in transport or
for heating in buildings differ in most MS96
, tax warehouse operators usually know the
94
For a detailed analysis, see ICF et al. (2020), p.239.
95
For more information, see ICF et al.(2020), p.143. Sometimes excise duties are due by registered
consignees or other authorised persons. However, many of the liquid fuels released for consumption by
such registered consignees or other authorised persons are received by these persons from a tax
warehouse, see CE Delft, Analysis of the options to include transport and the built environment in the
EU ETS (2014), p. 228-229.
96
According to an evaluation study on the use of fiscal marking, “Gas oil for heating benefits from tax
relief in 22 Member States, while in the remaining countries exemptions/rebates were discontinued in
recent years (Netherlands, Estonia, Slovakia, and Bulgaria) or have never been granted (Hungary). The
Euromarker is utilised in all the 22 Member States providing tax relief (…)”. See the Evaluation study
on the application of the provisions of the Council Directive 95/60/EC of 27 November 1995 on fiscal
99
final use of the products they supply and are able to distinguish oil product used in road
transport and heating. Still, there will be instances where taxes cannot be used to
distinguish oil product use in transport and heating97
. Also, there will be instances where
taxes cannot be used to distinguish between subsectors (eg road, rail, agricultural).
Therefore additional monitoring responsibilities of tax warehouses may be needed. The
fact that such arrangements already apply in several MS shows that it is possible to
implement additional monitoring to make this distinction. Alternatively, with respect to
the distinction of sub-sectors, it can also be envisaged to allow MS to apply the new ETS
to all transport fuels, possibly with setting in place a compensation mechanism for
subsectors other than road transport.
As regards the need under option EXT1 and EXT2 to distinguish fuels for combustion by
entities already covered by EU ETS operators, often tax warehouses do not have a direct
contact with the end-consumer, which makes that they do not distinguish fuels that are
addressed to entities already covered by the EU ETS from fuels addressed to entities
outside the EU ETS. Further specific consideration on this are in the section on MRV.
In many MS tax warehouses monitor biofuels and therefore have good knowledge of the
share of biofuel98
.
Oil refineries, much lower in number than tax warehouses, could in principle also be
chosen as the point of regulation. However, if so, imported and exported oil would need
to be treated separately. Regulation at this level would not benefit from the existing
monitoring system that already exists at the level of the tax warehouses. Also, at this
level, it is not clear which share of the fuels will be used in the relevant sectors99
. The
overlaps with the existing ETS would need to be addressed (as some oil products are
already included in the existing ETS). Under option EXT2, since a large part of the
energy sector and major industry is supplied directly from the refineries, it can be
expected that the latter are able to know the downstream regulated entity, but imported
and exported oil will need to be treated separately100
.
marking of gas oil and kerosene, available at: https://op.europa.eu/en/publication-detail/-
/publication/6e0f7327-0704-11e8-b8f5-01aa75ed71a1/language-en
97
ICF et al. (2020), p.247.
98
UPEI Feedback Inception Impact Assessment – Revision of the EU Emissions Trading System and the
EU Effort Sharing Regulation 26 November 2020 p. 2 “Fuels suppliers currently report much data to
authorities, e.g. for the purpose of statistics, energy taxation, blending of biofuel components, carbon
intensity requirements. Hence, there is already precise and robust data available. No further separate
system of monitoring, reporting and verification is necessary.”
99
CE DELFT (2014) p. 22 and 23.
100
ICF et al (2020), pp.434 and 435.
100
In the case of gas and coal, there is no harmonised tax warehouse system applicable in
all MS. Although gas and to a large extent also coal is subject to excise duty, the excise
duty on coal and gas does not necessarily target the same point in the supply chain.
In the case of gas, almost all MS levy excise duty from the supplier to the end
customer.101
This strengthens the argument that the point of regulation considered most
appropriate is the fuel suppliers that supply directly to the end-users. These are
companies that hold supply contracts with final consumers (households, companies)). A
distinction must be made at the DSO level between the seller of the gas and the
distributor of the gas. Although in some countries these might be vertically integrated
companies the provisions of unbundling require separation between the business of
operation of the grid and the business of supply. ETS regulation on the side of the sellers
(suppliers) of the gas is preferable in this case102
. Volumes supplied to consumers are
transported by the system operators at transmission (TSO) and distribution level (DSO).
Supply companies ship the gas and bill it to the customers, whereas metering the
volumes and the gas quality is a task of the TSO and DSO.
Under option EXT1, the regulated entity should be able to distinguish fuels for the road
transport and buildings sectors. In this respect it is worth noting that all gas for building
heating is supplied by a gas supplier. The end customers are known by the gas suppliers
and therefore it is easy for them to distinguish between the supply to buildings and other
user. Under option EXT1, the regulated entity should also be able to distinguish supplies
to entities already regulated downstream in the EU ETS. The gas suppliers have such
possibility since they are in direct contact and know the end-consumers.
Some larger consumers may have a direct connection to the Transmission System
Operators (TSO) network. These would typically be larger entities already regulated
downstream by the EU ETS, which would not need to be captured in the new ETS.
However, also entities not yet covered by the EU ETS, such as hospitals, hotels or petrol
stations, may have a direct connection to the TSO and these entities would need to be
captured under the new ETS. In practice, notwithstanding the direct connection to the
TSO, these entities most often still purchase their gas with a supplier, which means that
these gas supplies would be captured under the new ETS. A specific regulation may need
to be foreseen for the few entities for which this would not be the case.
With respect to option EXT2, there would be no need to distinguish gas in function of the
sectoral use. It would still be necessary to distinguish gas supplied to entities already
101
ICF et al (2020), pp. 239-240
102
In some countries, a distinction must be made at the DSO level between the seller of the gas and the
distributor of the gas, as they are partly separated due to competitive regulation. Regulation on the side
of the sellers of the gas is preferable in this case. See ICF et al. (2020), p.243.
101
covered by the EU ETS, which should not be a problem as the gas suppliers are in direct
contact and know the end consumers.
Given that under this option EXT2 also small industry is covered, it could be that there
are more end-consumers with direct connection to the TSO. Most likely however, also
here these companies would still purchase their gas through a gas supplier, which means
that these gas supplies would be captured under the new ETS. In those exceptional cases
where a company would have a direct TSO connection and would not purchase its gas
through a regional or local distributor, this may require a specific arrangement as
described above.
TSOs could be an option as point of regulation for gas under EXT1 and EXT2, as they
monitor the quantities of gas that are transported through their pipeline network. But it
raises some difficulties. Regulating the Transmission System Operators raises legal
questions as they are not the owners of the gas, but merely the transporters103
. As mere
transporters, they push volumes down to exit points charging their clients, the actual
owners of the gas, a transport fee. They know volumes supplied, but, except for very
large off takers, they will have no information on the end-consumers. This means that
they will not know the sector to which he belongs and whether he is already regulated
under the EU ETS and therefore already incurs a compliance obligation in the EU ETS.
The lack of knowledge of the sector in which the gas will be used is a problem for option
EXT1. The lack of knowledge of whether the end-consumer is already covered by the EU
ETS is a problem for both options EXT1and EXT2. TSOs would not have such
information on the end use of the gas themselves but would need to collect it from the
gas owners and suppliers, which would be very cumbersome and involve cooperation
from different actors.
In case of option EXT2, where it is not necessary to know the sectoral use of the gas, it
could be envisaged to regulate at the level of the TSO all gas supplied to suppliers. In this
case, gas volumes going to suppliers and thus regulated under the new ETS, could end up
with entities already covered by the EU ETS. In this case, there would thus be a double
burden for these entities already covered by the EU ETS and compensation mechanism
would need to be foreseen.
Another disadvantage of the fact that TSOs are only the transporter of the gas is that they
have no impact on the quality of the gas they transport. Biomethane is only injected at
DSO level, and only rarely at the TSO level.
103
Regulating the owners of the gas that is being transmitted at TSO level seems not possible because the
ownership rights of the gas cannot always be identified in the TSO.
102
In the case of coal, identifying an appropriate level of regulation is not evident and none
of the possible avenues is without significant complexities. The reason for this is that the
market for coal is very complex and much less regulated than the markets for oil and gas.
Not all coal products necessarily pass through an excise duty point, and where they do,
there are no harmonised practices in Europe. For a selection of the ten MS (Bulgaria,
Czechia, Germany, Hungary, Ireland, Italy, Lithuania, Poland, Slovakia, Spain) which
are most relevant in terms of coal use, either for heating or for (small) industrial use, an
analysis of their coal excise regime found that all of these MS have excise duty on coal,
be it with a number of exemptions and reductions. Mostly, the seller to the final customer
is the tax payer, but at least three MS (Germany, Ireland and Spain) have appointed the
first supplier (importer or producer) as liable entity for excise duty purposes and
sometimes payment of excise duty can even fall upon the user. Most of the ten MS have
a separate category of excise duty (exemption or special rate) for coal use for households
and Ireland for heating with a distinction between ETS and non-ETS customers. Some
have special exemptions or tax reductions for the use of coal for heating in buildings
other than households or district heating or for very specific heating purposes.
Under option EXT1, where there is a need to distinguish coal destined for the buildings
sector from coal used for example in (small) industry, it makes sense to align where
possible the level of regulation under the new ETS with the existing excise duty points to
make the most of the already existing monitoring and reporting structures for taxation
purposes. This despite the fact that, because excise duty is often levied from the final
supplier, there would be a high number of entities to be regulated104
and the many
different emission factors that may apply due to the many different end products.
In the market for coal, tracking through the level of supply is challenging. At the level of
distribution, it is possible to identify the supply streams to buildings since the distributors
have a direct contact with the final consumer. Sometimes, because of tax reasons,
tracking of relevant coal supplies will already be done. However, as mentioned above,
not all countries have exemptions or special rates for the categories of coal use
distinguished, and countries do not usually separate out coal supply to ETS and non-ETS
consumers in their excise duty regime. Additional MRV structures will therefore need to
be set up in at least a number of countries, with the associated administrative costs. For
the countries that do have relevant separate excise duty categories, regulated entities and
required proof varies, so harmonisation of the MRV structures for the new ETS across
countries may be needed to ensure sufficiently robust rules and a level playing field
across MS.
104
There is very limited information and insights available as regards the number of coal suppliers. ICF et
al. estimates that there are around 3000. There is a large size range, including some very small suppliers.
103
If under option EXT1, regardless of the point at which the MS has put the excise duty,
the level of regulation would be set higher (i.e. at the level of production or import), it
would often not be possible for a regulated entity not acting as excise duty point to
sufficiently distinguish the sectoral end use (only some large industrial customers and
power plants would be known). It would therefore be necessary to set in place monitoring
of the flows of coals to buildings throughout the supply chain..
In the case of option EXT2, it is not necessary to distinguish coal volumes meant for
consumption in the buildings sector. It is however necessary to distinguish coal use
outside the ETS from coal use within the ETS. For this distinction, the excise duty
system is most often not useful. It could therefore be envisaged to set the level of
regulation for the new ETS at the level of mine operators, producers and importers,
regardless of where the MS have put the excise duty point. The number of entities to be
regulated would be more limited.105
However, it would often not be possible for the
regulated entity to make the distinction between coal meant for use outside the ETS from
coal meant for use by ETS operators. For those cases where the mine operator, producer
or importer is not the directly selling to the consumer, a tracing mechanism should be set
in place for them to obtain information on whether the consumer is an ETS-regulated
entity. Alternatively, or additionally for those case where it would not be possible to do
such tracing, compensation mechanisms would need to be set in place for those cases
where coal supply is captured by the new system, while it should not have (e.g. because
an ETS-operator does not buy directly from a regulated entity). Different solutions for
compensation are possible, also entailing different costs and burden for the competent
authorities, the regulated entities and the ETS operators.
Whichever avenue is followed, one main challenge will be establishing a monitoring and
reporting system, implying high transaction costs.
Ability to pass-on the carbon price to the end-consumer
12.2
As regards incentives to reduce emissions, it is important to note that tax warehouses and
fuel suppliers have only limited possibilities themselves to reduce emissions. Often they
will not have the possibility themselves to reduce the carbon intensity of the fuels they
put on the market (for example resellers or tank storage facilities without blending
facility). The possibility of substituting fossil fuels with lower carbon alternatives is also
not evident as they would need to be available in the market. Another option would be to
simply put less fuel volumes in the market, but that would go against the regulated
105
ICF et al. (2020), p.133-134 still estimated the number of coal mining companies at 198 in 2018. This
number is expected to have reduced even more following recent closures of mines and mine companies.
Information on the number of importers is limited and has been estimated at around 500.
104
entities’ business.106
Most emission reductions induced by the new ETS would need to
come from the end consumers. It is therefore important that the price signal coming from
the new ETS is passed on to the consumers.
With respect to oil, it can be assumed, in general, that the carbon prices on oil coming
from the new ETS will be passed on to the end consumer even if there could be
distortions in function of the size and market power of the customer.107
At the same time
however, there is a risk that little or no information about the carbon price is passed on to
end consumers and that therefore there would be little awareness amongst the end
consumers about the carbon price component. One solution to address the lack of
awareness could be to list the CO2 price separately on the bills for the end consumers108
.
In the case of gas, the gas supplier can pass on the price signal coming from the new ETS
coverage to its customers. However, it could lead to a competitive disadvantage for gas
suppliers compared to other ways of heating109
. Given the relatively inelastic nature of
demand, the price signal is however likely to be passed on.
In the case of coal, it is very likely that the CO2 price signal will be passed on to the final
consumer through the levels of the supply chain relatively undistorted.110
The coal
suppliers can inform the final consumer about the carbon costs given that they are in
direct contact. Again, to increase awareness, the CO2 price could be shown separately on
the bill.
Administrative cost
12.3
With respect to oil, tax warehouses are already heavily regulated and already collect for
tax reasons detailed data on oil volumes. They thus already have a solid basis on which to
106
See also the analysis by IW with respect to the German national emissions trading for transportation and
heating, pages 26 and 27.
107
ICF et al. (2020), p.248 : ”Since the world market prices for crude oil have to a large extend so far been
passed on to the end consumer, it can be assumed that this would happen with a price signal from an
ETS. However, the price signal could be distorted by the fact that large customers in the commercial
building sector may have more market power than private customers, so that private customers may
have to pay more than commercial customers.”
108
ICF et al. (2020).
109
ICF et al. (2020), p.243: «Given the very low short-term price elasticities shown in Section 2.2.1, it
should be possible to pass through the price at least in the short term. However, gas companies are
increasingly having to compete with district heating, heat pumps and wood pellet heating. Against this
background natural gas suppliers could face the challenge that passing on the price signal would lead to
a competitive disadvantage in one of their main consumer markets. (…)” and page 433-434.
110
ICF et al. (2020), p.251 : «With regards to the final consumers of coal, it can be assumed that demand
from the final consumer is relatively inelastic in the short term and that, accordingly, the price signal can
be passed on to the final consumer relatively undistorted in the short term. This is because distributors
and retailers operate on a relatively limited regional market and transporting smaller quantities of coal
over larger distances is not financially attractive and short-term adjustment processes are rather limited.
(…)”
105
found their monitoring and reporting under the new ETS. Some additional monitoring
duties may need to be imposed where and insofar their data today not distinguish the end
use(r) of the fuels, to the extent relevant. There would be a high number of regulated
entities, but thanks to the already existing monitoring systems, the cost for these entities
would be moderate.
Due to the large number of tax warehouses, the costs for the public sector would be
rather high. On the positive side, it should be easy for the public sector to identify the list
of regulated entities with respect to oil, and the data submitted by the regulated entities
can be expected to be reliable (because also used for tax purposes).
With respect to gas, when regulating suppliers, even if the number of regulated entities
will be relatively high, the cost for the regulated entities of monitoring and reporting,
including identifying the supply streams, are expected to be moderate. Given that the gas
market is heavily regulated and that many suppliers act as excise duty points, it should be
easy for the public sector to identify the list of regulated entities with respect to gas, and,
as in the case of tax warehouses, the data submitted by the regulated entities for gas can
be expected to be reliable.
With respect to coal, there is a relatively high number of coal suppliers, while the number
of mine operators, producers and importers is limited.
In some cases, a monitoring and reporting mechanism would need to be set up from
scratch and adequate fraud prevention measures set in place. In comparison to the
markets for oil and gas, the administrative impacts would be significantly higher, both for
the regulated entities and for the national administrations in terms of participants’
identification, supervision and enforcement.
Especially with respect to the regulation of coal, the question of regulating small entities
arises as there are many, sometimes very small coal suppliers which until now are hardly
regulated. It is true that there will be a need for regulated entities to manage their carbon
allowance needs. If they feel unable to do so themselves, entities can call upon financial
advisors such as corporate banks to provide them with advice and services for the
purchase of allowances and hedging of their risk. This would come at a cost.
Excluding small entities from the new ETS may seem advantageous in terms of limiting
burden and impact for the entities concerned; however, this advantage would have to be
weighed against the resulting environmental impact. Also, a system with de minimis
thresholds such as the one used for the EU ETS does not seem appropriate in the case of
the fuel supply based new ETS. In the case of the new ETS, there is a risk that such de
minimis approach would trigger avoidance of the rules by organising businesses such
that they remain under the thresholds. Alternative mechanisms to reduce the burden can
be considered. Measures can be taken to facilitate the access by small entities to auctions
for example by allowing them to form business groups that can bid on their behalf in
auctions.
106
For the different types of fuel, expected administrative burden is summarised in the
following table.
Figure 24: Expected administrative burden for the regulated entities depending on the
type of fuel.
Fuel Point of
regulati
on
Administ
rative
costs
Main drivers
Oil Tax
warehou
ses
Moderate  Size of the regulated entities: variable, many players
 Regulation in place: yes, heavily for taxation purposes.
 Monitoring and reporting system in place: yes, administrative
quantity metering system for monitoring and reporting
already exists for the purpose of excise duty.
 Possibility to identify the purpose of the fuel use (sector end
use) for EXT1: yes, with additional costs, such as the need to
put in place additional MRV requirements.
 Possibility to identify the end user of the fuel (including ETS
operators) for EXT1 and EXT2: yes, possible with additional
limited costs, such as the need to put in place additional MRV
requirements.
 Information on the composition of the fuel: Not always
available, so need to set in place of a system to collect this
information
Gas Gas
supplier
s
Moderate  Size of the regulated entities: variable, moderate amount of
players
 Regulation in place: yes
 Monitoring and reporting system in place: yes
 Possibility to identify the purpose of the fuel use (sector end
use) for EXT1: yes, with additional costs. Data on volumes
and fuel quality are already collected since the delivery is
done to end users, and suppliers can identify the purpose of
the use of the fuel.
 Possibility to identify the end user of the fuel (including ETS
operators) for EXT1 and EXT2: yes, with additional costs.
Coal Coal
distribut
ors
High  Size of the regulated entities: typically smaller than oil and
gas, many players
 Regulation in place: no or with differences among MS or no
reliable monitoring and reporting system.
 Monitoring and reporting system in place: Only very limited.
Monitoring and reporting system expected to be less accurate
than oil and gas supplies. Risks of error and fraud identified
because of the variation in coal quality, difficulties to identify
all regulated entities and all of their deliveries, and because of
difficulties to control import and export.
 Possibility to identify the purpose of the fuel use (sector end
use) for in EXT 1: yes, with high additional costs due to the
high number of entities to be regulated and the many different
emission factors that may apply to the many different end
products.
107
- Possibility to identify the end user of the fuel (including ETS
operators) for EXT1 and EXT2: yes, with high additional
costs due to the high number of entities to be regulated, and
the many different emission factors that may apply to the
many different end products. Excise duty infrastructure can
be used to some extent but there are differences among MS.
Illustrative cost estimates under EXT1
The paragraphs below present illustrative cost estimates associated with (i) the additional
activities regulated entities would need to implement upon inclusion in the new ETS,
initially in preparing for system implementation, but also recurring costs after the system
enters into force and (ii) the additional activities required from competent authorities for
setting up the system and managing the system after implementation.
The estimates are inspired by information from two earlier studies on the administrative
costs associated with the inclusion of regulated entities in aviation (small emitters) and
maritime sector in the EU ETS carried out for DG CLIMA111
. While they are the best
estimates available, they should be treated with caution. There is a degree of uncertainty
due to the lack of empirical data, the need to aggregate data and the possible impact the
specific design of the new ETS might have, including the MRV system to apply which is
still to be defined in detail.
For the purposes of the illustrative cost estimate, the regulated entity is assumed to be a
supplier of coal that acts as excise duty point and thus already has in place a certain
excise duty/energy tax infrastructure. Where this would not be the case, or to the extent
that the existing infrastructure of the coal supplier is insufficient for the purposes of the
new ETS the actual costs could be higher. For gas suppliers, the registry costs are
estimated to be the same as in the table below but the other costs are expected to be
lower. This is due to existing metering of gas which removes the need to monitor stock
changes and batch metering as is the case for coal. For oil, also the registry costs are
expected to be the same but other costs are expected to be somewhat lower. They may be
111
ETS Aviation Small Emitters: Cost assessment of applying EU ETS on aviation small emitters and
analysis of improvements potential by simplifications, alternative thresholds and alternative means of
regulation 2014 and Commission Staff Working Document SWD (2013) 237 final.
Where monitoring and reporting infrastructure for sales is already in place for excise duty/energy tax
system, this will facilitate the implementation of monitoring and reporting in a new ETS system. In a
similar way, for small emitters in the aviation sector the use of Eurocontrol Support Facility and
Eurocontrol data facilitated their implementation of monitoring and reporting.
108
higher though than for gas as some additional monitoring to certain customers may be
needed. Thus as regards the ‘per entity’ costs, coal will be the highest, oil next highest
and gas lowest. The overall costs depend of course on the total number of regulated
entities. The estimated cost for a regulated entity is illustrated through the time required
for each of the additional identified activities. It does not reflect compliance costs for the
regulated entities, i.e. cost of allowances corresponding to emissions.
Table 47: Illustrative cost estimate for regulated entities under EXT 1 (supplier of coal)
Activity Required number of hours or cost
estimate
One off costs
Preparation of the monitoring plan to
monitor sales to buildings and road
transport, where possible based on existing
mechanisms for excise duty. Set up
emissions calculations
75 hours, one-off
Implementation of the monitoring plan,
where possible based on existing
mechanisms for excise duty
100 hours, one-off
Setting up registry account 32 hours, one-off
Recurring costs
Recurring monitoring and reporting
according to the Monitoring plan112
45 hours, annual
Verification of reported emissions based on
excise duty declarations where possible
1400 euros, annual
Trading and surrendering of allowances and
other registry operations.
16 hours, annual
Estimated illustrative administrative cost result for regulated entities: for one-off
costs a range between 6,085 EUR and 8,590 EUR and for recurring costs a range
between 4,900 and 6,350 EUR113
.
112
In the existing ETS, where the MRV cost can be expected to be significantly higher than in a
downstream model based on fuel supplies, average total costs of MRV per 18 month compliance cycle
(as per 2014 compliance cycle as an indicative compliance cycle under phase 3 of the ETS) are
approximately €59,000 per installation and the average annual cost per tonne of CO2e per 18 month
compliance cycle is €0.16. The average cost per Member State per installation is €2,250 . See in this
regard “Evaluation of ETS Monitoring, Reporting and Verification Administration Costs - Final Report-
June 2016” - Amec Foster Wheeler Environment & Infrastructure UK Limited, for the European
Commission. Other literature founds that for participants in the current ETS, the MRV cost has been
estimated to represent about 70% of the total transaction costs and average MRV costs per entity have
been estimated at around 22,000 €/year and 0.07 €/tCO2. See in this regard “Monitoring, reporting and
verifying emissions in the climate economy”, 25 March 2015, V.Bellassen, N.Stephan, I.Cochran, J.-
P.Chang, M.Deheza, G.Jacquier, M.Afriat, E.Alberola, C.Chiquet, R.Morel, C.Dimopoulos, I.Shishlov,
C.Foucherot, A.Barker, R.Robinson. Nature climate change, VOL 5, April 2015.
113
For calculating the recurring costs, the one-off costs are multiplied with a factor, depending on how
often they are expected to recur in a ten-year period. The lower end of the range is based on an assumed
109
Table 40 below represents the additional activities that will be required for the
competent authorities, triggering either one-off costs or recurring costs. No estimates of
the required number of hours for different categories of activities were available from the
existing studies. Two types of one-off costs have been identified: (i) those associated
with setting up the emissions trading scheme in general and (ii) those that could be
additionally needed for setting up the tracking systems for fuel to its destination.
As regards the first type of one-off costs, information collected for the small emitters
study suggested total one-off administrative costs of 1,048,000 EUR for 28 MS as a
whole, with around 870 regulated entities (operators). In terms of set up costs in the new
ETS, the preparation of materials and the identification of the participants is largely
independent of the number of entities. The effort associated with the other activities will
depend on the number of entities, although there will also be some economies of scale. In
the absence of empirical information, it is assumed that 60% of that total one-off cost for
competent authority scales with the number of entities, while 40% is independent of the
number of entities. This gives estimates for one-off competent authority administrative
costs across all MS of approximately 8.6 million EUR for EXT1, based on an assumption
of 11,400 regulated entities114
.
Regarding the one-off costs associated to setting up the tracking systems, it is assumed
that MS will use their excise duty procedures to the extent possible. Where no such
existing schemes can be used, as identified in four MS with respect to coal, it is assumed
that setting up the necessary tracking scheme would cost on average 200,000 EUR in
each country. As different systems will exist across the 27 MS, it is further assumed that
an additional 200,000 EUR will be needed to set up the necessary systems. This gives an
additional total one-off costs for competent authorities of 1,000,000 EUR for the coal
sales tracking system (200,000*4 + 200,000 EUR). Nonetheless, there are large
uncertainties on these estimations, which also depends on the specific choices as regards
to implementation and the starting position as regards existing systems in the MS.
As regards recurring costs, the average net115
costs per entity for the competent authority
from the small emitters study were around 1,000 EUR but with a very large range for
different MS. In the absence of further information, it is considered a range of 1,000-
hourly rate of 29.4 euro/hour while the upper end of the range is based on an assumed hourly rate of
41.5 euro/hour.
114
[1,048,000/100*40] + [1,048,000/100*60 /870*11,400]
115
Costs minus revenues from Member States fees
110
1,400 EUR per entity116
. It is thereby to be noted that the number of regulated entities
administered by each MS, the administrative structure and the allocation of
responsibilities among the different levels of administration can also entail different costs
among MS. Also, where the MS can fall back on MRV data that are backed reliable
datasets that are used eg. for taxation purposes, the actual recurring cost for the MS could
below the estimate. Recurring costs can also be expected to go down after the initial
years, as experience with the new ETS will be gained both on the side of competent
authorities as on the side of regulated entities.
Table 40: Costs for competent authorities under EXT 1
Activities triggering one off costs
Identify participants, where possible based on the existing excise duty regime117
Prepare materials including guidance notes and briefing materials
Inform participants and other stakeholders. Signpost briefing materials and help desk.
Approve monitoring plans for annual emissions for each regulated entity
Check details provided by regulated entities for the purpose of registry account application
Set up systems to avoid double coverage
Activities triggering recurring costs
Helpdesk for regulated entities and other stakeholders (incl. verifiers), answering queries
Approve monitoring plans for new entrants and approve changes to existing monitoring plans
Review annual emissions reports and verification reports, based on information verified by
independent accredited verifiers118
Managing updated and new registry accounts, reviewing changes and confirmations; Check
details provided by new participants and updates to existing participants.
Managing system for tracking.
As regards to aviation, data available on small emitters show that the average total
recurring costs of EU ETS per small emitter were EUR 9,050 for 2011 and EUR 13,121
for 2012. 2012 includes EUR 2,887 for costs of allowances for operators, EUR 9,264 for
costs of compliance and EUR 970 for MS costs. The projected annual recurring costs of
EU ETS per operator starting 2013 amounted to EUR 11,121. The historical recurring
116
Although not calculated directly from labour costs, this range represents the relative difference in labour
costs used in the calculation of regulated entities.
117
Insofar not covered by the costs for the identification of the participants and the approval of the
monitoring costs, and depending on the existing framework in the Member States, it may be that, would
EXT1 be articulated through GHG emission permits for the new regulated entities, additional costs
might arise both for the competent authorities and for the regulated entities related, respectively, to the
approval, issue and maintenance of the permits, and to their submission.
118
In addition, a MS may face additional enforcement costs, which cannot be estimated because they
would depend on the level of non-compliance.
111
cost items for MS amounted to EUR 559,000 for 2011 and EUR 507,000 for 2012. Based
on the feedback received from the MS some decrease in costs per operator in 2013 was
foreseen due to expected lower helpdesk costs119
Addressing possible double burden and loopholes/Interaction with the existing
12.4
ETS
Double burden may occur when an ETS operator surrenders allowances to comply with
ETS obligations and also pays a carbon price on fuel used, which may occur as a result
from the introduction of the new ETS. There is therefore a double coverage of fuel being
supplied to installations already covered by the EU ETS. Therefore, the risk of double
counting affects installations already covered by the current EU ETS. Loopholes leads to
evasion of the carbon price, e.g. large non-ETS gas consumers not purchasing gas from
the distributors but a direct connection to the gas TSO network. This is also linked with
the monitoring, reporting and verification design for these sectors.
This may justify ex-ante exemptions or ex-post compensation: fuels delivered to
installations covered by the EU ETS may be exempted from the obligations arising from
the new ETS. In cases where such an exemption would entail disproportionate
administrative efforts, it might also be possible to compensate the facilities for such
double coverage.
Carbon slippage and double counting requires the fuel supplier to discriminate on the
intended use and destination of the fuel, and in particular if, when combusted, the fuel
will incur with a compliance obligation.
To avoid carbon slippage, solutions range from to legally classify fuels that are destined
for different categories of customers and uses as different products, which would require
that the different fuels are distinguished and tracked separately all the way down the
supply chain; to generally treat all fuels as if destined for a customer / use that is not
covered by a downstream obligation, and to allow those customers / uses that have such
an obligation to apply for a refund. Another option would be the possibility to opt- in,
allowing customers the choice to remain under the existing ETS or to enter as an
upstream customer. All those options need further analysis as they raise legal issues120
.
119
Cost assessment of applying ETS on aviation small emitters and analysis of improvement potential by
simplifications, alternative thresholds and alternative means of regulation. 25 March 2014. PwC with the
support of CE Delft and SQ Consult, for the European Commission. Page 17 and 18.
120
ICF et al. (2020), p.267.
112
13 COMPLIANCE, ENFORCEMENT AND USE OF INFRASTRUCTURE
Stationary industrial installations and aircraft operators covered by the current EU ETS
report their annual CO2 emissions, which have been monitored based on a the monitoring
plan. The monitoring plan is submitted to the national competent authorities together
with the operating permit. This approved monitoring plan shall be used by the operator to
monitor CO2 emissions during the year. Operators report on their emissions once a year
through the submission of a verified emissions report. On the basis of this report, an
operator will surrender an equivalent number of emission allowances, every year by 30
April.
As far as linking the existing ETS to the new created ETS is an option that might
materialise in the future, it would be preferable that the compliance cycle of the new ETS
mirrors the compliance cycle of the existing ETS. The administrative authorities could
also benefit from their experience in managing the ETS compliance cycle. Depending on
MS’ administrative structures, MS could decide to establish as the competent authority
the same as the one actually responsible for the current EU ETS. Administrative burden
and capacity building matters could arise, but relevant savings might occur. MS will be
responsible in deciding the optimal competent authority according to their constitutional
organization.
In case of a breach by the entities regulated under the new ETS of their compliance
obligations, a sanction regime such as the one established under article 16(3) of the ETS
Directive should apply. Any regulated entity who does not surrender sufficient
allowances by 30 April of each year to cover its emissions during the preceding year
shall be held liable for the payment of an excess emissions penalty. The excess emissions
penalty is at present 100 euros for each tonne of carbon dioxide equivalent emitted for
which the operator has not surrendered allowances. Payment of the excess emissions
penalty do not release the operator from the obligation to surrender an amount of
allowances equal to those excess emissions when surrendering allowances in relation to
the following calendar year. The breach of the obligation to surrender allowances will
entail the activation by competent authorities of effective, proportionate and dissuasive
penalties to entities not complying with the rules.
As regards to Registry, the new ETS would in principle be implemented and operated
through the Union Registry, and within the most optimal technical solution.
14 MONITORING REPORTING AND VERIFICATION
The extension of an emissions trading system to new sectors will require the design and
the establishment of a new monitoring, reporting and verification (MRV) system, which
113
is accurate, reliable and cost-effective. As a starting point, the new MRV system would
need to comply with the principles of transparency, accuracy, consistency, comparability
and completeness (as also stated in the current EU MRV framework121
).
The MRV system will be important for the proper functioning and credibility of the new
ETS, but also to collect adequate information for the re-assessment of the cap.
Under the EU ETS, the procedure of monitoring, reporting and verification consists of
the following: EU ETS operators are required to have an approved monitoring plan for
monitoring and reporting annual emissions. This plan is also part of the permit to operate.
Every year, operators must submit an emissions report. The data for a given year must be
verified by an accredited verifier by 31 March of the following year. Once verified,
operators must surrender the equivalent number of allowances by 30 April of that year, in
the absence of which they face penalties. Penalties will also be applied in case of errors
or incompleteness in the emission reports.
In terms of optimization when establishing the MRV rules for the new regulated entities,
lessons from the currents ETS MRV rules (on activity data, carbon content, biomass
content, among others), the environmental taxes, regulations or markets systems can
contribute to reduce the administrative burdens for the relevant entities. Also in view of a
possible future integration of the new ETS with the current EU ETS, it makes sense to
design the MRV system along the same lines as the one existing for the current EU ETS.
An MRV cycle will be applied requiring regulated entities to monitor, to report every
year to the competent authority and to surrender enough allowances to cover all its
verified emissions.
Under an upstream ETS, the regulated entities (which are not the emitters themselves as
in the current EU ETS) must be able to monitor and report, per type of fuel, the fuel
volumes put on the market. They must know, to the extent necessary, the end use of the
fuel to determine whether the fuel volumes put on the market are captured within the
scope of the new ETS. Under EXT1, the end use of the fuel also needs to be identified.
Emissions are determined indirectly via fuel quantities put on the market.
121
Commission Implementing Regulation (EU) 2018/2066 of 19 December 2018 on the monitoring and
reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament
and of the Council and amending Commission Regulation
Commission Implementing Regulation (EU) 2018/2067 of 19 December 2018 on the verification of data
and on the accreditation of verifiers pursuant to Directive 2003/87/EC of the European Parliament and
of the Council Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11
December 2018 on the Governance of the Energy Union and Climate Action, amending Regulations
(EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives
94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/EU, 2012/27/EU and 2013/30/EU of the
European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and
repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council.
114
The monitoring and reporting rules would also be simpler than those applying to the
current sectors. In the new sectors, only sales of largely standardised fuels for
combustion purposes would be monitored. The new MRV system would share more
similarities with the MRV applicable to aviation both in terms of costs and obligations.
MRV feasibility, requirements and further design choices are dependent on the point of
regulation chosen and its specific nature.
The main MRV challenges for the extension of an emissions trading that have been
identified are the following122
:
The possibility for the regulated entity to ensure an accurate monitoring and reporting of
CO2 emissions and to identify the end-user of the supplied fuel and distinguish fuels that
will result in emissions in the transport and building sectors.
An important factor in the design of an ETS is that the regulated entity is able to
accurately monitor and report CO2 emissions. The most obvious monitoring option for
the new ETS, which will necessarily be based on an upstream model, is the monitoring of
volumes of relevant fuels put on the market. Standard emission factors based on the type
of fuel can be applied to estimate the GHG emissions from the fuel consumption.
The main question is whether there is an adequate tracking mechanism for the relevant
fuels if not, whether one could be developed at reasonable cost. Tracking mechanism for
the use of fossil fuels by type is mostly dependant on the regulated entities.
Tax warehouse keepers need to keep track of the fuel buyers for tax reasons, directly
providing a track mechanism by user and energy product. On the contrary, fuel suppliers
do not always have to track the amount of fuels with the same accuracy because gas and
coal are sometimes exempt from energy taxes, or in some cases, the energy taxes are not
paid at their level. Nevertheless, they could in principle do so, which provides a good
basis for building a tracking mechanism upon it123
.
CO2 emissions from biomass are subject to specific rules under ETS. Therefore the
blending of fuels with non-fossil fuels with biofuels or e-fuels raises an issue respecting
the monitoring and reporting of accurate CO2 emissions and needs to be analysed
regarding the new regulated entities and its consistency with the Renewables Energy
Directive and the Fuel Quality Directive.
The complexities involved in combining and delimiting upstream and downstream
approaches for different sectors.
122
ICF et al. p.280 for further details.
123
ICF et al. p. 303.
115
Some complexities can arise from combining upstream and downstream approaches for
different sectors.
Excluded installations: One of the issues to solve will be how to deal with installations
excluded from the current EU ETS according to Articles 27 and 27a of the EU ETS
Directive (Directive 2018/410). One option would be to maintain the exclusion criteria in
the new ETS. However, as excluded installations can be reintroduced into the EU ETS if
conditions for reintroduction are fulfilled, then the entity becomes a regulated entity
already covered by the EU ETS, for which the CO2 emissions related to the fuel
consumption should not reported twice. This has to be solved by identifying the end-user
of the fuel supplied by the regulated entity.
District heating: A large share of the combined heat and power plants and district heating
are already regulated under the EU ETS.124
These entities are eligible for free allocation
under the EU ETS.
It has been argued that there is a lack of level-playing field between the district heating
sector (largely covered by the EU ETS) and other heat sources so far not covered by
emissions trading (except for electricity). If emissions trading is extended to the buildings
sector, fossil fuel supplies to small CHP and heat plants providing heat to district heating
network would also need to be captured by emissions trading. Because of their small
size, it does not seem appropriate to proceed to a general inclusion of the small CHP and
district heating installations into the current EU ETS. It would on the other hand be
appropriate to regulate the fossil fuels supplied to these entities for district heating
purposes under the new ETS. It is thereby necessary to avoid slippage (making sure that
all relevant fuel volumes supplied to small (non-ETS) CHP and heat plant for the purpose
of producing district heat are captured), as well as double coverage (when fuel supplied
to large (ETS) CHP and heat plants would also captured under the new emissions trading
system). The MRV process would need to tackle boundaries challenges coming from the
need to distinguish fuels supplied to ETS-district heating installations and fuels supplied
to non-ETS district heating installations; from the need to allocate fuel supplies to
power/heat separately, or from the need to know the end consumer of the heat125
.
The resulting cost and administrative burden for the regulated entity and the relevant
administrative bodies and agencies.
124
It is estimated that more than 90% of district heating emissions were covered by the ETS (76 Mt), while
less than 10% were non-ETS district heating emissions (7 Mt) in the period 2016-2018.
125
ICF et al. p.330: Identification of the end-user of the fuel means that the fuel supplier has to identify the
share of heat delivered to every entity considered as part of the building sector (residential and
commercial buildings, services, some hospitals), compared to the total heat delivered associated with the
fuel burnt.
116
An MRV system results in costs and administrative burdens for the regulated entities and
the relevant administrative bodies and agencies. Costs arise in each step of the MRV
process.
If emissions trading is extended to road transport and buildings, the MRV complexity lie
in the tracking of the end-user to avoid double-counting, loopholes or fraud126
.
The administrative burden for the MS administration would depend on various factors
ranging from the administrative structure and specific organization of each MS, the
number of competent authorities in each MS, the available resources, the number and
size of the regulated entities and how the MRV process is set-up, including the activity to
be monitored.
An extension of emission trading would increase by more than 100% the current number
of regulated entities under the current EU ETS framework.
However, it is expected a lower complexity of the MRV rules for the new regulated
entities, because only sales and distribution of largely standardized fuels for combustion
purposes would be monitored. This corresponds to only one activity, but it is a new kind
of parameter that the competent authorities need to consider when delivering their
administrative tasks and activities.
Possibilities to reduce administrative costs could be to identify if some competent
authorities already deal with the type of data to be monitored and reported by newly
regulated entities in order to avoid double work when creating a new competent
authority, develop simplified approaches for the new sectors, or to develop guidance
documents, templates and IT tools for monitoring, reporting and verification activities.
The possibility for fraud of the regulated entity’s monitoring and reporting system.
To ensure effectiveness and reliability of the ETS, fraud in the monitoring and reporting
of CO2 emissions by the regulated entities has to be made impossible or very costly.
Regulatory solutions to prevent fraud under the MRV system have to be designed so to
cover all possible situations as far as possible.
Experience has shown that the risk of fraud can be reduced increasing harmonization
across MS, mainly by including monitoring, reporting, verification and accreditation
requirements in regulations and issuing guidance documents and templates, as well as
reinforcing the capacity of the competent authorities in MS.
The current legal framework for industrial installations and aircraft operators relating to
MRV would be relevant starting points for any specific MRV requirements for the road
126
ICF et al. (2020), p.333.
117
and buildings sectors, in particular in terms of reducing the possibility of fraud in the
monitoring and reporting of emissions but would need to be adapted to introduce any
new sectors. The possibility of fraud will depend on the regulated entity chosen and
would need to expand or create new responsibilities for monitoring and reporting.
In the transport sector, the risk of fraud of an upstream system would typically relate to
declaring false quantities of fuel sales or false shares of biofuels. However, this risk is
minimal as tax warehouses have to comply with strict fiscal rules. The tax warehouse
keepers are referred to in the ETD Directive under which MS are required to identify tax
warehouses, keep registration of these entities and the type of fuels they trade. Therefore,
the chances that those entities would not be identifiable and that would not implement or
comply with ETS rules is very small. The same monitoring and enforcement measures
used for excise duties could be used for ETS127
.
Furthermore, gas oil, widely used in road transport, but also for heating purposes, is
subject to the Euromarker Directive128
. This Directive requires that the gas oil that is
released for consumption in the EU to a lower rate than the full excise duty rate has to be
dyed with a yellow colour and to contain a tracer agent. Additional national markers may
be applied in parallel. The application of the marker takes place in the tax warehouse
before the gas is release for consumption. The quantities of the fuel that is marked are
documented and reported by the tax warehouse. The marker is therefore an important
tool for avoiding excise duty evasion in relation to consumption, and a control and
enforcement measure to fight fraud.
Natural gas (LNG or CNG) is the only transport fuel that is not currently required to pass
through a tax warehouse. Excluding them from the systems could stimulate a shift from
the fuels covered by the ETS to natural gas. Two options can be considered: one is to
consider appointing natural gas suppliers as the regulated entity, which will particularly
be a feasible option as they could carry out this role for both the transport and building
sector. Another option could be to establish the obligation to pass natural gas through tax
warehouses129
.
To reduce the risk in monitoring the type and share of biofuel, gather data to determine
the biofuel content would be a solution.
For the building sector, the choice of the tax warehouses as regulated entity allows to
reduce fraud risk, but for gas and coal a new system will have to be developed. Tax
warehouse keepers keep track of the fuel buyers for tax reasons, providing a track
127
ICF et al (2020) p.340.
128
Council Directive 95/60/EC of 27 November 1995 provides for the designation of a common fiscal
marker to be used for gas oils and kerosene (other than jet fuel) exempted or subject to a reduced rate.
129
ICF et al (2020), p.340
118
mechanism by user and energy product, but fuel suppliers do not always have to track the
amount of fuels with the same accuracy because gas and coal are often exempt from
energy taxes130
.
15 TRADE OF ALLOWANCES
Under the new emissions trading system, a new type of allowances will be issued. As per
the very nature of a cap-and-trade system, these allowances will be tradable. The
question arises who should be able to trade these allowances: trading can be strictly
limited to the regulated entities or it can be opened up also to other persons. The latter is
the case for the ETS (both as regards primary trading at auctions and secondary trading).
Also with respect to the new emissions trading system, it makes sense to open trading to
entities other than those entities that have compliance obligations under the new system.
In order for a proper price discovery process, there needs to be sufficient liquidity in the
market. Also, entities with compliance obligations under the new system are likely to
need possibilities to hedge against price fluctuations, and will therefore need access to
financial products that allow such hedging. Given the possibility of a future linking it
makes sense to design trading under the new system along the same lines as for the
existing ETS.
The main traders in the new type of emissions can expected to be the entities that would
be regulated under the new regime, as well as financial intermediaries.
It is necessary to ensure a safe and efficient trading environment for the new type of
allowances. For this an appropriate framework must be put in place, including a robust
oversight regime designed along the lines of the one applicable to other financial
markets. For the existing ETS, this is primarily achieved through the classification of
emission allowances as financial instrument under financial market legislation.
If the new emissions trading system is set up under the umbrella of Directive
2003/87/EC, the financial framework that was put in place for the existing ETS will also
apply to the trading in new allowances.
Finally, setting up the new emissions trading system under the umbrella of Directive
2003/87/EC will also allow the application of the VAT reverse charge mechanism to
transfers of the new type of allowance.
130
ICF et al. (2020), p.342
119
16 COHERENCE WITH OTHER POLICIES
Interactions with possible parallel coverage by Effort Sharing Regulation
16.1
For parallel coverage of emissions of buildings and road transport or all fossil fuels under
a new ETS and under the ESR, there would be some administrative impacts. First, ESR
administrative rules would continue to apply in parallel to the MRV rules for the new
ETS. However, they are generic and the administrative costs related to the ESR
implementation are limited and are independent from the emission scope, as they always
start from GHG inventory emissions deducting (or not) emissions covered by the EU
ETS.
In a nutshell, for the ESR there is no change envisaged compared to the current
monitoring and compliance architecture. While there may be complexities resulting from
differences in emission calculation methods under the EU ETS and under the GHG
inventories, that will need to be further analysed, there is experience from dealing with
such issues and related risks for ESR compliance for the industry sector, where such
calculation methods differ more strongly. The impacts on monitoring and evaluation are
further assessed in the ESR impact assessment Chapter 8 (How will actual impacts be
monitored and evaluated).
Additional assessment of parallel coverage is included in the ESR impact assessment in
sections 6.1.6, while sections 6.2.5 and 6.3.2 assess impacts of not covering those sector
under the ESR.
Compatibility and implications of an ETS covering buildings with the relevant
16.2
pieces of EU legislation in force
 The Energy Performance of Buildings Directive 2010/31/EU, as amended
The Energy Performance of Buildings Directive (EPBD) ensures reducing emissions
both outside the scope of the ETS and within the ETS (i.e. electricity generation) by
setting cost-optimal minimum energy performance standards for new buildings and
existing buildings undergoing major renovation and other supporting energy efficiency
measures related to buildings. By introducing a carbon price on top of its provisions, the
price signal can provide an additional incentive to switching to decarbonized heating and
cooling appliances in buildings, but even at very high price levels, it is very unlikely that
will have an effect in accelerating renovations. It can however reduce their pay-back
time, especially for light renovations.
An emissions trading system covering buildings as under option EXT1 can improve the
energy performance in the building sectors by putting a price signal and therefore
triggering investments in switching to more efficient or decarbonized heating and cooling
appliances.
An ETS may incentivize investments for further achievement of the objective of the
EPBD to drive energy performance of buildings (i.e. in line with the current legislation
envelope improvements, technical buildings systems and boilers replacements, and on-
120
building renewables131
) as increased energy costs will increase the costs effectiveness of
building energy efficiency measures. Additionally, it could ameliorate the full potential
improvement of energy performance in the buildings sector driven by the EPBD132
(both
in terms of energy efficiency, meaning improvements to the building envelope, the
technical buildings systems – boilers, air conditioning systems, ventilation units, etc – as
well as how much renewables a buildings has on-site and how green its energy supply
is).
However, in terms of key questions or issues for the integration of buildings into an ETS,
the EPBD impacts in terms of emission reductions has to be taken into account when
designing an emissions trading system covering the building sector. The cap will need to
be set at a level that ensures a price signal beyond the implicit price already imposed by
the EPBD in order to ensure any additional environmental benefit. The revision of the
EPBD will enhance its role in promoting building decarbonisation through reinforced
instruments which will be defined and which are not currently known with detail. As
regards the impacts of the current EPBD, those are broadly covered by the EU Reference
Scenario (for instance by incorporating the effects of the nearly-zero-energy-building
provisions for new buildings), although it has to be recognized that not all the measures
and effects of EPBD policies can be illustrated in detail with the use of energy system
modelling, due also to the differences in national and climatic conditions across the EU.
The 2030 cap for the new sectors is based on a scenario which includes additional energy
efficiency policies in the building sector which are however only approximated, and
which will be complementary as regards the combined effect in achieving the 2030 55%
goal. Besides that, the complementarity between ETS and EPBD should also look at their
specific design measures. One element to look at is the cost-optimal methodology to
calculate cost-optimal levels of minimum energy performance for buildings and building
elements to be applied by MS. A carbon price on heating fuels could impact the cost-
optimal balance between the investments involved and the energy costs saved throughout
the lifecycle of the building. MS as a consequence may need to revise their standards
accordingly. However, these standards need to be revised every five years in any case
under the EPBD. The choice of regulated entities doesn’t seem to have an impact on the
131
Modelling for buildings has traditionally faced difficulties in reflecting the granularity of building
renovation and therefore often simplified it by modelling different scenarios for increased levels of
envelope improvements (insulation and windows) and then separately referring to boiler replacement as if
totally disconnected (point raised for many years now, including during the preparation of the clean energy
package).However, this should not lead to misunderstandings on the policy and its aims to improve the
energy performance of the buildings stock. The current legal definition of energy performance, entails the
best combination of building envelope measures (including façade, windows, roof and embedded
insulation), but also equal footing on its technical buildings systems including of course boilers.
132
ICF et al. (2020).
121
EPBD framework as under an upstream approach such entities would not be directly
involved in building renovations. Finally ETS auctioning revenues and related solidarity
mechanisms like the Modernisation Fund could help EPBD objectives133
, as well provide
or finance the financial incentives that MS are encouraged to put in place under Article
10 of the EPBD.
 The Energy Efficiency Directive 2012/27/EU, as amended
The objective of the Energy Efficiency Directive (EED) is to establish ‘a common
framework of measures to promote energy efficiency’ to ensure that the EU’s 2020 and
2030 energy efficiency targets are met134
. The objective of the EED is coherent with the
objectives of the ETS and both legal instruments, if carefully designed, can reinforce
each other.
The EED currently contributes to GHG reductions by addressing energy demand,
ultimately contributing to emissions reductions in sectors both within and outside the
ETS. Energy efficiency improvements can have impact in price developments in the
ETS. The impact of the current EED (via the REF) as well as further efficiency measures
is factored into the cap-setting under option EXT1 as the 2030 cap is set based on
scenarios combining the impacts of strengthened regulatory policies with carbon pricing.
Furthermore, the energy efficiency measures promoted by the EED would likely become
more cost-effective if the building sector be fully brought within the scope of the ETS,
due to higher costs for building heating with fossil fuels. This could therefore accelerate
progress towards achieving the targets in the EED.
From 2014 to 2020, MS had been required to implement policy measures to achieve
cumulative energy savings equivalent to annual reduction of 1.5% in national energy
sales by the end of 2020. For the period 2021-2030, the EED requires MS to set national
energy efficiency targets, and to establish policy measures and tools to achieve their
targets. In 2018, as part of the 'Clean energy for all Europeans package', the Co-
Legislators agreed on the new amending Directive on Energy Efficiency (2018/2002/EU)
to update the policy framework to 2030 and beyond. The key element of the amended
directive is a headline energy efficiency target for 2030 of at least 32.5%. It also includes
an extension to the energy savings obligation in end-use, introduced in the 2012
Directive. Under the amending Directive, EU countries will have to achieve new energy
savings of 0.8% each year of final energy consumption for the 2021-2030 period, except
Cyprus and Malta which will have to achieve 0.24% each year instead. Article 7 EED
allows MS for the first obligation period 2014-2020 to exclude a range of energy end
133
ICF et al. (2020).
134
Article 1, Directive 2012/27/EU as amended.
122
uses when calculating their targets (transport, energy for own use etc.), and a number of
exemptions up to maximum of a 25% reduction of the energy savings target. All MS
have applied at least one of these exemptions to reduce their target for the period 2014 to
2020. MS may, for example, exclude from the calculation all or part of the sales of
energy used, by volume, with respect to the energy savings obligation period by
industrial activities listed in Annex I to Directive 2003/87/EC.
For the obligation period 2021-2030 and beyond, Article 7(5) EED as amended provides
that, whether or not MS exclude, in whole or in part, energy used in transport from their
calculation baseline or make use of any of the options in Article 7(4) EED, they must
ensure that the calculated net amount of new savings to be achieved in final energy
consumption over the 2021 2030 obligation period is not less than 0.8% (0.24% for
Cyprus and Malta). For the obligation period 2021 to 2030, none of the MS used the
flexibility provided in Article 7(4)(b) of the EED as amended.
MS must achieve the required cumulative end-use energy savings by establishing an
energy efficiency obligation scheme (EEOS), adopting alternative policy measures, or a
combination of both. A policy measure is defined as a regulatory, financial, fiscal,
voluntary or information provision instrument formally established and implemented in a
MS to create a supportive framework, requirement or incentive for market actors to
provide and purchase energy services and to undertake other energy efficiency
improvement measures (Article 2(18) EED). It is considered that well-designed EEOS
can deliver significant, cost-effective energy savings over many years. This requirement
drives measures in various sectors; to a large extent in the buildings sector, but also in
transport and industry.
Regarding the obligation period 2014-2020, some MS notified only one policy measure,
all of them but one implemented an EEOS. Sweden notified for instance only a taxation
measure. Six countries reported more than 25 policy measures. All countries with more
than 10 policy measures reported a mix of at least five different instrument types.
18 MS have notified 20 EEOSs for the purpose of reporting energy savings towards the
2014-2020 energy savings obligation135
. Eleven MS had energy efficiency obligation
schemes in place at the beginning of the 2014-2020 target period. Since then seven
further EEOSs have been reported with three still to generate energy savings by the end
of 2018 (as reported in the 2020 Annual Reports). Amongst the MS that report energy
efficiency obligation schemes, four (Denmark, France, Luxembourg and Poland) report
energy savings only from an EEOS. In the other 14 MS with energy efficiency obligation
schemes, a combination of EEOSs and alternative measures is used. Only a few MS
introduced White Certificates which are tradable and recognised as market-based
135
The United Kingdom reports three EEOSs, two of which did not produce any new actions after 2012.
123
instruments to promote energy efficiency measures. Horizontal trading between obligated
parties is relatively common amongst EEOSs in the EU whereas vertical trading is
relatively rare, with two EEOSs (Austria and the United Kingdom) facilitating vertical
trading, e.g. through brokerage mechanisms, and three EEOSs (France, Italy and Poland)
allowing trading in the form of White Certificates.
Figure 25: Number of reported policy measures by Member State
Source: Assessment of Commission services supported by technical assistance
The majority of the reported policy measures are financing schemes/instruments. The
remaining of notified policy measures refers to other instrument types.
More than a third of the reported energy savings (around 35%) result from energy
efficiency obligation schemes, whereas financial schemes contribute with 12% to the
overall energy savings. Energy and CO2 taxes contribute with 16%.
FR
DK
SE
PL
LU
SI
BG
MT
NL
PT
IT
FI
EE
AT
IE
HR
LV
EL
CY
LT
RO
HU
DE
CZ
UK
BE
ES
SK
0 20 40 60 80 100
energy efficiency obligation scheme
energy labelling scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
124
Figure 26: Number of reported policy measures by Member State, as of November 2020
Source: assessed by Commission services with technical support
Figure 27: Share of reported energy savings by policy measure type on EU level, as of
November 2020
Source: Commission services based on technical assistance
Regarding the sectors targeted by the policy measures under Article 7 EED, the major
share of energy savings results from cross cutting measures, which cannot be attributed
to a single sector. The two main instrument types in terms of energy savings, energy
efficiency obligation schemes and taxation measures, are exclusively cross-cutting. The
majority of measures (by count) is targeting services/industry, reflecting the
heterogeneity of this sector.
energy
efficiency
obligation
scheme
17
energy labelling scheme
1
energy or CO2 tax
18
financing
scheme/instrument
229
fiscal incentive
16
other
40
regulation
33
standard/norm
22
voluntary agreement
15
energy efficiency
obligation scheme
35%
energy labelling scheme
0%
energy or CO2 tax
15%
financing
scheme/instrument
14%
fiscal incentive
8%
other
7%
regulation
4%
standard/norm
11%
voluntary agreement
6%
125
Figure 28: Share of reported energy savings by sector on EU level, as of November 2020
Source: Assessment of Commission services based on technical assistance
Figure 29: Number of policy measures by instrument type for targeted sector on EU
level, as of November 2020
Source: Assessment of Commission services based on technical assistance
cross-cutting
63%
private households
15%
services/industry
17%
transport
5%
energy efficiency obligation scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
energy efficiency obligation scheme
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
energy labelling scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
energy labelling scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
cross-cutting
private
households
services/industry
transport
0 20 40 60 80 100 120
126
As buildings represent a major share of the EU’s energy consumption, a broad variety of
policy measures targets them exclusively or at least partially. Among the measures
targeting buildings exclusively, financing schemes prevail.
Figure 30: Number of policy measures only targeting buildings and measures including
buildings by instrument type on EU level, as of November 2020
Source: Assessment of Commission services based on technical assistance
Several MS already implemented policy measures to achieve energy savings in the
buildings sector in the period 2014-2020.
Regarding the obligation period 2021 to 2030, MS submitted with their first National
Energy and Climate Plans the policy measures they intend to implement to achieve the
required energy savings by 2030. The structure of the reported policy measures by type
are very similar as for the obligation period 2014 to 2020. Around 50% of the policy
measures are financial programmes. But again, when looking at the savings achieved by
the different policy measure types, around 70% of the savings are achieved by the energy
efficiency obligation schemes, and another 25% by the financial schemes. Consequently,
most of the energy savings are achieved in the cross-cutting sector, and not in the
individual sectors.
energy efficiency obligation scheme
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
energy efficiency obligation scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
building
measure
measure
including
buildings
0 20 40 60 80 100 120
127
Figure 31: Number of reported policy measures by Member State, as of November 2020
Source: Assessment of Commission services based on technical assistance
Figure 32: Number of policy measures by instrument type, as of November 2020
Source: Assessment of Commission services based on technical assistance
0 10 20 30 40 50
SK
SI
SE
RO
PT
PL
NL
MT
LV
LU
LT
IT
IE
HU
HR
FR
FI
ES
EL
EE
DK
DE
CZ
CY
BG
BE
AT
energy efficiency obligation scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
energy
efficiency
obligation
scheme; 13
energy or CO2
tax; 17
financing
scheme/instru
ment; 154
fiscal
incentive; 27
other; 39
regulation; 41
standard/norm;
4
voluntary
agreement; 21
training and
education; 32
128
Figure 33: Share of cumulative energy savings 2021-2030 by instrument type, as of
November 2020
Source: Assessment of Commission services based on technical assistance
Figure 34: Share of cumulative energy savings 2021-2030 by targeted sector, as of
November 2020
Source: of Commission services based on technical assistance
energy
efficiency
obligation
scheme
53%
energy or CO2
tax
10%
financing
scheme/instru
ment
24%
fiscal incentive
10%
other
3%
cross-cutting
83%
private
households
7%
services/industry
7%
transport
3%
129
Figure 35: Number of policy measures (type) reported per sector, as of November 2020
Source: Assessment of Commission services based on technical assistance
Regarding the building sector, MS submitted a significant number of policy measures
planned to be implemented in the 2021-2030 period. The scope of these measures varies
from very specific measures focused on a given sub-sector or end-use, to a cross-cutting
Energy Efficiency Act. The majority of these policy measures target buildings, alone or
together with other sectors or end-uses. “Buildings” means here the building envelope
and heating ventilation and air conditioning systems.
Of the policy measures strictly focused on individual actions in buildings, about half
focus on residential buildings and some are cross-cutting (i.e. covering both, residential
and non-residential buildings). The vast majority of the building focused policy measures
are financial incentives, mostly financing schemes, and to a smaller extent fiscal
incentives. The other building-focused policy measures are regulatory measures.
In addition, MS submitted a significant number of measures which do not strictly focused
on buildings, but include them in their scope of eligible actions, together with actions
covering other end-uses (e.g. appliances, lighting, industrial processes). This includes for
example cross-cutting measures such as energy efficiency obligation measures or
0 5 10 15 20 25 30 35
energy efficiency obligation scheme
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
voluntary agreement
training and education
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
training and education
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
standard/norm
voluntary agreement
(Leer)
training and education
energy or CO2 tax
financing scheme/instrument
fiscal incentive
other
regulation
voluntary agreement
(Leer)
training and education
cross-cutting
private
households
services/industry
transport
130
voluntary agreements, general behavioural and information measures or measures
promoting energy management. About half of those including buildings in their scope
cover both residential and non-residential sectors. More than a third are focused on the
non-residential sectors (industry and services). A smaller rate of policy measures are
focused on the residential sector.
According to the information submitted in the NECPs (Annex III), in the period from
2021 to 2030 at least 52% of the energy savings will be realized on buildings (the
remaining 48% would come from cross-cutting measures which could also target
buildings). These are to be achieved either via energy savings obligations scheme, which
are currently in place in 15 EU MS, or alternative measures.
Measures adopted by MS to meet their obligations under the EED are likely to impact a
broad range of entities, including regulated entities under option EXT1 such as energy
suppliers. MS national EEOSs are likely to directly regulate suppliers of energy for
building heating and cooling services, including suppliers of electricity, heat, gas, liquid
and solid fuels. If the building sector is brought within the ETS and the obligation is set
at the point of supply, suppliers of gas, liquid and solid fuels may be regulated under both
schemes.
MS designate one or more obligated parties at national level that are required to achieve
energy savings among final customers. The designation of an obligated party must be
based on objective and non-discriminatory criteria as provided in Article 7a(2) EED.
Most MS have chosen to obligate energy suppliers. However, in Denmark and Italy
distribution companies are obligated, while in Portugal, the obligation is held by a non-
profit private entity with a public function. One of the UK’s energy obligation schemes
obligated both energy suppliers and licensed electricity generators.
Several MS employ a threshold above which energy companies are obligated. In other
countries there is no threshold in place and small energy companies often participate
through sector associations or other bodies that can act collectively on their behalf.
Where thresholds are in place, they vary in the way they are defined. For example, in
Ireland the threshold is set in energy terms, at a minimum of 600 GWh of sales per year,
while in Austria and Latvia on 25 GWh and 10 GWh per year, respectively. In the UK,
the threshold is set in terms of number of domestic customer accounts (250 000 in 2014,
falling to 200 000 in 2019 and 150 000 in 2020, reflecting the increasing number of small
electricity suppliers in the UK market.
The obligated parties’ fuel and sector coverage also varies between schemes, with many
programmes covering all fuels and sectors, e.g. Austria, France, Greece, Ireland,
Luxembourg and Slovenia. However, where thresholds are sufficiently restrictive this
can, in practice limit fuel coverage to electricity, gas, oil and district heating. In some
programmes, fuel coverage is limited to electricity and gas (e.g. Italy and the UK), while
in others it is limited to electricity only (e.g. Latvia and Malta). In a number of
131
programmes transport sector fuel coverage is excluded (e.g. BG, IT, PL and the UK)
while in the UK sector coverage is limited to the household sector.
In most schemes the fuel and sector coverage of the energy efficiency actions open to
obligated parties matches the scope of the fuels and sectors used to calculate their
obligation. This ensures that all the end-users that ultimately pay for the programme costs
of the energy efficiency obligation scheme have the possibility to benefit from the energy
efficiency actions brought about through the scheme. A narrower focus for energy
efficiency actions would leave some end-users paying and unable to benefit, while a
broader focus would enable some end-users to benefit without paying. However, in at
least one energy efficiency obligation scheme (Italy) obligated parties can meet their
obligations through energy savings generated outside of the sectors to whom they pass
through costs, although in practice most energy efficiency actions save electricity and gas
(the obligated fuels).
Fulfilling the obligations under the Article 7a EED will help the obliged parties to lower
their GHG emissions and thereby also the ETS related costs.
Interactions or overlaps might occur regarding energy efficiency obligation schemes
(including White Certificates) implemented or to be implemented by MS. In addition,
overlaps might also occur regarding voluntary agreements established by MS with the
industry sector (which is e.g. the case for Flanders), and other alternative policy
measures, e.g. taxation measures or financial and fiscal schemes.
EEOSs tend to have stronger monitoring and verification regimes than the alternative
measures (excluding taxation measures) that account for the majority of the energy
savings reported under Article 7 EED.
Taxation measures implemented under Article 7 EED, e.g. taxes on fuel for transport
(Czechia, Finland and Lithuania), cross-cutting taxes that cover transport (e.g. Cyprus
and Greece), travel taxes, either km-tax or tolls for trucks (Austria, Belgium and
Germany) or air passenger duty (Germany) have effects on the transport sector in terms
of modal shift (e.g. to rail mode) or in reducing travel demand and improving the energy
efficiency per goods carried (by providing an incentive to freight companies to optimize
the truck loads).
MS already implemented other policy measures explicitly targeting modal shifts as part
of their objectives. Half are umbrella policies for transport or mobility (Austria, Hungary,
Romania, Slovakia and Spain). Three are related to metro extensions (Greece, Hungary
and Romania). The three others are specific measures: companies’ mobility plans in the
Brussels region, City bike systems in Croatia, and subsidies to decrease cost of public
transport in Hungary.
The majority, 45 of the 58 policy measures aim at improving the efficiency of transport
modes, and particularly road vehicles (22 measures). The predominance of measures
related to improving efficiency of transport modes might be because energy savings from
132
these measures are easier to monitor, and their energy savings effects are easier to
demonstrate.
The notified transport policy measures under Article 7 EED first target private passenger
travels (26 measures), public transport (19 measures) and freight (14 measures) (one
policy measure might target different travel types). A few measures had a specific scope:
fleet management system for the Central government’s vehicles in Cyprus, the PIMA
Tierra scheme for tractors in Spain, waterway and air transport modernisation in
Romania.
Interactions or overlaps might occur regarding energy efficiency obligation schemes
(including White Certificates) or other policy measures under Art. 7.
The functioning and effectiveness of the energy savings obligation schemes as key
delivery instrument could be affected. The two instruments would most likely have to
rely on the same regulated entities, which could not always be easy to implement,
because the obligated parties under the Article 7 energy savings obligation schemes are
defined at MS level and consequently differ across the countries. Usually these cover
energy suppliers, but can also be energy distributors (network operators). However, this
is less an issue for MS using alternative policy measures under Art. 7b. The latter MS
include Germany, which is in a particular position as there a national ETS targeting
among others the building sector is being implemented.
 the Renewable Energy Directive 2018/2001/EU
The objectives of the Renewable Energy Directive (RED) are coherent with those of the
ETS. Under option EXT1, the price signal of the ETS may contribute to the objectives of
the RED by increasing the cost-effectiveness of renewable energy sources compared to
fossil fuel energy sources. The emissions reductions achieved through the RED would
potentially affect the scarcity of allowances and the price signal under the ETS. This is
factored in through the cap-setting based on scenarios which fully include the RED
impact.
The RED includes specific provisions for buildings (article 15 (4) and 15(5)) by requiring
MS to introduce appropriate measures in their building regulations and codes in order to
increase the share of all kinds of energy from renewable sources and requiring the use of
minimum levels of renewables in new buildings and existing buildings that are subject to
major renovation, in so far as technically, functionally and economically feasible. In
addition, MS shall ensure that new public buildings, and existing public buildings that
are subject to major renovation, at national, regional and local level, fulfil an exemplary
role and they may allow that obligation to be fulfilled by complying with nearly zero-
energy building provisions as required in Directive 2010/31/EU. Indicative targets for
heating and cooling (Article 23) and requirements in renewables for district heating and
cooling networks for 2021-2030 (Article 24) have triggered some increased RES shares
in the heating supplied for buildings.
133
Indeed, in order to promote the use of renewable energy in the heating and cooling
sector, Article 23 provides for an umbrella heating and cooling indicative target that
covers all sectors, including buildings. The target is 1.3 percentage points as an annual
average calculated for the periods 2021 to 2025 and 2026 to 2030. Up to 40% can be
covered by waste heat, if a MS decides so.
Article 23(4) lists possible measures that can be used to fulfil the targets. Point a) relates
to fuel switch. The rest of the measures relate to fuel switch in a more indirectly way.
This list may be extended.
Article 24 mirrors the overall heating and cooling target established under article 23 by
setting an indicative annual average one percentage point increase as an annual average
in renewables for district heating and cooling networks for the period 2021 to 2025 and
for the period 2026 to 2030. This target is indicative and optional.
As with the EED, there is likely to be some overlap in terms of the regulated entities
covered. Regulated entities under MS measures to implement the RED are likely to
include suppliers of fuel used in building heating and cooling, who would partly also be
regulated entities under option EXT1136
.
 the Ecodesign Directive 2009/125/EC;
The objective of the Ecodesign Directive is to set a framework for Ecodesign
requirements for energy-related products that are placed on the EU market. The
implementing measures set minimum performance requirements and information
requirements for specific products. The Directive specifies that the level of energy
efficiency or consumption must be set aiming at the life cycle cost minimum to end-users
for representative product models, taking into account the consequences on other
environmental aspects. The Ecodesign Directive and its measures are complementary to
that of the ETS. Inclusion of the building sector in the ETS would possibly support the
goals of the Ecodesign Directive: the increased costs of using inefficient heating and
cooling equipment could drive faster uptake of more efficient products that meet the
Ecodesign requirements for boilers and water heaters. The Ecodesign Directive could
also partially assist in limiting the potential negative social impacts of including space
heating and cooling in the ETS by providing final residential consumers with products
that could aid in reducing the costs of heating and cooling137
.
 the Energy Labelling Regulation (EU) 2017/1369
136
ICF et al. (2020).
137
ICF et al. (2020).
134
The Energy Labelling Regulation lays down a framework for the labelling of energy-
related products. The Commission will review and rescale EU energy labels for key
products like space heaters, water heaters, air conditioning systems in the coming years.
Energy labels incentivize consumers to choose the best performing appliances. Pursuant
to Article 7(2) of the Energy Labelling Regulation, where MS provide incentives for
specific products with energy labels, such incentives shall aim at the highest two
significantly populated classes. The Energy Labelling Regulation and its delegated acts
for heating and cooling appliances are complementary with the ETS. Like the inclusion
of the building sector in the ETS does via a price signal, energy labels steer consumers
towards more energy-efficient heating and cooling appliances, while Article 7(2) of the
Energy Labelling Regulation steers financing towards the most efficient appliances.
 the Energy Taxation Directive (Directive 2003/96/EC)).
Broadly speaking, the objectives of the Energy Taxation Directive (ETD) are in line with
those of the ETS and their coexistence could reinforce their effectiveness. Indeed, under
the ETD (Article 9 and Annex I), energy taxes are decided on a MS level, but there are
minimum excise duty rates that MS must apply to energy products for motor, heating and
electricity fuels. However, even if the minimum excise duty levels are often translated
into “effective carbon taxes” in MS by using the carbon intensity of the respective fuel,
often energy excise duties are levied for reasons other than pricing in part of the carbon
externality.
The ongoing revision of the ETD, planned for the second quarter of 2021, includes as one
possible option for discussion, taxation rates based on a carbon content to the sectors not
covered by the ETS, on top of the energy content. This option would incentivize products
with low or zero content (as hydrogen, advanced biofuels and renewable electricity) and
would allow to differentiate among various fossil fuels, such as less CO2 intensive
natural gas and more CO2 intensive coal.
The ETS and the ETD would potentially overlap, as both Directives would send a price
signal to end users that should reduce their demand for energy, and ultimately reduce
GHG emissions. In addition, exemptions for ETS installations would have to apply138
.
In any case, if extending emission trading to buildings, a key challenge is to identify the
regulated entities. The tax warehouse operators could be an appropriate regulated entity
but would present some difficulties as natural gas and coal do not pass through tax
warehouses, and some MS specifically exempt these fuels from energy taxation when
used in residential heating.
138
ICF et al. (2020).
135
Table 48: Effective 2020 carbon price by Member States
Figures for countries with a * include national CO2 taxation. Calculations based on the “Taxes in Europe
Database”139
Compatibility and implications of an emissions trading system for road
16.3
transport with the relevant pieces of EU legislation in force
 Vehicle CO2 performance standards140
Reducing CO2 emissions from road transport in the EU has been driven through fleet-
level emissions standards, which set annual CO2 performance targets for the new vehicle
fleet of manufacturers to meet by a certain date, thereby encouraging the supply of
efficient and zero- and low-emission vehicles. The CO2 standards and inclusion of
transport into the ETS follow the same emissions reduction objective through different
complementary approaches: the CO2 standards address the CO2 efficiency of new fleet
while ETS would cover the fuel use in the entire vehicle stock.
139
https://ec.europa.eu/taxation_customs/tedb/splSearchForm.html, calculations using the official EU
emission intensity factors as in COMMISSION IMPLEMENTING REGULATION (EU) 2018/2066.
140
Regulation (EU) No 333/2014; Regulation (EU) No 253/201; Regulation (EU) 2019/631: Regulation (EU)
2019/1242
136
As the CO2 performance standards have generally been effective at lowering emissions in
the light-duty vehicle transport sector and are expected to be so in the heavy-duty sector
with the application of the new CO2 performance standards, including the road transport
in an emissions trading system have to be carried out without weakening the existing and
future standards.
ETS coverage could be complementary to the CO2 standards to the extent that it could
address possible rebound effects, whereby customers drive more as their vehicles become
more efficient due to lower usage costs141
. An ETS inclusion would increase the price of
every additional kilometre driven. ETS coverage could also address one of the
deficiencies of the CO2 standards, which is that as it is achieved under testing conditions,
it does not capture real-life emissions. In addition, an increase in fuel prices through the
ETS could increase demand for more fuel-efficient vehicles, allowing for fulfilment of
the efficiency objectives of the car manufacturers.
The entities concerned by the regulations on vehicle CO2 performance standards are the
vehicle manufacturers. An inclusion of transport into an ETS would not lead to overlaps
in terms of regulated entities. While pricing can have a complementary impact to other
policies, supporting fuel shift and logistics improvements, as well as purchase decisions,
and other regulatory instruments, like the CO2 standards, are necessary to tackle market
barriers and failures142
. Pricing supports these other instruments. In fact, without
instruments such as vehicle standards addressing the supply of vehicles, pricing policies
would be less effective, due to the low price elasticities in road transport.
In the short term, the current estimated low price elasticities of road transport are due to
the long investment lead times of private car users. The relatively low price elasticities in
general are also due to the market barriers, such as split incentives (for instance between
first and second owner, company cars), short-term consumer perspective, a lack of
information, lack of access to finance, lack of alternative fuels infrastructure, lack of
internalisation of externalities ranging from climate change to innovation, lack of access
to public transport, etc.
For instance, private consumers typically severely discount future fuel savings143
, only
taking these into account on average up to a time horizon of a few years144
. Furthermore,
there are split incentives between the first and second owner of the car. Purchasers of
new cars have preferences skewed away from fuel economy and towards factors such as
141
ICCT, op. cit, p. 5; CE Delft, Analysis of the options to include transport and the built environment in the EU ETS
(2014), p. 60
142
Impact assessment on the cars and vans CO2 emission standards.
143
See e.g. Greene, D. L., Evans, D. H., Hiestand, J., Survey evidence on the willingness of U.S. consumers
to pay for automotive fuel economy (2013). In: Energy Policy. 61, pp. 1539–1550.
144
See e.g. Greene, D. L., Evans, D. H., Hiestand, J., Survey evidence on the willingness of U.S. consumers
to pay for automotive fuel economy (2013). In: Energy Policy. 61, pp. 1539–1550.
137
comfort and power145
, and even more so if the car is purchased as a company car, and
fuel expenses are paid by the company.
 The Eurovignette Directive 1999/62/EC146
The Eurovignette Directive provides the legal framework for charging heavy goods
vehicles (HGVs) for the use of certain roads and infrastructure. It currently does not
apply to light duty vehicles (LDVs) or passenger transport. The Directive aims to
eliminate internal market distortions and promote a step-wise harmonisation of vehicle
taxes and fair infrastructure charging. It is predominantly concerned with infrastructure
charging, thus implementing the user pays principle in addition to the polluter pays
principle. The road charges are predominantly meant to be invested in optimizing the
transport system and in particular infrastructure maintenance, while the revenues
collected from external cost charges should be used to make transport more sustainable.
The Eurovignette Directive is currently being revised. The Commission proposed the
variation of infrastructure charges according to the CO2 emissions for trucks and buses
and the extension of the scope also to light duty vehicles147
. The co-legislators agree in
their negotiating positions on extending its scope to all HGVs and LDVs.
 Renewable Energy Directive
The Renewable Energy Directive 2018/2001 (REDII)148
and the inclusion of transport in
an ETS would be compatible. However, the increase in supply of renewable energy for
transport due to REDII could lower the number of allowances necessary for transport
under the ETS leading to a lower carbon price, which would need to be taken into
account when designing the new ETS.
Concerning the regulated entities, the entities concerned in the RED II are the fuel
suppliers, who must demonstrate that the minimum share of energy supplied for transport
fuels from renewable sources is met. REDII includes a reporting and monitoring
methodology for the energy content of transport fuels, covering petrol, diesel, natural
gas, biofuels, biogas, renewable liquid and gaseous transport fuels of non-biological
origin, recycled carbon fuels and electricity supplied for transport. These reporting
requirements are potentially complementary for ETS inclusion.
145
ICCT 2019/2020 EU vehicle market statistics. Between 2001 and 2018 average CO2 emission levels for
new cars, according to the official test procedure, have decreased by about 30%, vehicle weight has
increased by +10% and engine power has increased by +30%.
146
Directive 1999/62/EC on the charging of heavy goods vehicles for the use of certain infrastructures, OJ L 187,
20.7.1999
147
COM(2017) 275
148
Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of
the use of energy from renewable sources
138
Even if tax warehouses is the regulated entity under a new and separate ETS, considering
that natural gas (LNG or CNG) currently does not pass through tax warehouses, gas
suppliers could be considered as a regulated entity. In this case, it would be possible to
draw on the pre-existing system for natural gas in REDII to monitor flows for this fuel149
.
Moreover, concerning biofuels, the monitoring and reporting requirements in REDII
regarding mass balances of biofuels would make it easier for tax warehouses to monitor
the type and share of biofuels in transport fuels by strongly reducing the risk of fuel
suppliers declaring higher shares of biofuels than there are in reality150
.
 Energy Taxation Directive
The Energy Taxation Directive151
lays down minimal tax rates for motor fuels and
electricity, above which MS can establish their respective rates. These minimum tax rates
have remained unchanged since 2003, and are currently unrelated to the CO2 emissions
or energy content of energy products.
Energy taxation and ETS coverage highly overlap, as they both provide a price incentive
to consumers to reduce the CO2 impact of their mobility behaviour.
As regards to regulated entities, energy taxes are applied as excise duties, which are
ultimately paid by the consumer. The transport fuels concerned by the Energy Taxation
Directive are held in tax warehouses until they are released for consumption, at which
point the excise duty must be paid. The amount of these fuels which is consumed for
transport is therefore monitored and registered by tax warehouses.
Compatibility with other pricing instruments at Member states level
16.4
As regulated under the Effort Sharing Regulation, MS have put in place climate and
energy policies applicable to road transport and buildings sectors, including pricing
instruments. As regards to carbon pricing, those instruments range from no or only
minimal carbon pricing, to the settlement of a carbon price from decades. Where carbon
pricing instruments are in place, they have been introduced as part of a broader package
of policies, or as part of national strategies aiming to achieving the respective climate
targets. When managing overlap between the national carbon pricing instruments and the
ETS, administrative solutions as exemptions to fuels or emissions that are priced under
the ETS have been exempted from the coverage of the national pricing tool. Other
market-based instruments have also been put in place in MS, as tradable energy
efficiency obligations, as well as other measures to mobilise mitigation potentials and to
149
ICF et al. (2020), p. 386
150
ICF et al. (2020), p.386.
151
Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of
energy products and electricity
139
address market imperfections that are not addressed through the carbon price. Therefore,
complementary measures have been used up to date.
Additional consideration on policy compatibility for a possible extension to all
16.5
fossil fuels for the sectors not under the ETS
 ETS Directive
Small industrial installations are either excluded from the scope of the Directive (Annex
1) or can excluded from its scope by MS if certain conditions are met (Articles 27 and
27a).
An evaluation of the impact of Article 27 has found that the around 4500 installations
excluded from the ETS under Art. 27 accounted for a fraction equivalent to 4.5Mt CO2e
or 0.3% of total verified emissions in the ETS in 2013152
. If these SMEs would be subject
to a carbon price under this option, they would pay a different (possibly larger) carbon
price than competitors subject to the ETS and there would be the need for a mechanism
to tackle carbon leakage.
The main considerations which were taken into account when excluding small
installations from the scope of the ETS were that a) the costs of participation are unduly
high for them; b) participation renders the conditions for SMEs to succeed more difficult
and c) the emission reductions that can be achieved are not worth the effort.
For industrial installations currently under the ETS, there would be the need for a
reimbursement mechanism as these installations would otherwise have to pay twice a
carbon price: once upstream and once under the existing ETS.
 Renewable Energy Directive
In case all fossil fuels were included in an ETS, all sectors would have an incentive to
use more biofuels to avoid the carbon price, driving up the demand for biofuels in all
sectors outside the scope of the existing ETS plus transport and housing. For the
transport sector, this would make it marginally more difficult to meet its biofuels
objectives.
 Energy Taxation Directive
In the case of all fossil fuel covered under an ETS, the increase of the fuel price would be
more palpable for the uses specified in Article 8 of the ETD (which establishes
derogations in the form of significantly reduced tax rates for motor fuels that are used for
industrial and commercial purposes, in particular in agricultural, horticultural or
152
Evaluation of the EU ETS Directive, 2015 (Environment Agency Austria, Ecologic, Sustainable Quality
Consult.
140
piscicultural works, and in forestry; for stationary motors; for construction machinery
and for vehicles intended for use off the public roadway), as they start from a much lower
base.
 EU Agricultural Policy
The partial exemption specified in article 8 of the Energy Taxation Directive for diesel
and kerosene used might need to be revised.
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Annex 6 Specific elements of maritime transport options
17 COMMON DESIGN ELEMENTS FOR ALL MARITIME OPTIONS
Overview of the different policy options
17.1
The table below summarises the main combination of policy options considered for maritime in this
impact assessment.
Table 49: Summary of maritime transport policy options
Geographical
scope
Policy
option
MINTRA MEXTRA50 MEXTRA100
MAR1 Inclusion of maritime
emissions from all intra-
EEA voyages and
emissions at berth in the
EEA in existing ETS
Inclusion of maritime
emissions from all intra_-
EEA voyages, emissions at
berth in the EEA and 50%
of extra-EEA voyages in
existing ETS
Inclusion of maritime
emissions from all intra-
EEA voyages, emissions at
berth in the EEA and all
extra-EEA voyages in
existing ETS
MAR2 A separate ETS for
maritime covering
emissions from all intra-
EEA voyages and
emissions at berth in the
EEA
A separate ETS for
maritime covering
emissions from all intra-
EEA voyages, emissions at
berth in the EEA and 50%
of extra-EEA voyages
A separate ETS for maritime
covering emissions from all
intra-EEA voyages,
emissions at berth in the
EEA and all extra-EEA
voyages
MAR3 Carbon levy covering
emissions from all intra-
EEA voyages and
emissions at berth in the
EEA
Carbon levy covering
emissions from all intra-
EEA voyages, emissions at
berth in the EEA and 50%
of extra-EEA voyages
Carbon levy covering
emissions from all intra-
EEA voyages, emissions at
berth in the EEA and all
extra-EEA voyages
MAR4
(MAR1+
standards)
Inclusion of maritime
emissions from all intra-
EEA voyages and
emissions at berth in the
EEA in existing ETS in
combination with
standards
Inclusion of maritime
emissions from all intra-
EEA voyages, emissions at
berth in the EEA and 50%
of extra-EEA voyages in
existing ETS in
combination with standards
Inclusion of maritime
emissions from all intra-
EEA voyages, emissions at
berth in the EEA and all
extra-EEA voyages in
existing ETS in combination
with standards
Regulated entities
17.2
The regulated entity is the party that would be held accountable to comply with the legislation
including the monitoring and reporting of emissions and bearing the cost of emitted carbon or
complying with any other form of regulation.
The structure of the maritime sector involves a range of ownership and commercial arrangements
which need to be taken into consideration when deciding which legal entity should bear the
responsibility for compliance under an ETS or other forms of carbon pricing policies. The main
difficulty of defining the regulated entity is linked to the fact that ship ownership and operation
often lie in the hands of different actors, with shipowners having control over technical
142
improvements of the ship and ship operators being in charge of implementing operational emission
reductions.
The two types of regulated entities considered in this analysis are “companies” and ship commercial
operators based on the following definitions:
 Companies: This category includes shipowners as well as any other organisation or person,
which has assumed the responsibility for the operation of the ship from the shipowner, such
as the manager or the bareboat charterer. These companies would also be the ones that have
agreed to take over all the duties and responsibilities imposed by the International
Management Code for the Safe Operation of Ships and for Pollution Prevention, as defined
under the SOLAS regulation and identified with their IMO company identification number.
While shipowner-operators can implement technical energy efficiency solutions, improve
ship operation (e.g. optimised speed) or use sustainable alternative fuels to reduce GHG
emissions, shipowners involved in certain forms of charterers contracts have much less
control on the operation of their vessels.
 Ship commercial operators: This category includes all entities, which has assumed the
responsibility for the commercial operation of a ship and which is responsible for paying for
the fuel consumed. This could be a manager, a time charterer, a bareboat charterer or a
shipowner. Operators are most likely able to implement and benefit from operational
optimisation dependent on their contractual obligations, but they might not be in a position
to implement technical energy efficiency improvements.
These two options differ in terms of their coherence with existing legislation, their alignment with
the polluter-pays principle and their ability to pass carbon costs.
In terms of coherence with existing legislation, the use of companies as regulated entities would
ensure an alignment of the policy options with both the EU maritime transport MRV regulation and
the IMO Data Collection System. It would allow building on the experience gained so far and it
would reduce administrative costs for both the industry and public authorities. Linking the
definition of regulated entities with the International Safety Management code would also mean that
companies can be identified through their unique IMO number, which was introduced in 2004, as a
measure to enhance maritime safety, security and environmental protection, and to facilitate the
prevention of maritime fraud. This could ease future implementation. The European Commission
has already proposed to amend the definition of companies in the EU maritime transport MRV
regulation in that sense153
. On the contrary, using ship commercial operators would diverge from
existing international and EU regulation. In addition, it would oblige revising the EU maritime
MRV regulation in order to ensure that each ship operator (e.g. a time charterer) monitor, report and
verify its CO2 emissions. It may also be impractical and costly to operate a policy that regulates all
time charterers, especially those chartering vessels for a short period. It would also lead to some
153
Proposal for amending Regulation (EU) 2015/757 in order to take appropriate account of the global data collection
system for ship fuel oil consumption data, COM(2019) 38 final, 2019/0017 (COD)
143
enforcement issues as Port State Control inspections would have limited ability to take action at
ship level in case of none-compliance.
In terms of following the polluter-pays principle, both options present some pros and cons. While
the focus on “ship commercial operators” would ensure that the entity purchasing the fuel is the one
that pays for the generated climate costs, it would fail to take into account the shipowner’s
responsibility, who is the liable entity in terms of the technical performance of the ship and the
entity that has ultimately the power of decision when it comes to implementing technical energy
efficiency measures. If the responsibility of the carbon costs was attributed to companies, it would
be fully in line with the polluter-pays principle in case of shipowner-operators or bareboat charterer
in charge of vessel’s operation. However, it would not bring to light the responsibility of
commercial operators in case vessels are time chartered, as charterers have a direct influence on the
way vessels are operated.
In terms of costs pass-through, some organisations have explained in their feedback why the use of
commercial operators as regulated entities would help shipowners from the tramp shipping industry
transfer the carbon pricing costs along the supply chain and ensure a level playing field. In general,
the cost related to CO2 emissions could be classified under voyage costs, which is generally borne
by companies when directly engaged in shipping activities. However, when a vessel is hired under a
charter party agreement the responsibility for the voyage costs might fall either on the charterers or
on the companies depending on the service the ship is expected to perform. Charter party
agreements are mostly classified either as bareboat, time or voyage charters. Each of these types of
charter parties has its own peculiarities in relation to the allocation of the voyage costs, as well as in
relation to the distribution of all the obligations, rights, and risks between the contracting parties.
Under bareboat and time charter contracts, as opposed to voyage charter parties, the charterers are
responsible for the operation of the ship, hence for the bunker fuel and all the port charges arising
during the voyage. Accordingly, if carbon pricing is applied to maritime emissions, bareboat and
time charterers would be directly linked to the CO2 emissions resulting from the combustion of the
fuel onboard the ship. However, in the case of voyage charter parties, it might result in new
obligations for the entities involved. New clauses could be added to charter parties for the purpose
of reflecting carbon pricing. This may imply that a company would need to either charge emission
related cost at the end of the contract when a charterer reports emissions from its operations, or
charge a “deposit” from the outset whereby the unused money would be returned to the charterer in
the end of the contract period. A charterer could also purchase allowances and transfer them to the
company, which will then surrender them to the regulator.
Regulated ships and activities
17.3
The regulated ships would be the ones covered under the EU maritime MRV regulation, which
exempts for proportionality and subsidiarity reasons all ships below 5.000 gross tonnage as well as
all warships, naval auxiliaries, fish-catching or fish-processing ships, wooden ships of a primitive
build, ships not propelled by mechanical means, or government ships used for non-commercial
purposes. In addition, the EU maritime MRV regulation only covers the ship movements that serves
the purpose of transporting passengers or cargo for commercial purposes.
144
The figure below illustrates the type of ships and activities inside and outside the scope of the EU
maritime MRV regulation.
Figure 36: Scope of the EU maritime transport MRV regulation
Source: 2019 EU MRV annual report on CO2 emissions from maritime transport
Geographical scope
17.4
According to the EU MRV maritime transport regulation, a voyage means any movement of a ship
that originates from or terminates in a port of call and that serves the purpose of transporting
passengers or cargo for commercial purposes. For inbound voyages to an EEA port, the starting
point for the emissions calculation would be the last port of call outside the EEA and the end point
would be the first port of call within the EEA. For outbound voyages leaving the EEA, the starting
point for the emissions calculation would be the port of departure within the EEA and the end point
would be the first port of call outside the EEA.
In this context, intra-EEA voyages represent all the voyages done by a ship between two EEA ports
of call, while extra-EEA voyages represent all the incoming voyages from the last non-EEA port to
the first EEA port of call and all outgoing voyages from an EEA port to the next non-EEA port of
call.
The table below presents the various geographical scopes considered under this impact assessment.
Each column corresponds to a category of CO2 emissions and each row corresponds to a specific
geographical scope.
145
Table 50: Overview of the different maritime geographical scope
Geographical
Scope
[A]
Intra EEA
voyages
[B]
Outgoing
Extra EEA
voyages
[C]
Incoming
Extra EEA
voyages
[D]
50% of all
outgoing &
Incoming
Extra EEA
voyages
[E]
At Berth
MINTRA
MEXTRA50
MEXTRA50
variant 1
MEXTRA50
variant 2
MEXTRA100
Legal feasibility of maritime options
17.5
All proposed options are legally feasible. Including the maritime transport under the ETS (MAR1)
would have Article 192(1) TFEU as its legal basis and would therefore be adopted with the ordinary
legislative procedure. Directive 2003/87/EC has no provision prohibiting the inclusion of emissions
from the maritime sector in the EU ETS. Inclusion of the maritime sector in the existing EU ETS
would require amending this Directive as well as its Annex I, similar to the way in which the
Directive was amended to include the aviation sector.
Establishing a separate scheme for ETS for the maritime sector (MAR2) is not excluded by any
provision of EU law. However, it would require a separate (new) legal instrument that could take
the form of a Directive or Regulation depending on the content of the instrument.
Introduction of a levy on GHG emissions from ships (MAR3) would not be possible within the
current system of EU excise duties since the levy would not be based on the sale of a product;
hence, the EU would have adopt a new Directive under Article 192(2) TFEU. Therefore, the level
of effort associated with legal procedures in this policy option is comparable with MAR2 and is
legally feasible.
The additional legal considerations related to MAR4 are linked to the carbon intensity standards.
They could be based on Article 192(1) TFEU. In this case, it would be adopted by qualified
majority, on the basis of the ordinary legislative procedure. From the perspective of international
law, the imposition of standards will be closely linked to the provisions of the relevant international
treaties and may impact the design of the measure. However, the measure is legally feasible based
on the EU MS’ competence as port States (under UNCLOS) and the GATT.
146
18 DESIGN ELEMENTS SPECIFIC TO MARITIME ETS OPTIONS (MAR1, MAR2 AND MAR4)
Maritime ETS cap and LRF
18.1
The ETS cap on emissions determines the ambition level of the ETS and is the maximum absolute
quantity of GHGs that can be emitted by the covered activities to ensure the emission reduction
target. The cap’s yearly trajectory is declining based on the linear reduction factor (LRF), which is
set as a percentage applied to a reference value. For the existing EU ETS, the cap trajectory is
currently set at 2.2% per year applied to the mid-point of the period 2008 to 2012 of the ETS sector
scope (i.e. stationary power and industry sector and intra EU aviation).
In view of the European Climate Law154
, the legislation on the EU ETS, the ESR, and LULUCF
need to consistently deliver the “at least -55%” reduction of net greenhouse gas emissions by 2030
compared to 1990. The -55% economy wide target is a “domestic” EU target which does not
preclude the EU ETS from regulating beyond the “domestic” target scope.
The cap and the LRF approach of the maritime ETS options (MAR1, MAR2 and MAR4) are
comparable because, either for an own ETS (MAR2) or for the extension of the existing ETS
(MAR1 and MAR4), the cap and LRF will need to be consistent with the -55% economy wide
“domestic” target155
, while then being applied to the relevant maritime ETS scope (MINTRA,
MEXTRA50 or MEXTRA100). The options with extension of the existing ETS (MAR1 and
MAR4) imply an increase of the existing ETS cap by the relevant maritime scope emissions and a
revised cap trajectory commensurate with the -55% target. The changes to the LRF compared to the
AMB options described would be limited, for example the integration of MAR1 into AMB 2c
would reduce the LRF by 0.02 % points. For the ETS strengthening options with the one off cap
reduction (“rebasing”), i.e. AMB2b, AMB2c and AMB3c, it means that the cap after rebase will be
increased by the maritime scope emissions, which will result in a net one off reduction smaller than
the estimated in Section 5.2.2 (options without rebasing will just see a cap increase by the maritime
scope emissions followed by a revised LRF). The amount of free allocation under the ETS would
154
In order to reach the climate-neutrality objective set out in Article 2(1), the binding Union 2030 climate target shall
be a domestic reduction of net greenhouse gas emissions (emissions after deduction of removals) by at least 55 %
compared to 1990 levels by 2030.
155
In order to ensure this compatibility with the net 55% greenhouse gas reduction target, in line with the European
Climate Law, emissions allocations excluding LULUCF and including international intra-EU aviation and
international intra-EU navigation would have to be 52.8% lower in 2030 compared to 1990, with LULUCF making
up the remainder of the reductions to reach the -55% target. Emissions estimates for 1990 are based on EU UNFCCC
inventory data 2020, converted to IPCC AR5 Global Warming Potentials, notably for methane and nitrous oxide.
However, international intra-EU aviation and international intra-EU navigation are not separated in the UNFCCC
data from the overall international bunker fuels emissions. Therefore, 1990 estimates for the intra-EU emissions of
these sectors are based on (a combination of) data analysis for PRIMES modelling and 2018-2019 MRV data for the
maritime sector. Once 1990 emissions in the intra-EU scope have been estimated, the 2030 emissions space
excluding LULUCF can be calculated. This emissions space is partly taken up by the sectors covered by the Effort
Sharing Regulation (ESR), which are assigned a target of -40% by 2030 compared to the 2005 baseyear of the Effort
Sharing Regulation. The remainder is taken up by the EU ETS sectors (stationary installations, intra EU aviation,
intra EU navigation), taking into account that navigation is partly covered under both the ESR and EU ETS. To the
extent that extra-EU maritime navigation is included in the ETS, while not part of the net 55% target, it follows a
similar cap trajectory, as explained in the main text.
147
also increase. Options with an own ETS (MAR2), will not impact the existing ETS reference cap,
but would similarly impact its LRF because of cumulative target would have to be consistent.
For all options, data from the EU maritime transport MRV regulation for the years 2018 and 2019
would be used to determine the LRF and the cap increase in order to base the system on recent,
robust and verified data.
Maritime allowance allocation
18.2
Auctioning requires participants to purchase any required allowances on an auctioning platform or
an intermediary based on their own judgement of their needs. Auctioning of allowances can
promote active trading in the market and early revealing of the carbon price in the system, thereby
providing a strong price signal for emission reductions. In addition, auctioning of allowances can
raise revenue that can be recycled to promote emission reductions further (ICAP, 2019). Under the
ETS, auctioning is the basic principle for allocation, as it is the simplest, and generally considered
to be the most economically efficient, system. It also eliminates windfall profits and put new
entrants on the same competitive footing as existing operators156
.
Free allocation of allowances, alternatively, can help establish an ETS in the early stages because it
directly benefits businesses with activities in the area. For energy-intensive industries where there is
a risk that businesses or their production centres would relocate to places outside of the scope of the
ETS (i.e. carbon leakage), free allocation has been agreed as a derogation from the principle of
auctioning so as to reduce this risk. Free allocation does not compromise the price signal of an ETS,
as businesses that are allocated allowances for free can reduce their own emissions and then sell
their freely allocated allowances on the market instead, and reductions of their emissions will still
be incentivised because it will avoid additional costs. However, as noted by the European Court of
Auditors157
, if a sector can pass through the costs of EU ETS, then there is less justification for it to
receive free allocation. In this context, free allocation is less relevant for the maritime sector
compared to other sectors, due to the limited risk of carbon leakage when equal treatment on routes
is ensured and due to the possibility of passing on costs.
When ETS revenue is used to tackle climate change for particular sectors, it has similarities with
free allocation. For example, the ETS funded Innovation Fund has over €22 billion to fund the
commercial deployment of innovative technologies to tackle climate change. The shipping industry
can currently benefit from this Fund for deployment of renewables and for energy storage (batteries,
hydrogen, synthetic ammonia etc.).
156
Article 10 and recital 15 of Directive 2009/29/EC, https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:32009L0029
157
European Court of Auditors, special report 18/2020: The EU’s Emissions Trading System: free allocation of
allowances needed better targeting
148
In case allowances were freely allocated, benchmarking appears as the most appropriate method to
determine the number of allowances to be allocated. This method relies on performance standards
for the emission intensity of a product or a sector (benchmark). Regulated entities are then allocated
allowances based on these benchmarks. This option can reward early abatement by regulated
entities. The effectiveness of benchmarking is heavily dependent on the quality of data (ICAP,
2019). A similar approach to benchmarking was used in the aviation sector to allocate allowances
on the basis of tonne-kilometres. However, the use of benchmarks to allocate free allocations to
shipping companies would be more complex as it would entail the development of dedicated
benchmarks for every ship size and type. Another challenge is the change in activity level observed
in some ship segments, which would make the distribution of free allocations ex-ante more difficult.
Administering authority
18.3
To reduce administrative costs, each regulated entity would be associated with one administering
authority. The administering authority could be assigned on the basis of different criteria,
considering the specificities of the maritime sector. Such criteria could be the origin of documents
of compliance in relation to the International Safety Management Code for the Safe Operation of
Ships and for Pollution Prevention158
, EEA port call activity or the origin of companies. As
mentioned in the feedback received by stakeholders, an EU authority could possibly act on MS’
behalf in order to reduce administrative burden and increase effectiveness (e.g. in relation to the
monitoring and reporting of emissions). In any case, the legislation should ensure the equal
treatment of all regulated entities independently from the administering arrangements.
In case the association is based on the country where the regulated entity is registered, the first EU
MRV annual report showed that in 2018, around half of the companies falling under the EU
maritime transport Regulation were European with a quarter of the shipping companies coming
from Greece and 10% from Germany.
158
A company can possibly have various documents of compliance according to the flags and the ship types
149
Figure 37: Origin of companies that reported under the EU maritime transport regulation in 2018
Source: 2019 EU MRV annual report on CO2 emissions from maritime transport
MRV and Enforcement
18.4
When expanding the ETS to cover maritime emissions, the MRV process should be in line with the
rules applied in other ETS sectors. It should also build on the existing EU maritime transport MRV
regulation.
In the ETS, the monitoring and reporting of greenhouse gas emissions needs to follow the EU
Monitoring and Reporting Regulation (MRR – Commission Regulation (EU) No 601/2012). As a
first step, operators of installations and aircraft operators need to submit a monitoring plan to the
Competent Authority for check and approval before start of operation. Thereafter, operators carry
out monitoring during the calendar year according to the approved monitoring plan. In case of
significant changes to the monitoring methodology, operators submit an updated monitoring plan
150
for approval. Operators then submit a verified annual emission report (AER) to the Competent
Authority that needs to be verified by an independent accredited verifier. Operators then surrender
allowances before 30 April and where needed, operators submit a report on improvements to the
monitoring methodology before 30 June. Competent Authorities are in charge of enforcing penalties
in case of non-compliance.
The EU maritime transport MRV regulation follows a similar sequence. As a first step, the
legislation requires shipping companies to produce a monitoring plan that has to be assessed by an
independent verifier. Then, companies can proceed to the second step of the MRV process, which
consists of the monitoring and reporting of the relevant parameters. The data produced by this
ongoing monitoring activity is reported on an annual basis. In the third step of the MRV process,
companies must prepare an emission report in THETIS-MRV159
based on their monitoring
activities. In a fourth step, independent accredited verifiers have to corroborate the emission reports
submitted by companies. Verifiers should assess the reliability, credibility, and accuracy of the
reported data and information in line with the procedures defined in the legislation. When an
emission report has been satisfactorily verified, the verifier drafts the verification report, issues a
document of compliance and informs the Commission and the flag State of this issuance. This
document confirms a ship’s compliance with the requirements of the Regulation for a specific
reporting period. Then, the Commission has to make information on CO2 emissions and other
relevant information publicly available by 30 June each year. The information is available at
individual ship level, aggregated on an annual basis. Finally, MS implement and enforce the EU
MRV process by inspecting ships that enter ports under their jurisdiction and by taking all the
necessary measures to ensure that ships flying their flag are compliant with the regulation. Non-
compliance should result in the application of penalties fixed by MS. Those penalties should be
effective, proportionate, and dissuasive. Expulsion is a last resort measure when a ship is non-
compliant for two or more consecutive reporting periods.
The figure below summarises the main steps of the EU maritime transport MRV process.
159
THETIS-MRV is the IT tool behind the EU maritime transport MRV regulation. It provides a single portal for
market actors where they can report CO2 emissions and other relevant information. It also gives access to all
publicly available information. THETIS-MRV lessens the administrative burden by facilitating the exchange of
information between companies, verifiers, the European Commission, flag States and the public. The THETIS-MRV
portal is hosted by EMSA: https://mrv.emsa.europa.eu/#public/emission-report.
151
Figure 38: Main steps of the EU maritime transport MRV process
Source: 2019 EU MRV annual report on CO2 emissions from maritime transport
While the two MRV processes present many similarities, one could note the following differences.
 Under the EU maritime transport MRV system, data is checked on a ship level and not on a
company/operator level. Should shipping (ISM) companies be the regulated entity, it will be
necessary to aggregate emissions data of all ships belonging to every ISM company covered
by the ETS. This aggregation could be done automatically through THETIS-MRV, if the
regulated entity option falls on the ISM Company (i.e. aggregating emissions from all ships
managed by the ISM company).
 Contrary to the monitoring, reporting and verification system applicable to stationary
installations and aviation, the EU maritime transport MRV system for shipping does not
foresee the approval of monitoring plans and the review of verified annual emissions report
by competent authorities. Currently, monitoring plans and annual emissions reports only
have to be satisfactorily verified by an independent accredited verifier. If this new approach
were to apply to maritime, competent authorities could be supported in this task by the
European Maritime Safety Agency with their expertise on MRV data and related tools.
THETIS-MRV could for instance be used as an automated system to facilitate the exchange
of information related to the monitoring plan, the annual emission report and the verification
activities between the operator, the verifier and competent authorities. It should be noted
that monitoring plans can already be created and assessed in THETIS-MRV on a voluntary
basis. In addition, guidelines and criteria could be developed to harmonise and smoothen the
process at competent authorities’ level. For instance, THETIS-MRV is already supporting
companies by providing warning and error messages when they are entering seemingly
incorrect or incomplete data, etc.
 The timing for submitting the annual emissions reports is slightly different as in the ETS,
operators have to submit their annual verified GHG emissions report to the Competent
Authority before 31 March, while in the EU maritime transport MRV regulation, companies
have to submit their verified emission report by 30 April of each year. However, nothing
prevent a company in the EU maritime MRV regulation to submit their emission report
152
before that deadline. This is likely to happen if companies face the obligation to pay an
excess emissions penalty in case of the non-surrendering of allowances.
Enforcement
Administering authorities, would ensure that all companies under their responsibility surrender
sufficient allowances or pay the levy in due time. Information about the compliance status of
regulated entities would be derived from the registry and made accessible to the relevant authorities.
The ones under non-compliance would be sanctioned based on penalties set at EU level and
enforced by the competent authorities. The penalty for failure to surrender allowances (e.g. Article
16(3) of the EU ETS Directive) would apply to maritime regulated entities. Payment of the excess
emissions penalty would not release the company from the obligation to surrender an amount of
allowances equal to the excess emissions.
In addition, in line with the “name-and-shame” sanction foreseen in the EU ETS Directive,
administering authorities would have to ensure publication of the names of companies which were
to be found e.g. in breach of requirements to surrender sufficient allowances. In case the penalties
could not be recovered, it is envisaged that ports would have the power to detain or deny entry to
ships belonging to the companies that are found not to be in compliance, until the matter is
satisfactorily resolved.
As a last resort, mirroring the additional penalty for non-compliant aircraft operators for which
national enforcement actions have not succeeded in ensuring compliance (Article 16(5) of the EU
ETS Directive), the administering authority could request that the European Commission considers
imposing an operating ban on non-compliant shipping companies as a last resort measure.
Penalties for other offences such as MRV compliance could continue being set and enforced at MS
level, in line with the EU maritime transport MRV Regulation. In the event that a ship has failed to
comply with MRV requirements for two or more consecutive reporting periods and where initial
enforcement measures have failed to ensure compliance, the competent authority of the MS of the
port of entry (i.e. the port state) may issue an expulsion order which again should be communicated
to the Commission, EMSA, other MS and the flag state concerned. Subsequent to this, all MS can
refuse entry of the ship concerned into any of its ports until the company fulfils its MRV
obligations.
Design elements for simplification and limitation of the administrative burden
18.5
a. Pooling mechanism
As proposed by the European Parliament in the context of the revision of the EU maritime transport
MRV regulation, an option to limit the administrative burden for small and medium sized
companies and companies that are not frequently active within the defined geographical scope is to
set up a pooling mechanism (called the Ocean Fund in the EP report) to which eligible maritime
transport companies may pay an annual membership contribution in accordance with their level of
emissions (as reported under Regulation (EU) 2015/757). This entity shall then buy and surrender
allowances collectively on behalf of member companies. The membership contribution per tonne of
153
emissions shall be set by the Fund by 28 February each year, but shall be at least equal to the
highest recorded primary or secondary market settlement price for allowances in the preceding year.
However, the advantages of such mechanism can be questioned given that the administrative burden
linked to purchasing and surrendering allowances is limited compared to MRV tasks. Moreover, the
pooling mechanism poses a number of practical and legal challenges. First, it is a complex
mechanism, which can reduce the effectiveness of enforcement. Second, there is a possible price
gap between the carbon price paid by market actors “as-they-go” and the price of ETS allowances.
This might require the establishment of a settlement mechanism. Third, it is potentially
incompatible with current legislation: the pooling system being an intermediary mechanism for the
ETS market, this poses issues within the current legal framework for the auctioning and secondary
market, including as the price is different. Finally, the issue of legal responsibility if the fund
defaults will have to be addressed.
b. Exemptions
The EU maritime transport MRV regulation already implements a number of exemptions. It does
not apply to ships with gross tonnage (GT) of less than 5.000, it does not apply to warships, naval
auxiliaries, fish catching or fish-processing ships, wooden ships of primitive build, ships not
propelled by mechanical means or government ships used for non-commercial purposes. In
addition, it only covers emissions from voyages for the purpose of transporting goods or passengers
for commercial reasons.
Applying the proposed measures to ships above 5.000 GT would reduce the number of ships
covered by at least 44% and exclude around 95% of SMEs. According to Recommendation
2003/361/EC, an SME can be defined according to three criteria: under 250 members of staff and
have either an annual turnover which does not exceed € 50 million, or an annual balance sheet total
which does not exceed € 43 million. The table below presents the annual turnover, number of
enterprises and persons employed in the water transport sector in 2018. As indicated by the turnover
per enterprise, on average, the enterprises with 50 – 249 employees can be considered SMEs, as two
of the criteria are fulfilled. However, it is not possible to conclude that all of the enterprises in the
50 – 249 category would meet the SME criteria, as the annual turnover of some of them might
exceed the EUR 50 million threshold. At the same time, it is possible that a greater proportion of
enterprises would fall under the SME definition than those displayed in the table below, as there
may be companies which exceed the turnover criterion yet meet the balance sheet criterion (which
is not considered in this analysis). With these limitations in mind, if we assume that all companies
in the 50 – 249 category are SMEs and that a ship over 5.000 GT requires more than around 20
people to be operated, retaining a threshold of minimum 5.000GT for regulated entities would
exclude around 95% of all SMEs in the water transport sector.
154
Table 51: Turnover, number of enterprises and persons employed in water transport in 2018
Number of employees Total >250 50-249 20-49 10-19 0-9
Turnover (million €) 126,721 84,158 15,357 5,552 2,815 18,802
Number of enterprises c 102 362160
540 817 16,727
Persons employed c c 38,903 16,721 10,995 c
Turnover per enterprise
(million €)
N/A 825.1 42.4 10.3 3.4 1.1
Meets SME defining criteria, on
average
  Medium Small Micro
c: confidential data
Other discarded design elements for the maritime sector
18.6
Regulating ports or fuel suppliers: Based on the previous 2013 impact assessment support
study161
, it is not considered a reasonable alternative to set the regulated entity as either the port or
the fuel supplier in an ETS as neither party can directly influence investment decisions or the
operation of ships and therefore do not have direct control over the majority of the sector’s
emissions.
Regulating ships and not companies: While it is also possible that the point of regulation could be
the vessels themselves, identified by their IMO number, this would require the designation of the
legal person who would have to ensure compliance with the regulation on behalf of the ship. As the
vessel cannot fulfil the obligations of MRV and surrendering allowances itself, it cannot be
considered a legal entity in its own right.
An upstream emissions trading system for maritime transport making bunker fuel suppliers
based in the EU liable for the emissions from the fuel sold is not suitable, as it will trigger evasion
due to ships being able to carry fuel for several months and thus easily being able to refuel outside
of the EU to avoid the carbon price.
Non-alignment with the EU Maritime transport MRV regulation in terms of ships covered:
The proportionality of policy actions in the maritime sector is highly dependent on the categories
and the size of ships covered. In general, in order to reduce administrative burden while ensuring a
high environmental impact, any measures should aim at high coverage of emissions with a
minimum number of ships covered. This is the reason why the EU maritime transport MRV
regulation was set with the minimum threshold of 5.000 gross tonnage. It was decided for the same
reasons not diverge from this conclusion and to keep the scope of the EU maritime MRV regulation
160
The 2017 figure used as an estimate, as 2018 figure considered confidential.
161
2013 Support study for the impact assessment of a proposal to address maritime transport greenhouse gas emissions,
Ref: CLIMA.B.3/SER/2011/0005,
https://ec.europa.eu/clima/sites/clima/files/transport/shipping/docs/ghg_maritime_report_en.pdf
155
in terms of ships covered. According to a recent study162
, around 33.000 ships between 400 and
5.000 gross tonnage performed intra-EU voyages in 2019 and emitted around 17.5 million tonnes of
CO2 emissions. Including these smaller vessels would seriously increase the number of ships
covered by the system from 12.000 to 45.000 ships and it would increase administrative costs. It
would also have a limited impact in terms of the amount of GHG emissions covered under the EU
maritime transport MRV regulation.
162
Data from the Finnish Meteorological Institute –to be noted that a number of ships report AIS signals only with their
MMSI number which poses some challenges for being uniquely identified through their IMO number and might have
therefore not been captured in the modelling estimates


EN EN
EUROPEAN
COMMISSION
Brussels, 14.7.2021
SWD(2021) 601 final
PART 1/4
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Directive 2003/87/EC establishing a system for greenhouse gas emission
allowance trading within the Union, Decision (EU) 2015/1814 concerning the
establishment and operation of a market stability reserve for the Union greenhouse gas
emission trading scheme and Regulation (EU) 2015/757
{COM(2021) 551 final} - {SEC(2021) 551 final} - {SWD(2021) 557 final} -
{SWD(2021) 602 final}
Europaudvalget 2021
KOM (2021) 0551 - SWD-dokument
Offentligt
Table of contents
GLOSSARY ................................................................................................................................................... 4
1 INTRODUCTION: POLITICAL AND LEGAL CONTEXT............................................................... 8
1.1 Context of the initiative.....................................................................................8
1.2 Current policies and progress achieved...........................................................11
2 PROBLEM DEFINITION .................................................................................................................. 14
Current ETS legislation is not optimal for a balanced path towards a -
2.1
55% 2030 target...............................................................................................14
Continued risk of supply/demand imbalances of the carbon market and
2.2
the review of the Market Stability Reserve .....................................................15
There is potential for a higher risk of carbon leakage due to EU’s
2.3
increased climate ambition..............................................................................17
Sectors not covered by emissions trading face stronger challenges to
2.4
contribute sufficiently to reduce emissions reductions ...................................18
2.4.1 Minimal contribution of the maritime sector to emissions reductions....... 19
2.4.2 Limited contribution of road transport and challenges to realise the
contribution of buildings to the emission reductions needed for the 55% target...... 22
Reaching the -55% target will require increased investment and
2.5
greater capacity to address the distribution of impacts of emissions
reduction measures, while funds will remain limited......................................24
2.5.1 Need for faster investment in low-carbon technologies............................. 24
2.5.2 Need to address the distribution of impacts of emissions reduction
measures.................................................................................................................... 25
3 WHY SHOULD THE EU ACT? ........................................................................................................ 26
Legal basis.......................................................................................................26
3.1
Subsidiarity: Necessity of EU action...............................................................27
3.2
Subsidiarity: Added value of EU action..........................................................27
3.3
4 OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 27
General objectives ...........................................................................................27
4.1
Specific objectives...........................................................................................27
4.2
Intervention logic.............................................................................................28
4.3
5 WHAT ARE THE AVAILABLE POLICY OPTIONS? .................................................................... 30
What is the baseline from which options are assessed? ..................................30
5.1
Description of the policy options ....................................................................32
5.2
5.2.1 Overview of policy options and policy scenarios used for the analysis..... 32
2
5.2.2 Strengthening of the existing ETS (power and industry installations)....... 35
5.2.3 Extension of emissions trading to maritime transport and alternatives...... 48
5.2.4 Extension of emissions trading to the buildings and road transport sectors
or to all combustion fuels outside the existing ETS.................................................. 53
5.2.5 Using ETS revenues to address distributional aspects between Member
States 59
Discarded policy options in the context of this impact assessment.................60
5.3
5.3.1 Discarded options to strengthen of the existing ETS (power and industry
installations).............................................................................................................. 60
5.3.2 Discarded maritime options in the context of this impact assessment ....... 61
5.3.3 Discarded options for the extension of emissions trading to buildings and
transport or all fossil fuels......................................................................................... 62
6 WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 64
Strengthening of the existing ETS (power and industry installations)............64
6.1
6.1.1 Environmental impacts............................................................................... 64
6.1.2 Economic impacts ...................................................................................... 68
6.1.3 Social impacts of strengthening the ETS.................................................... 85
Extension of emissions trading or alternatives for the maritime
6.2
emissions .........................................................................................................87
6.2.1 Environmental impacts............................................................................... 87
6.2.2 Economic impacts ...................................................................................... 98
6.2.3 Social impacts........................................................................................... 108
Extension of emissions trading to buildings and road transport/ all
6.3
fossil fuels......................................................................................................110
6.3.1 Environmental impacts............................................................................. 111
6.3.2 Economic impacts .................................................................................... 115
6.3.3 Social impacts........................................................................................... 123
6.3.4 Administrative impacts............................................................................. 130
6.3.5 Coherence with other elements of the regulatory framework .................. 133
7 HOW DO THE OPTIONS COMPARE?.......................................................................................... 138
Strengthening of the existing ETS (power and industry installations)..........138
7.1
7.1.1 Summary comparison of effectiveness and efficiency/key impacts of
individual options.................................................................................................... 138
7.1.2 Comparing packages of options ............................................................... 142
3
7.1.3 Coherence................................................................................................. 144
7.1.4 Proportionality.......................................................................................... 145
Extension of emissions trading or alternatives for maritime emissions........145
7.2
7.2.1 Effectiveness and efficiency..................................................................... 145
7.2.2 Coherence................................................................................................. 148
7.2.3 Proportionality.......................................................................................... 150
Extension of emissions trading to buildings and road transport or all
7.3
fuels ...............................................................................................................151
7.3.1 Effectiveness and efficiency..................................................................... 151
7.3.2 Coherence................................................................................................. 153
7.3.3 Proportionality.......................................................................................... 154
8 PREFERRED OPTION .................................................................................................................... 154
REFIT (simplification and improved efficiency)..........................................160
8.1
9 HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?................................ 160
LIST OF FIGURES .................................................................................................................................... 163
LIST OF TABLES...................................................................................................................................... 164
4
GLOSSARY
Term or acronym Meaning or definition
Biofuels Biofuels are liquid or gaseous transport fuels such as biodiesel and
bioethanol which are made from biomass.
Biofuels
(conventional)
Biofuels are produced from food and feed crops.
Biofuels (advanced) Biofuels produced from a positive list of feedstock (mostly wastes and
residues) set out in Part A of Annex IX of Directive (EU) 2018/2001.
CAPRI Common Agricultural Policy Regionalised Impact model: a global multi-
country agricultural sector model, supporting decision making related to
the Common Agricultural Policy and environmental policy.
CBAM Carbon border adjustment mechanism
CCFD Carbon contract for difference
CCS Carbon Capture and Storage: a set of technologies aimed at capturing,
transporting, and storing CO2 emitted from power plants and industrial
facilities. The goal of CCS is to prevent CO2 from reaching the
atmosphere, by storing it in suitable underground geological formations.
CCU Carbon Capture and Utilisation: the process of capturing carbon dioxide
(CO2) to be recycled for further usage.
CEF Connecting Europe Facility: an EU funding instrument to promote growth,
jobs and competitiveness through targeted infrastructure investment at
European level.
CGE Computable General Equilibrium: a family of economic models.
CHP Combined Heat and Power: a combined heat and power unit is an
installation in which energy released from fuel combustion is partly used
for generating electrical energy and partly for supplying heat for various
purposes.
CLEF Carbon leakage exposure factor: a factor that determines how much free
allocation a sector or sub-sector may obtain. It depends on whether the
sector or sub-sector is deemed to be at risk of carbon leakage or not.
CLI Carbon leakage indicator: a number that indicates to which extent a sector
or subsector is deemed to be at risk of carbon leakage. It is calculated by
multiplying the trade intensity with the emission intensity.
CO2-eq Carbon dioxide-equivalent: a measure used to compare quantities of
different greenhouse gases in a common unit on the basis of their global
warming potential over a given time period.
COP Conference of the Parties: decision-making body of the United Nations
Framework Convention on Climate Change (see UNFCCC)
CORSIA Carbon Offsetting and Reduction Scheme for International Aviation
5
COVID-19 Coronavirus disease: a global pandemic caused by a coronavirus unknown
before the outbreak began in Wuhan, China, in December 2019.
CSCF Cross-sectoral correction factor: a factor by which free allocation of
emission allowances is reduced in a uniform manner across all industry
sectors, if the demand for free allocation exceeds the total amount of
available free allowances
CTP 2030 Climate Target Plan
DG ECFIN Directorate General Economic and Financial Affairs
EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortisation
EEA European Economic Area
EED Energy Efficiency Directive: Directive 2012/27/EU and amending
Directive 2018/2002/EU
E-fuels Liquid fuels produced on the basis of hydrogen obtained from electricity
via electrolysis
EIB European Investment Bank
EPBD Energy Performance of Buildings Directive
ERDF European Regional Development Fund
ESR Effort Sharing Regulation: Regulation 2018/842/EU
ETD Energy Taxation Directive: Directive 2003/96/EC
ETS Emissions Trading System
EU, EU-27 European Union with 27 Member States since 1 February 2020
EU-28 European Union with 28 Member States from 1 July 2013 to 31 January
2020
EUA European Union allowance: the tradable unit under the EU ETS, giving the
holder the right to emit one tonne of CO2-eq
EUTL European Union Transaction Log: central transaction log, run by the
European Commission, which checks, records and authorises all
transactions between accounts in the Union Registry (see also EU ETS,
NIMs)
GAINS Greenhouse gas and Air Pollution Information and Simulation model
GDP Gross Domestic Product
GEM-E3 General Equilibrium Model for Energy Economy Environment
interactions: a computable general equilibrium model, version operated by
E3Modelling, a company
GHG Greenhouse gas
6
GLOBIOM Global Biosphere Management Model: a model for land use of agriculture,
bioenergy, and forestry.
GT Gross Tonnage
GW Gigawatt
GWh Gigawatt hours
IA Impact assessment
ICAO International Civil Aviation Organisation
IEA International Energy Agency
IF Innovation fund
IMO International Maritime Organization
JRC Joint Research Centre of the European Commission
JRC-GEM-E3 General Equilibrium Model for Energy Economy Environment
interactions: a computable general equilibrium model, version operated by
the JRC
LDC Least developed countries
LRF Linear Reduction Factor: a factor by which the overall emissions cap of
the ETS is reduced yearly
LULUCF Land Use, Land-Use Change, and Forestry
MACC Marginal abatement cost curve
MMF Multiannual Financial Framework
MRV Monitoring, reporting and verification
MS EU Member State(s)
MSR Market stability reserve
MtCO2 Million tonnes of CO2
MW Megawatt
MWh Megawatt hours
NACE Statistical classification of economic activities in the European
Community (from the French nomenclature statistique des activités
économiques dans la Communauté européenne)
NECP National Energy And Climate Plan
NIMs National implementation measures, submitted under Article 11 of the ETS
Directive
NPV Net Present Value
7
OPC Open Public Consultation
PRIMES Price-Induced Market Equilibrium System: an energy system model for
the European Union.
PRIMES-TREMOVE Model for the transport sector, integrated in the PRIMES model.
RED / RED II Renewable Energy Directives 2009/28/EC and 2018/2001/EU (recast)
RES Renewable Energy Sources
SIDS Small island developing states
SME Small and Medium-sized Enterprise
SMSS Sustainable and Smart Mobility Strategy
SWD Staff working document
TEN-E Trans-European Networks for Energy
TNAC Total number of allowances in circulation
UNFCCC United Nations Framework Convention on Climate Change
VAT Value Added Tax
8
1 INTRODUCTION: POLITICAL AND LEGAL CONTEXT
1.1 Context of the initiative
The European Green Deal1
aims to transform the EU into a fairer and more prosperous
society, with a modern, resource-efficient and competitive economy where there are no
net emissions of greenhouse gases by 2050 and where economic growth is decoupled
from resource use. The climate neutrality objective has been endorsed by the European
Council2
and Parliament3
and is laid down in a legally binding manner in the politically
agreed European Climate Law4
. The European Green Deal also aims to protect, conserve
and enhance the EU's natural capital, and protect the health and well-being of citizens
from environment-related risks and impacts. At the same time, this transition must be just
and inclusive.
The necessity and value of the European Green Deal have only grown in light of the very
severe effects of the COVID-19 pandemic on our health and economic well-being.
Unprecedented near term investments are needed to overcome the negative impact of the
COVID-19 crisis on jobs, incomes and businesses, including in the sectors covered by
the EU Emissions Trading System (ETS).
With the Communication on stepping up Europe’s 2030 climate ambition – the 2030
Climate Target Plan5
(2030 CTP) the Commission has proposed an EU-wide, economy-
wide net greenhouse gas emissions (GHG) reduction target by 2030 compared to 1990 of
at least 55% that will set the Union onto the path to climate neutrality. The December
2020 European Council confirmed this ambition level6
and the political agreement on the
European Climate Law in April 2021 ensures that it is legally binding. The Union has
updated its Nationally Determined Contribution7
and called upon all other parties of the
Paris Agreement to come forward with their own ambitious targets and policies.
1
COM(2019)650 final.
2
European Council conclusions, 12 December 2019.
3
European Parliament resolution of 14 March 2019 on climate change and resolution of 28 November
2019 on the 2019 UN Climate Change Conference in Madrid, Spain (COP 25).
COM (2020)80 final; Council letter to EP on Climate Law agreement:
4
https://data.consilium.europa.eu/doc/document/ST-8440-2021-INIT/en/pdf
COM (2020) 562 final.
5
6
European Council meeting (10 and 11 December 2020) – Conclusions; EUCO 22/20.
7
https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/European%20Union%20First/EU_NDC_S
ubmission_December%202020.pdf
9
In line with the policy conclusions (see Annex 14), the Commission is reviewing all
relevant climate and energy policies. This includes increasing the environmental
contribution of the ETS in a manner commensurate with the overall target. The ETS is a
cap-and-trade system that limits emissions from approximately 10000 energy intensive
installations (power stations & industrial plants) and around 500 airlines8
. The ETS
covers 41% of the EU's greenhouse gas emissions.9
The 2030 CTP indicates that
increasing the EU’s 2030 climate ambition requires a strengthened cap of the existing EU
ETS, while its impact assessment provided estimates what this could mean.
Reducing maritime transport emissions is part of the EU economy-wide reduction
commitment under the Paris Agreement. The co-legislators expressed in Regulation (EU)
2018/842 and the ETS Directive that all sectors of the economy should contribute to the
reduction of greenhouse gas emissions. The ETS Directive also states that action from
the International Maritime Organisation (IMO) or the Union should start from 2023,
including preparatory work on adoption and implementation and due consideration being
given by all stakeholders. The 2030 CTP states that the EU should include at least intra-
EU maritime transport in the Emissions Trading System.
Furthermore, the impact assessment accompanying the 2030 CTP10
has assessed
carefully the possibility of reinforcing and expanding emissions trading as a tool to
achieve greenhouse gas emission reductions at the EU level in an economically efficient
manner. The 2030 CTP is clear that an expansion of emissions trading could include
emissions from road transport and buildings, and that the Commission would look into
covering all emissions of fossil fuel combustion11
. The expansion could be developed as
an upstream system and would need to appropriately address the relation to entities
whose emissions from fuel combustion are covered by the existing downstream ETS.
The CTP pointed to the benefit of transitional arrangements or a pilot period before
gradually integrating the new sectors into the existing system.
The December 2020 European Council invited the Commission to consider exploring the
ways to strengthen the ETS, in particular carbon pricing policies, while preserving its
8
The ETS has been established by Directive 2003/87/EC of the European Parliament and of the Council of
13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the
Community, Official Journal L 275, 25.10.2003, p. 32–46.
9
This percentage is based on the current EU 2020 and 2030 climate target scope, which includes all
international aviation, excludes the international maritime sector and keeps LULUCF separate.
10
SWD(2020) 176 final
11
In addition to building and road transport emissions, this would include emissions from small non-ETS
industries, fuel use in agriculture and non-electric railway.
10
integrity and taking into account the need to address distributional concerns and energy
poverty. The European Council also invited the Commission to consider proposing
measures that enable energy-intensive industries to develop and deploy innovative
climate-neutral technologies while maintaining their industrial competitiveness.12
The European Parliament called on the Commission to rapidly review the ETS Directive
to make it fit for purpose for the increased GHG targets, and welcomed the inclusion of
the maritime sector in the ETS, and stressed that the EU should defend a high level of
ambition for its GHG reductions. In general, it supported the idea of market-based
measures as one of the tools to achieve climate objectives. However, the Parliament
rejected an inclusion of road transport into EU emissions trading13
.
This impact assessment also includes the first review of the Market Stability Reserve
(MSR). This review is foreseen by the legislation currently in force and has to take place
within three years of the date of its start of operation on 1 January 2019. The MSR was
established by Decision (EU) 2015/1814 (‘MSR Decision’) and amended by Directive
(EU) 2018/410 to ensure the appropriate reduction of the large structural imbalance
between the supply and demand of allowances which characterised the early phase 3 of
the ETS, which ran from 2013 to 2020, and to improve the system's resilience to major
shocks by adjusting the supply of allowances to be auctioned.
Aviation is already included in the ETS, though currently under some different rules, and
with its scope currently restricted to intra-EU flights under the time-limited “stop the
clock” derogation under Regulation (EU) 2017/2392, also under revision in 2021. The
European Parliament and Council have set out very specific requirements to assess and
make a proposal, as appropriate, relating to implementing the carbon offsetting and
reduction scheme for international aviation (CORSIA) and to review the cost pass
through ‘with a view to increasing auctioning’ taking into account other transport forms.
Therefore a separate impact assessment is considering how aviation should (a) contribute
to the EU’s 2030 climate objectives and ambition through the ETS and any appropriate
amendment, including through increasing the level of allowances auctioned under the
system; (b) how the EU should implement CORSIA set up under the auspices of ICAO,
in a manner consistent with the EU’s 2030 climate objectives and ambition.
This impact assessment is coherent with the remainder of the 2030 climate, energy and
transport framework, notably the impacts assessments related to the Effort Sharing
12
European Council conclusions, 10-12 December 2020.
13
European Parliament resolution of 15 January 2020 on the European Green Deal (P9_TA(2020)0005)
11
Regulation (ESR); the Land Use, Land Use Change and Forestry (LULUCF) Regulation;
CO2 Emissions Performance Standards for Cars and Vans; the Renewable Energy
Directive (RED II); the Energy Efficiency Directive (EED)14
; and, at a later stage, the
Energy Performance of Buildings Directive (EPBD). Other relevant initiatives include
the revision of the Energy Taxation Directive; the Zero Pollution Action Plan and the
revision of the Industrial Emissions Directive, where the Commission will examine
options to achieve maximum synergies between the zero pollution and the
decarbonisation goals; initiatives on mobility, such as those on transport fuels (FuelEU
maritime initiative and ReFuelEU aviation initiative) and a proposal for a Carbon Border
Adjustment Mechanism (CBAM). To ensure coherence, this impact assessment covers
relevant interactions of the ETS revision with other policies, such as the complementarity
between extending emission trading and the EED.
The EU budget plays an increasingly important role in the EU meeting its climate
commitments. At least 30% of the expenditures under the Multiannual Financial
Framework 2021-2027 (MFF) and at least 37% of national expenditures under the
NextGenerationEU Recovery Instrument have to support climate objectives.
The European Council, the European Parliament and the Commission agreed in an inter-
institutional agreement of 16 December 2020 to introduce over the MFF period new own
resources that are sufficient to cover the repayment of the Recovery Instrument. The
Commission committed to table by summer this year proposals for new own resources
based on the revision of the Emissions Trading System, including its possible extension
to maritime and reducing the allowances allocated for free to airlines, for a new Carbon
Border Adjustment Mechanism and for a new digital levy, with a view to their
introduction at the latest by 1 January 2023.
1.2 Current policies and progress achieved
The ETS started in 2005 and operates in all EU countries plus Iceland, Liechtenstein and
Norway. Its third trading phase ran from 2013 until the end of 2020 (phase 3). During
that period the cap on emissions was reduced by 1.74% per year to achieve a total
emission reduction target of 21% compared to 2005 by 2020. In reality, emissions
remained well below the cap, which means that the EU has surpassed its 2020 target and
actual emissions from stationary sources (power and industry) have declined by around
35% between 2005 and 2019.
14
Directive 2012/27/EU as amended by Directive 2018/2002
12
The fourth trading phase started on 1 January 2021 and is currently meant to run until the
end of 2030 (phase 4). The revised rules governing this phase were finalised in March
2018 with the adoption of Directive (EU) 2018/410 amending Directive 2003/87/EC
(ETS Directive).
The 2018 revision included a contribution by the ETS to the EU’s 2030 economy-wide
emissions reduction target of the time (at least -40% compared with 1990) of -43%
compared to 2005. This meant that the cap on emissions had to decline at a faster rate
than 1.74%. The reduction rate, or ‘linear reduction factor’, was revised accordingly and
is now set to decline by 2.2% every year starting in 2021.
From 2009 to phase 3, a large surplus of allowances built up in the EU ETS. To address
this surplus, a Market Stability Reserve (MSR) was created in 2015, and strengthened in
the 2018 ETS revision. The MSR can reduce the total number of allowances in
circulation (TNAC) by absorbing a part of the auction volumes, or increase the TNAC by
releasing additional allowances for auctioning. The MSR absorbs or releases allowances
if the TNAC is outside of a predefined range. If the TNAC is above a predefined upper
threshold (833 million allowances), 24% (the intake rate) of the TNAC is removed from
the volumes to be auctioned, and added to the MSR instead. If the TNAC is below a
predefined lower threshold (400 million allowances), 100 million allowances are released
from the MSR and auctioned. The strengthened MSR also has an invalidation rule - from
2023, allowances held in the MSR exceeding the previous year's auction volume will no
longer be valid. The MSR began operating in 2019, and has already reduced the surplus
to below 1.6 billion allowances.
The existence of the MSR also means that the ETS is now better equipped to handle the
impacts of complementary policies, such as renewable energy policies or coal phase outs.
Coal phase outs were driven in some cases by national policies and in other cases by lack
of competitiveness of coal, in itself mainly driven by carbon prices. These policies
reduced demand for ETS allowances and thereby had the undesired effect of increasing
the surplus pushing the carbon price down. Today, if complementary policies have the
effect of reducing demand for allowances, then the surplus is gradually absorbed by the
MSR15
.
The reaction of the market to these 2018 reforms has been notable. In 2019, with carbon
prices increasing from around EUR 6 at the beginning of 2018 to around EUR 25/tCO2,
these emissions saw a further drop of almost 9% year on year. In 2020, carbon prices
15
SWD/2014/017 final
13
remained relatively stable despite estimated large emission reductions caused by the
COVID-19 lockdown, sending a meaningful price signal both in the short term and in the
long term. In the short term, coal-fired power plants have been and are being replaced by
lower emissions technologies, including through an impressive development of
renewable energies. In the long term perspective, the carbon price is now a more
important element in the investment decisions of installations covered by the ETS.
A more ambitious ETS comes with a potentially increased risk of carbon leakage, either
because production is transferred from the EU to other countries with lower ambition for
emission reduction, or because EU products are replaced by more carbon-intensive
imports. The 2018 revision targeted leakage protection better to the most exposed
sectors, in a renewed carbon leakage protection framework, consisting of partial free
allocation and allowing Member States (MS) to compensate higher electricity costs
caused by the ETS under certain conditions (‘indirect cost compensation’).16
The ETS Directive also includes solidarity provisions, such as the redistribution of 10%
of the auctioned allowances to the 16 lower income MS. In addition, a Modernisation
Fund was set up to support the 10 lowest income MS to invest in their energy systems’
modernisation, just transition and energy efficiency.
An Innovation Fund, moreover, is open to all MS. It supports investments in
breakthrough low-carbon technologies, which despite the increased carbon price remain
too expensive to compete with existing technologies, such as materials substitution and
circular approaches, by contributing to de-risk their initial deployment in the market.
Sectors outside the ETS are presently covered by the Effort Sharing Regulation (ESR)
which establishes an overall EU-wide greenhouse gas emission reductions target of -30%
compared to 2005, as well as binding annual targets for individual MS to be achieved by
2030. The ESR covers among others the road transport and buildings sectors and
therefore, in order to reach their national reduction targets, MS have to put in place
climate and energy policies applicable to those sectors, including the possibility of
pricing instruments at national level. These sectors have to contribute to the overall
objective. Contrary to the ETS, the sectors covered by the ESR are not subject to an EU-
wide carbon price signal.
As far as maritime transport is concerned, the ESR only covers emissions from domestic
maritime transport. Since 2015, however the EU has legislation on monitoring, reporting
16
Communication from the Commission. Guidelines on certain State aid measures in the context of the
system for greenhouse gas emission allowance trading post 2021. OJ C 317/5, 25.9.2020.
14
and verification of emissions from maritime transport more broadly (‘EU Maritime MRV
Regulation’)17
. The IMO adopted its GHG reduction strategy in 2018.
2 PROBLEM DEFINITION
This section defines the problems, describes their underlying causes and looks at their
expected evolution if the current regulatory framework remains untouched. The problems
can be divided in three types: first, those associated with the increased climate target and
the need to strengthen the existing ETS in a commensurate way (these are addressed in
Sections 2.1 – 2.3); second, the issue of the stronger challenges faced by certain sectors
to contribute sufficiently to the achievement of the increased target (described in Section
2.4); and third, those related to distributional and innovation aspects following both the
required strengthening of the existing ETS and the possible expansion of emissions
trading to additional sectors (in Section 2.5).
Current ETS legislation is not optimal for a balanced path towards a - 55%
2.1
2030 target
Higher 2030 climate ambition is needed to ensure the EU is set on a gradual and
balanced trajectory to reach climate neutrality by 2050. If the legislation remains
unchanged, sectors currently covered by the ETS would, according to the EU Reference
Scenario 202018
, together achieve a 2030 emission reduction of -51% compared to 2005
(see also Section 5.1). Even though this would mean outperforming the legislated
contribution of -43%19
referred to above, this would still be an insufficient contribution
to an overall target of -55% compared to 1990. The policy scenarios that achieve around
55% reductions project a cost-effective contribution of the sectors currently covered by
the ETS in the range of -62-63% compared to 2005. This problem was also recognised by
stakeholders responding to the public consultation. As regards to the sustainability
criteria for biomass under the Renewable Energy Directive 2018/2001 (RED II), there is
coherence through the amended EU ETS Monitoring and Reporting Regulation (MRR –
Commission Implementing Regulation (EU) 2018/2066 amended by Commission
17
Regulation (EU) 2015/757 on the monitoring, reporting and verification of CO2 emissions from maritime
transport, OJ L 123, 19.5.2015, p. 55–76
18
The EU Reference Scenario projects the combined impacts currently adopted EU and Member State
climate, energy and transport legislation. For more details see Section 5.1.
19
The ETS cap only determines the maximum amount of emissions for the covered sectors. It is possible
that the covered sectors emit less than the cap, for instance as a result of policies fostering the
development of renewable power generation, energy efficiency or the circular economy.
15
Implementing Regulation (EU) 2020/2085), hence it is not further assessed in this
initiative.
However, increasing the ambition is not as simple as lowering the cap on ETS
allowances. A reduced amount of allowances available to the market affects other pillars
of the ETS and the carbon price. It also impacts core principles such as the need for
market stability, the protection against the risk of carbon leakage and the carefully
balanced distributional effects between MS. These problems are described in the
following paragraphs.
Continued risk of supply/demand imbalances of the carbon market and the
2.2
review of the Market Stability Reserve
The MSR’s main objective is to tackle the surplus of allowances in the carbon market,
thus ensuring the delivery by the ETS of the necessary investment signal to reduce CO2
emissions in a cost-effective manner. The MSR was also meant to make the ETS more
resilient to the risk of supply-demand imbalances, so as to enable the market to function
in an orderly manner.
In the coming decade the importance of the MSR is undiminished as part of the
allowance surplus built up in the past still exists (approximately 1.578 billion
allowances) and the risk of demand and supply shocks remains very real.
Article 3 of the MSR Decision20
tasks the Commission with reviewing the functioning of
the MSR before 1 January 2022, on the basis of an analysis of the orderly functioning of
the European carbon market. The review must pay particular attention to the MSR’s
numerical parameters (its upper and lower threshold, and its intake rate) and to the
invalidation rule; it must assess the impact of the reserve on growth, jobs, the Union's
industrial competitiveness and the risk of carbon leakage.
On top of the results of the review, other elements may trigger a need for changes to the
functioning of the MSR. The changes to the cap to increase ambition for 2030, as well as
the impact of unknown external factors such as Covid-19 or national measures such as
coal phase-outs, raise the question whether the basic rules of the MSR remain fit to
continue tackling structural supply-demand imbalances throughout the decade.
20
Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for
the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC, OJ L 264
9.10.2015, p. 1
16
For these reasons, both a backward- and a forward-looking assessment are necessary to
determine whether the MSR’s design needs to be amended in order for it to continue to
meet its objectives. The MSR can be considered as fairly recently in operation, 21
having
started operation on 1 January 2019. Nevertheless, as part of the review, the Commission
has carried out a study of the first two years of its functioning and of the expected
performance of the MSR in years to come. The full outcome of the review is presented in
Annexes 7 and 8.
The review of the MSR showed that it has fully achieved its objectives, since it began
operating in January 2019, by reducing the historical surplus22
and in general providing
confidence to the market23
that it can deal with unexpected events such as the recent
demand shock related to Covid-19. Moreover, the MSR has so far functioned in a stable
and predictable manner24
. Also at least 70% of respondents to the open public
consultation (OPC) agreed that the MSR has worked well in the past (while only 4%
disagreed).
The analysis showed that the MSR’s objectives of surplus reduction and market
stabilisation not only remain valid, but should be adapted to the new policy and market
conditions (set out in Annex 8), updated behaviour by market participants and in
particular hedging needs (Annex 8, Section 24), and probable economic shocks (Annex
8, Section 22). All of these elements may ultimately result in decreasing needs for
allowances in the future. The MSR thresholds and intake rate may be adjusted to ensure
an optimal level of market liquidity, avoiding future surpluses and deficits of allowances.
At the same time, if the MSR reduces the surplus too quickly, or does not fulfil a
liquidity need, this could create uncertainty and significant price volatility on the market.
The future evolution of these market conditions is also very uncertain.
The analysis outlined some points for improvement. One point is the need to improve the
way the total number of allowances in circulation is calculated, by including net demand
21
The changes adopted through Directive 410/2018 revising the EU ETS for the period from 2021 to 2030
will only be implemented as from 1 January 2021, while the Market Stability Reserve entered into
operation in 2019. Therefore, while a full evaluation was not possible, a first analysis of the functioning
of the reserve is included in the IA.
22
See Annex 7, Section 20.4.
23
See Annex 7.
24
See Annex 7.
17
from the aviation sector,25
which is not taken into account at the moment. The MSR
should also take into account the maritime sector if it will be included in the EU ETS.
The analysis highlighted the possible existence of a threshold effect.26
Each year the
MSR either absorbs 24% of the TNAC or nothing at all, depending on whether the
TNAC is above or below the upper threshold. In years when the TNAC is very close to
the threshold, this can cause significant uncertainty on the market.27
Another possible cause for market uncertainty is the invalidation of allowances up to the
auctioning level of the previous year. This level is uncertain, as it depends on the
operation of the MSR itself.28
Finally, the analysis found29
that if the MSR parameters are not adjusted appropriately
and in a timely manner, the surplus could increase significantly in the coming years.
Indeed, after 2023, the 24% intake rate reverts to only 12%. This lower rate would not be
enough to reduce the surplus in an optimal manner in coming years.
There is potential for a higher risk of carbon leakage due to EU’s increased
2.3
climate ambition
Increased ambition requires lowering the ETS cap, which leads to a reduced overall
amount of allowances. This in turn raises important questions as to the continued
suitability of the carbon leakage protection framework currently included in the ETS
Directive. A lower cap indeed means that fewer allowances may be available for free
allocation. Moreover, the carbon price is expected to rise as a result of a reduced cap.
Both developments could lead to higher compliance costs and an increased risk of carbon
leakage. This impact assessment will therefore assess the effects of ETS strengthening in
line with the -55% target on the risk of carbon leakage.
25
See Annex 7, 20.5.1.
26
See Annex 7, 21.
27
As an illustration for the threshold effect, if the TNAC is 834 million allowances, slightly higher than the
upper threshold of 833 million, then according to the MSR rules, 24% of the TNAC is put in the MSR.
However, if the TNAC is just below the threshold, at 832 million allowances, then the TNAC is not
reduced at all.
28
The MSR reduces the TNAC by reducing future auction volumes. For example, the level of auction
volumes in year X is influenced by the MSR operations corresponding to the TNAC levels of years X-1
and X-2. The levels of the TNAC in years X-1 and X-2 depend also on the verified emissions of those
years, which are by definition uncertain. Therefore, if an external event (such as COVID-19) reduces
emissions significantly in X-2, this could result in a significantly higher TNAC, and a higher reduction
of auction volumes in year X.
29
See Annex 7, Section 21.
18
In this context, it is also important to analyse how the carbon leakage protection
framework could strengthen incentives to reduce emissions, e.g. through investments in
low-carbon technologies (see also Section 2.5.1), whereby it is important to recall that
the power sector does not receive free allocation.
This impact assessment does not address the question whether and how a Carbon Border
Adjustment Mechanism (CBAM) can be an effective alternative, as this is part of a
separate impact assessment accompanying a separate legal proposal. However, impacts
of a CBAM will be considered for the assessment of ETS policy options on the
framework to address the risk of carbon leakage.
Sectors not covered by emissions trading face stronger challenges to
2.4
contribute sufficiently to reduce emissions reductions
The impact assessment accompanying the 2030 CTP found that emissions in certain
sectors, including buildings and road transport, in the absence of additional measures,
would not decrease as much as required to be on a path to achieve an economy-wide 55%
reduction in emissions. In fact, in road and maritime transport, emissions today are
higher than in 1990. It also found that while a significant overachievement of emission
reductions of 8 % points is projected for the current ETS sectors (see Section 2.1), effort
sharing sectors are projected to decrease emissions by 31% compared to 200530
, which is
slightly better than the -30% EU ambition level of current ESR legislation.
This indicates that the current policy framework is more effective in reducing emissions
in current ETS sectors and that it is warranted to focus the policy debate on the need for
additional EU instruments in the ESR sectors. These sectors are subject to regulatory
measures but generally not subject to a carbon price and may therefore not be sufficiently
incentivised to reduce their emissions. The general analysis concerning this problem has
been carried out already in the impact assessment for the 2030 CTP31
.
The modelling for that impact assessment showed that over-reliance on strengthened
regulatory policies would lead to higher burdens on economic operators and more
significant investment challenges. On the other hand, focusing more (or only) on
economic incentives would imply overly high carbon prices, and carbon pricing alone
will not allow overcoming persisting market failures and non-market barriers.
30
SWD/2020/176 final, Section 6.7, confirmed by the new EU Reference Scenario 2020.
31
SWD/2020/176 final, Section 6.7
19
The optimal policy mix should thus combine strengthened economic incentives, such as
carbon pricing, to take action with updated regulatory policies notably concerning
renewables, energy efficiency and sectoral policies such as CO2 and cars, and possibly
enhanced ESR incentivising national policies across sectors, and an enabling framework
(e.g. R&D policies and financial support).
2.4.1 Minimal contribution of the maritime sector to emissions reductions
As highlighted in the 2030 Communication, climate action in the maritime transport
sector is urgently needed. While the sector plays an essential role in the EU economy32
and is one of the most energy-efficient modes of transport, it emits 3-4% of all EU CO2
emissions (around 144 million tonnes of CO2
33
in 2018) and its emissions are projected
to grow quickly if mitigation measures are not swiftly introduced. Since 1990, CO2
emissions from fuel sold in the EU for international navigation have grown by around
36%34
, contrary to domestic navigation emissions that have decreased by 26% over the
same period35
. Today, CO2 emissions from international navigation represent close to
90% of all EU navigation emissions and according to projections, these could grow by
around 14% between 2015 and 2030 and 34% between 2015 and 205036
in a business-as-
usual scenario. Such a future growth would off-set the emissions reduction achieved in
the sector since 2008.
There are different reasons for this expected increase in international navigation
emissions. The single most important element is the foreseen increase in the demand of
maritime transport services to cater for the demand for additional primary resources and
containerised goods in Europe. This is aggravated by a range of barriers to the
decarbonisation of the maritime transport sector. These barriers will need to be addressed
by dedicated measures in order to achieve the full greenhouse gas emissions reductions
potential of the sector.
32
Maritime transports 75% of EU’s external trade, 36% of intra-EU trade flows and more than 400 million
passengers each year at EU ports
33
CO2 emissions from maritime transport as reported under Regulation (EU) 2015/757 and including
emissions from intra-EEA and extra-EEA voyages as well as emissions occurring at EEA berth.
34
EU GHG inventory to UNFCCC, 1 A 3 d I, CO2 equivalent, EU 27, 2018 vs 1990 emissions
35
Domestic navigation emissions are covered under the Effort Sharing Regulation, statistics from the EU
GHG inventory to UNFCCC, CO2 equivalent, 2018 vs 1990
36
Revised REF2020 scenario, PRIMES modelling, navigation
20
Part of these barriers are market-related and cover issues such as the problem of split
incentives37
, the difficulty to access finance, the duration of vessel ownership or the long
lifespan of ships. A number of these barriers explain why shipping companies are not
sufficiently investing in readily available cost-effective energy efficient measures,
despite energy costs accounting for 60-70% of their overall operating costs. Other
barriers are more technology related. For instance, the majority of stakeholders38
indicated that the current lack of viable solutions, and in particular the lack of market-
ready renewable and low-carbon fuels, is a key barrier.
On top of these technological and market barriers, the deployment of low-carbon
solutions is also slowed down by a range of economic barriers. Maritime transport is a
sector where the “polluter-pays” principle is not applied and where the price of transport
does not reflect the impact it has on climate and the environment. It is also a sector that
relies on heavy fuel oil, at significantly cheaper costs than fuel used in other sectors, and
where maritime bunker fuels benefit from a tax exemption under the Energy Taxation
Directive. In this context, applying carbon pricing to maritime transport emissions would
create a clear price signal that would make energy efficiency investments more cost-
effective and that would reduce the price differential between alternative fuels and
traditional maritime fuels and hence support their deployment.
The majority of stakeholders displayed positive views regarding the ability of carbon
pricing to respond to the barriers to decarbonisation in the maritime sector, in particular
when considering the possible use of revenues. However, views were more mixed as to
whether carbon pricing could address the issue of split incentives.
Maritime transport lacks a strong enabling regulatory framework to ensure its fair
contribution to the emission reductions needed in line with the increased EU climate
objectives and Paris commitments, in particular when compared to the collective
contribution expected from all ETS sectors.
At the global level, efforts to limit international maritime emissions through the
International Maritime Organisation (IMO) are under way. In 2011, the IMO adopted a
new regulatory framework on Energy efficiency. Since then, the IMO adopted in April
2018 an initial strategy on reduction of greenhouse gas emissions from ships, albeit
without support from all States. It sets a greenhouse gas emission reduction objective of
37
Some cost-effective solutions are not being implemented in some shipping industries because the maritime transport
actor (e.g., the shipowner) making the investment in a solution does not always capture the benefit (e.g. fuel saving)
of the investment.
38
Targeted stakeholders’ consultation – enablers and barriers to decarbonisation of maritime transport
21
at least 50% by 2050 compared to 2008 levels coupled with a vision for the full
decarbonisation of the sector as soon as possible in this century. It also sets an objective
to reduce carbon intensity, as an average across international shipping, by at least 40% by
2030, pursuing efforts towards 70% by 2050, compared to 2008. In November 2020, the
IMO approved a technical and operational measure for existing ships with a view to
implement the IMO Strategy and complement existing energy efficiency policies. While
the recent progress achieved is welcome and provides a framework to make existing
ships more energy efficient, these measures will not be sufficient to decarbonise
international shipping in line with the IMO objective of 50% emission reductions by
2050 (from 2008 levels) and following a pathway consistent with the Paris agreement
objectives.
At the EU level, the current regulatory framework to address maritime GHG emissions is
limited. At present, only domestic navigation emissions are covered by mitigation
measures at EU level (through the Effort Sharing Regulation) and international shipping
remains the only means of transportation not included in the European Union's
commitment to reduce greenhouse gas emissions. The current regulation focuses solely
on the monitoring, reporting and verification of emissions from ships regardless of their
flag, covering emissions in EEA ports39
, intra-EEA voyages and extra-EEA voyages40
, in
line with the first step of the strategy set out by the Commission in 2013 to integrate
progressively emissions from maritime transport into EU climate policy.
Given this situation, the European Commission undertook the commitment to propose a
basket of EU measures to increase the contribution of maritime transport to the EU
climate efforts, along with the measures agreed at global level within the IMO. This
basket of measures is necessary because different policies are needed to address the
various technological, market and regulatory barriers that hinder the decarbonisation of
the sector.
The basket of measures is defined in the Sustainable and Smart Mobility Strategy as the
combination of carbon pricing, research and development and sustainable fuels policies
(regulatory and infrastructure development). In practice, it covers the ETS extension to
maritime transport in line with the Climate Target Plan and it includes the launch of the
FuelEU Maritime initiative to boost the demand for sustainable alternative fuels and
accelerate the transition to new technologies. It also covers the review of existing
39
Including emissions arising from ships at berth or moving within a port
40
all incoming voyages from the last non-EEA port to the first EEA port of call and all outgoing voyages
from a EEA port to the next non-EEA port of call
22
directives dealing with energy taxation, alternative fuel infrastructures or renewable
energy.
2.4.2 Limited contribution of road transport and challenges to realise the contribution
of buildings to the emission reductions needed for the 55% target
Direct emissions in the building sector, which mainly stem from heating, have decreased
significantly compared to 1990 but increased from 2014 to 2018 by 3%, currently
amounting to around 12% of EU GHG emissions41
. However, according to the impact
assessment for the 2030 CTP, the measures implemented in MS aimed at building
renovation do not always reflect the full energy savings potential of the building stock.
The energy efficiency level and deployment of renewable heating and cooling solutions
with the existing 2030 climate and energy legislative framework are well below what is
necessary to reach the higher greenhouse gas ambition. In the policy scenarios in the
impact assessment accompanying the 2030 CTP that achieve around 55% GHG
reductions below 1990, buildings’ GHG emissions reduce through carbon pricing and/or
energy policies by 60% between 2015 and 2030 through increased energy efficiency and
stepping up of fuel switching, indicating a similar mitigation potential as stationary ETS
sectors. Under current policies, emissions would only reduce by 33%.
Road transport is a particular challenge. Road transport emissions have increased
compared to 1990, and by 6% from 2014 to 2018, amounting currently to around 20% of
all EU GHG emissions. Within the 55% GHG reduction, road transport is projected to
reduce its emissions less than buildings, by 23 to 25% in 2030 compared to 2015.
In both sectors, current EU policies focus on regulatory approaches and provide limited
economic incentives to achieve the necessary emission reduction levels. Explicit carbon
pricing at national level in these sectors is often absent or limited. In addition, the Impact
Assessment accompanying the 2030 CTP found that the energy investments from
households to achieve the higher ambition in both sectors would be higher in a
regulatory-only approach (REG) than with a policy mix including carbon pricing.
At the same time, already now, the ETS directly or indirectly covers part of their
emissions, resulting in an uneven playing field within the buildings sector and to a much
lesser extent in the transport sector.
41
If the indirect emissions of buildings stemming from electricity and centralised heat consumption are
included, buildings are responsible for 36% of energy-related GHG emissions.
23
In fact, the ETS covers around 30% of direct and indirect buildings emissions related to
heating via fossil-fuel district heating, electric heating and electricity use of heat pumps,
while the rest is covered by the ESR42
. If compared to all direct and indirect energy-
related GHG emissions of buildings, the existing ETS covers more than half.
Similarly, the ETS already indirectly covers some road transport emissions via electric
vehicles (related emissions below 0.1%43
), as well as electrified rail (around 80% of
rail44
), while fossil fuelled road transport and non-electrified rail are covered by the ESR.
However, this uneven playing field is less of an issue than that between fossil fuel and
electricity use for buildings heating, as on average road transport already implicitly pays
a significant carbon price due to energy taxation, even though there are large national
disparities in the levels of fossil fuel taxation.
Other emissions of fossil fuel combustion concern firstly small industrial installations,
secondly CO2 emissions from agriculture and thirdly small sources like non-electrified
railways. These have decreased in the past and currently represent around 5% of EU
GHG emissions. Within the overall 55% GHG reduction, other fossil fuel combustion is
projected to reduce its emissions less than buildings but more than road transport, by
around 40% in 2030 compared to 2015. For small industry, there is already currently the
requirement for equivalent measures in order to remain excluded from the existing ETS.
The impact assessment accompanying the 2030 CTP examined the possibility of using
carbon pricing as an additional tool to achieve greenhouse gas emission reductions at the
EU level in these and other sectors. In line with the 2030 CTP, this impact assessment
needs to examine further whether and how emissions from buildings and road transport
or all emissions from fossil fuel combustion could be addressed efficiently by including
them in European emissions trading, taking into consideration already existing measures,
such as energy savings obligations under Article 7 of the EED or CO2 standards for
vehicles. This impact assessment does not examine the possible setting of minimum
carbon content elements for excise duties in the revised EU Energy Taxation Directive,
which is addressed in the impact assessment for that initiative.
42
ETS coverage of heating emissions in low-income Member States is with around 40% significantly
above EU average, with ETS even exceeding ESR shares in Bulgaria, Czechia, Estonia and Latvia.
Other Member States with higher ETS shares are Cyprus, Denmark, Finland, Greece and Sweden. See
ICF et al. (2020): Possible extension of the EU Emissions Trading System (ETS) to cover emissions
from the use of fossil fuels in particular in the road transport and the buildings sector, under DG CLIMA
Framework Contract.
43
ICF et al. (2020).
44
Electrification of the Transport System, Expert group report, DG RTD 2017.
24
Reaching the -55% target will require increased investment and greater
2.5
capacity to address the distribution of impacts of emissions reduction
measures, while funds will remain limited
2.5.1 Need for faster investment in low-carbon technologies
The Impact Assessment accompanying the 2030 CTP shows that the increased
contribution of current ETS sectors to the 2030 objective is expected to induce, over
time, a strengthened carbon price signal, providing the necessary operational and
investment incentive for operators to reduce their GHG emissions in line with the revised
overall cap.
That Impact Assessment also identifies extra annual energy-related investment needs of
EUR 350 billion in the period of 2021-2030 compared to the previous period of 2011-
2020, of which the majority for buildings and road transport. Compared to the EUR 260
billion additional investments needed 2021 to 2030 to achieve the prior 2030 climate and
energy targets, this figure represents an increase of around EUR 90 billion per year.
The energy sector has already decarbonised to a significant extent due to a combination
of a strong ETS carbon price signal coupled with regulatory policies and public support
for the deployment of renewable energy technologies. Also for industry, emissions have
been decreasing, but to a smaller extent, even though many technological pathways for
decarbonisation are available. These include use of green hydrogen and increased
electrification (which however require a significant increase of clean energy available),
as well as low-carbon circular production processes.45
In fact, in recent years, a substantial number of industrial break-through technologies and
innovative renewable technologies have been identified and researched that are crucial to
achieve deep decarbonisation. However, few have been scaled beyond the pilot phase, at
best. The prime reason is that the current abatement costs for most technologies that
achieve deep decarbonisation are substantially above current and even projected ETS
prices. Market signals have been softened by free allocation to avoid the risk of carbon
leakage. There remains a substantial uncertainty on breakthrough technologies costs, and
the first investments may face higher abatement costs. At the same time, the uncertainty
over a sustained trend towards increased carbon prices over longer periods may also
reduce the commercial viability and bankability (willingness by third parties to finance)
of such projects. The Impact Assessment accompanying the Innovation Fund delegated
45
EEA (2020) Quantification methodology for, and analysis of, the decarbonisation benefits of sectoral circular
economy actions, p.93-95
25
regulation published in 201946
, as well as academic literature47
converge on the
conclusion that at the current levels, the carbon price on its own is not expected to trigger
sufficient investment in many important breakthrough technologies in industry and
energy (e.g. CCS, low-carbon technologies for cement, green hydrogen-based steel
making, geothermal, recycling and circular economy solutions) as well as in the
appropriate infrastructure, without further support.
Complementary policies to bridge the so-called ‘valley of death’ and bring innovative
low-carbon technologies to market can thus be justified because of the need to lower
costs through innovation, including economies of scale and uncertainty as regards carbon
price developments over the next decade(s) and associated investment risks.
The Innovation Fund, set up as part of the 2018 revision of the ETS Directive, is one of
the EU’s prime instruments to bring such technologies closer to the market,
complemented by multiple other instruments focusing on earlier research phases or on
less innovative technologies48
. In this Impact Assessment, key features of the Innovation
Fund are being assessed in the light of the revised 2030 objective and the goal to achieve
climate neutrality by 2050. These elements mainly concern its size and the level of
support to projects, as both have a major effect on the required scale and pace of the
deployment of innovative low-carbon technologies that are eligible in the Innovation
Fund. Currently, the Innovation Fund is expected to mobilise around EUR 22.5 billion in
the period 2020-2030 (assuming a carbon price of EUR 50/tonne) coming from the
monetisation of ETS allowances. The first call for proposals of EUR 1 billion received
311 projects from all MS requesting almost 22 times the available budget.49
This
illustrates the appetite of companies to invest in clean tech projects all across Europe and
the very high investment needs. This aspect is analysed together with the level and
modalities of support that projects can receive in Annex 11.
2.5.2 Need to address the distribution of impacts of emissions reduction measures
The effects of raising the contribution of the ETS towards a higher emissions reduction
target will not be felt equally across the EU. Some MS will be more affected than others.
46
https://ec.europa.eu/clima/sites/clima/files/innovation-fund/swd_2019_85_en.pdf
47
https://www.iddri.org/sites/default/files/PDF/Publications/Catalogue%20Iddri/Etude/201910-ST0619-
CCfDs_0.pdf
48
The EU makes funding available for green innovation via various support instruments, such as Horizon
2020 and Horizon Europe, European Innovation Accelerator and others. The green and digital transition
is also an element strongly present in the Recovery and Resilience Plans of Member States.
49
https://ec.europa.eu/clima/news/first-innovation-fund-call-large-scale-projects-311-applications-eur-1-
billion-eu-funding-clean_en
26
Increasing the contribution to achieve the revised target will require investments in the
energy systems and the greening of industrial processes in MS where modernisation
needs are already the highest. Furthermore, there are distributional concerns within MS,
as low-income households across the EU will bear a relatively higher burden notably in
terms of heating fuel expenses compared to wealthier households. At the same time, there
will be also positive social impacts, like an improvement concerning health issues linked
with air pollution. Hence, there are likely to be different distributional issues that emerge
if the EU emissions trading is expanded to new sectors.
The Modernisation Fund, set up as part of the 2018 revision of the ETS Directive,
supports investments in modernising the power sector and wider energy systems,
boosting energy efficiency, and facilitating a just transition in coal-dependent regions in
10 lower-income MS. Its initial size is 2% of the ETS cap equivalent to some 275 million
allowances.50
The current size of the Modernisation Fund is analysed together with
defining the types of investments that it can finance in Annex 12, its distributional
implications between MS are addressed in Annex 13.
The review will therefore need to address the solidarity provisions currently in place and
the role of the Modernisation Fund in this respect, also taking into account that as new
sectors are possibly covered by EU emissions trading, not only distributional challenges
but also revenues may increase. The ETS review needs also to take into account and is
relevant for the Commission’s forthcoming proposal for an ETS-based own resource.
3 WHY SHOULD THE EU ACT?
Legal basis
3.1
Articles 191, 192 and 193 of the Treaty on the Functioning of the European Union51
empower the EU to act to preserve, protect, and improve the quality of the environment;
protect human health; and promote measures at the international level to deal with
regional or worldwide environmental problems. The legal basis of this initiative is in
Article 192(1), as this initiative is action being taken to combat climate change and to
serve the other environmental objectives specified in Article 191.
50
This was de facto more than doubled to around 643 million allowances thanks to the choice of five
Member States to transfer their solidarity allowances to this funding instrument.
https://ec.europa.eu/clima/policies/budget/modernisation-fund_en
51
Treaty on the Functioning of the European Union, OJ C 326, 26/10/2012, p.1–390.
27
The ETS has been operating on this legal basis since 2003. The European Parliament and
Council agreed upon all amendments to the ETS Directive on this legal basis.
Subsidiarity: Necessity of EU action
3.2
Climate change is a trans-boundary problem and both international and EU action can
effectively complement and reinforce regional, national and local action. Increasing the
2030 target for EU GHG reductions will impact many sectors across the EU economy
and coordinated action at the EU level is therefore indispensable and has a much bigger
chance of leading to the necessary transformation, acting as a strong driver for cost-
effective change and upward convergence. Furthermore, many of the policy elements
assessed in this initiative have an important internal market dimension, in particular the
options related to the carbon leakage protection and the low-carbon funding mechanisms.
EU action can also inspire and pave the way for the development of market based
measures at global level, e.g. as regards the maritime transport within IMO.
Subsidiarity: Added value of EU action
3.3
As a carbon market, the ETS incentivises emission reductions to be made by the most
cost-effective solutions first across the activities it covers, achieving greater efficiency by
virtue of its scale. Implementing a similar measure nationally would result in smaller,
fragmented carbon markets, risking distortions of competition and likely lead to higher
overall abatement costs. The same logic holds for the extension of carbon pricing to new
sectors.
4 OBJECTIVES: WHAT IS TO BE ACHIEVED?
General objectives
4.1
The general objective of this initiative is to revise the ETS Directive in a manner
commensurate with the 2030 climate ambition to reach at least 55% net greenhouse gas
emission reductions by 2030 below 1990 levels and with a gradual and balanced
trajectory towards climate neutrality by 2050, in a cost-effective and coherent way while
taking into account the need for a just transition and the need for all sectors to contribute
to the EU climate efforts.
Specific objectives
4.2
 Strengthening the ETS in its current scope
 Reviewing the Market Stability Reserve in line with the corresponding legal
obligation and examine possible amendments to its design, to fulfil the legal
objectives in the MSR decision and to address any issues that may be raised in the
context of the MSR review.
28
The objectives of the MSR, as they are set in the MSR decision, are to
 Tackle historical supply-demand imbalances, and
 make the ETS more resilient to supply-demand imbalances
In addition, the mechanism must preserve regulatory stability and ensure long-term
predictability.
 Ensuring continued effective protection for the sectors exposed to a significant risk of
carbon leakage while incentivising the uptake of low-carbon technologies
 Ensuring that the maritime transport and other sectors contributes cost-effectively to
the emission reductions needed in line with EU targets and Paris Agreement
commitments by notably considering the inclusion of at least intra-EEA emissions of
the maritime sector and possibly of emissions from other sectors such as buildings
and road transport into EU emissions trading while ensuring synergies with
complementary other policies targeting those sectors.
 Addressing the distributional and social effects of this transition, by reviewing, as
appropriate, the use of auctioning revenues and the size and functioning of the low-
carbon funding mechanisms
Intervention logic
4.3
Figure 1 shows the intervention logic of this impact assessment, from the general
problem and problem drivers to the objectives. The policy options described in Section 5
are defined to address these objectives.
29
Figure 1: Intervention logic of the EU ETS revision
30
5 WHAT ARE THE AVAILABLE POLICY OPTIONS?
What is the baseline from which options are assessed?
5.1
The baseline for this initiative is the continuation of the Emissions Trading System
covering power, centralised heat and industry in its current design as most recently
amended by Directive (EU) 2018/410. The ETS cap trajectory for phase 4 (2021-2030) is
reduced with a Linear Reduction Factor of 2.2% to achieve -43% GHG emission
reduction by 2030 (compared to 2005). Under current legislation the Market Stability
Reserve would gradually absorb the existing surplus allowances and invalidate them
from 2023 onwards.
The risk of carbon leakage continues to be addressed through granting free allowances
based on updated benchmarks. The auctioning revenues are distributed to MS. Before
that the current solidarity mechanisms are applied and 450 million allowances are
auctioned to finance the Innovation Fund.
The ETS coverage of buildings-related emissions remains limited to emissions related to
fossil fuel-based district heating, electric heating and electricity use of heat pumps and its
share is projected to remain stable at around 30% of total emissions related to buildings
heating, cooling and cooking. The ETS coverage of transport-related emissions would
remain focused on aviation. The ETS coverage of emissions related to electric vehicles
and electrified rail would slightly increase but remain a small component of road
transport emissions.
The new EU Reference Scenario 2020 (REF) published alongside the Fit for 55 package
provides a model-based baseline projecting the impacts of the ETS and all other current
policies and their interaction.
REF includes all EU climate legislation that implements the ‘at least 40% GHG reduction
target’. Beyond the ETS, these are the Effort Sharing Regulation52
, currently covering
non-ETS sectors such as non-electric direct heating of buildings, fossil fuel use in road
and rail transport, domestic navigation, small emitters from the industry sector,
agriculture and waste, and the LULUCF Regulation, covering emissions and removals
from land use, land use change and forestry53
.
52
Regulation (EU) 2018/842
53
Regulation (EU) 2018/841
31
In respect of energy, REF includes the Energy Efficiency Directive and the Renewable
Energy Directive54
as well as other key policies covered in the Energy Union and the
“Clean Energy for All Europeans” package, including internal electricity market policy55
.
This includes the Regulation on the Governance of the Energy Union and Climate Action
and its integrated National Energy and Climate Plans (NECPs). These are key
instruments to achieve ESR, EED and renewable energy sources (RES) targets, covering,
for the first period, the years 2021-2030 and allowing an update in the years 2023/2024.
The updated modelled baseline also includes relevant adopted national policies (as well
as the national contributions contained in the NECPs) to achieve the EU level targets on
renewable energy and energy efficiency. Draft MS specific REF results have been
consulted with MS. Unlike the baseline used for the Impact Assessment for the Climate
Target Plan, this updated baseline does not assume that the EU-level energy efficiency
target is achieved. Based on modelling national policies, REF confirms a 3% gap to the at
least 32.5% energy efficiency target for final energy use and a 1% overachievement of
the target of at least 32% of renewable energy share in the energy mix56
.
On transport, the baseline includes measures from the three “Mobility Packages”
published57
in 2017-2018. Key measures include CO2 standards for cars and vans58
, CO2
standards for heavy duty vehicles59
, the Alternative Fuels Infrastructure Directive60
and
the Clean Vehicles Directive61
. For maritime transport, the baseline reflects the Energy
Efficiency Design Index (EEDI) and the Ship Energy Efficiency Management Plan
(SEEMP) adopted by the IMO, as well as IMO MARPOL Annex VI rules as regards the
reduction of nitrogen and sulphur oxides emissions. However, it does not include the
short-term measures recently agreed at IMO that are not yet adopted and still under
development.
54
Directive (EU) 2018/2001
55
The adopted regulation on the electricity market design is reflected to the extent possible. However, the
modelling work undertaken is not detailed enough to draw conclusion on the adequacy of specific
elements of the current market design. Such issues will require further analysis in a dedicated study.
56
COM(2020) 564 estimated based on NECP commitment aggregation a gap to the energy efficiency
target between 2.8 and 3.1 percentage points and an overachievement of the renewables target between
1.1 and 1.7 percentage points.
57
See for links to the different policy initiatives: https://ec.europa.eu/transport/modes/road/news/2018-05-
17-europe-on-the-move-3_en
58
Regulation (EU) 2019/631
59
Regulation (EU) 2019/1242
60
Directive 2014//94/EU
61
Directive (EU) 2019/1161
32
In other sectors, the F-gas Regulation, the circular economy and waste legislation,
notably including the Landfill Directive, the Nitrate Directive as well as the Common
Agricultural Policy are worth highlighting in particular.
The impact of these combined measures is projected in REF with the use of the PRIMES
(energy system and CO2) – CAPRI (agriculture) – GAINS (non-CO2) – GLOBIOM
(LULUCF) modelling tools. This allows seeing economy-wide interactions for all sectors
that emit and absorb emissions in a coherent manner. It builds on economic assumptions
underpinning the Commission/DG ECFIN’s Ageing Report 2021 which include impacts
of the COVID-19 crisis. The extent of economic impacts of COVID-19 and their longer-
term consequences, as well as the necessary assumptions on the development of
international fuel prices and technology costs belong to the main sources of modelling
uncertainty. For a description of the models and assumptions used and an overview of
key results see Annex 4, Section 8.
The ETS contributes in relative terms more than proportionally to the projected total
intra-EU GHG emission reductions in the baseline. With the existing ETS and MSR
framework and the described other policies, the current ETS sectors are projected to
achieve 51% emission reductions in 2030 compared to 200562
, an overachievement of the
2030 ETS target by 8 percentage points.
At sectoral level, under current policies the power sector is projected to reduce emissions
in 2030 by 60% compared to 2005, industrial combustion by 44%, district heating by
42%, industrial processes by 32% and the transformation sectors by 36%. Intra-EU
aviation emissions are projected to increase by 12% compared to 2005, while intra-EU
maritime emissions would decrease by 5%.
Description of the policy options
5.2
5.2.1 Overview of policy options and policy scenarios used for the analysis
The following table provides an initial overview of the policy options which are further
described in this section and retained for assessment in Section 6. The discarded policy
options are described in Section 5.3:
62
Aviation emissions are included in this figure in the intra-EU “stop the clock” scope. For comparison,
the Climate Target Plan baseline projected a 54% reduction in 2030.
33
Table 1: Overview of policy options assessed
ETS strengthening Extension maritime Extension buildings
and road transport/
all fossil fuels
Baseline ETS as legislated, partly
assessed in -55% context
(MSR0+, IF0)
Existing IMO measures
but no new EU or global
mitigation measures for
maritime emissions
EXT0 no extension
Core options AMB1 ETS 2030 ambition
with LRF update in 2026
without rebasing
AMB2 ETS 2030 ambition
with LRF update in 2024
without (AMB2a) or with
rebasing (AMB2b,c)
AMB3 ETS 2030 ambition
with LRF update with
rebasing in 2026 (AMB3c
as central variant)
MAR1 Inclusion of
maritime emissions in
existing ETS
MAR2 A separate ETS
for maritime
MAR3 Alternative carbon
pricing policy option: levy
on ship GHG emissions
MAR4 Extension of the
ETS to maritime
emissions in combination
with standards
EXT1 A separate EU-
wide upstream ETS for
buildings and road
transport
EXT2 A separate EU-
wide upstream ETS for all
emissions from the
combustion of fossil fuels
not covered by the ETS
Other policy
options
MSR1 Update current
parameter values
MSR2 More dynamic
parameters
MSR3 Addition of short
term response mechanism
CL1 More targeted free
allocation with tiered
approach
CL2 More targeted free
allocation with strengthened
benchmarks
IF1 Increase Innovation
Fund to 550 million
allowances
IF2 Increase the Innovation
Fund to 700 million
allowances
MEXTRA100 Cover
100% of emissions from
intra-EEA voyages, 100%
of extra-EEA voyages
(incoming and outgoing)
and all emissions at berth
in the EEA
MEXTRA50 Cover 100%
of emissions from intra-
EEA journeys, 50% of all
incoming and outgoing
extra-EEA voyages and
all emissions at berth in
the EEA
MINTRA Cover 100% of
emissions from intra-EEA
journeys and all emissions
at berth in the EEA
ELINK1 Review in order
to determine whether the
integration is feasible and
desirable
ELINK2 One or two-way
flexibility with existing
ETS that could increase
over time to eventually
lead to full integration
with the current system
The following stylised general policy scenarios which achieve -55% net emission
reductions compared to 1990 and represent in a coherent way a mix of climate, energy
and other policies have been used to support the assessment of the outlined policy
options:
 MIX, representing a policy mix of carbon price signal extension, strong
intensification of energy and transport policies and increased energy taxation.
With its uniform carbon price it can represent two separate ETS with caps set
reflecting cost-effective contributions for each of the two ETS segments (similar
incentive as one extended ETS),
 MIX-CP, representing a more carbon price driven policy mix with other policy
drivers of the MIX scenario at a lower intensity. It illustrates a revision of the
34
EED and RED but limited to a lower intensification of current policies in addition
to the carbon price signal applied to new sectors. Unlike MIX, this scenario
allows to separate carbon price signals of existing and new ETS. The relative split
of ambition in GHG reductions between existing ETS and new ETS remains,
however, close in MIX-CP to the MIX scenario, leading to differentiated carbon
prices between existing and new ETS.
These scenarios build on REF, further develop the policy scenarios modelled for the
2030 CTP and have been elaborated based on the same set of modelling tools. MIX and
MIX-CP are two updated core scenarios used for assessing the climate and energy related
Fit for 55 package initiatives, e.g. the Effort Sharing Regulation and the Energy
Efficiency Directive. For a detailed description of the scenarios, see Annex 4, Section
8.5. The MIX scenario has also been the starting point for analysing the maritime
transport extension and other options with the PRIMES maritime module.
These policy scenarios also serve to further assess impacts of the ETS revision. In policy
terms, the MIX scenario broadly represents a policy mix envisaged in the 2030 CTP and
is often used as central scenario for further analysis in this impact assessment. MIX-CP
represents for the sectors covered by the new ETS a less balanced policy mix, requiring a
stronger role of the new ETS to achieve the -55% 2030 target.
The Vivid EU ETS model63
was used for the MSR analysis, focusing directly on the
interaction between MSR dynamics and market equilibrium within the EU ETS; this
model provided also some indications of the direction of carbon prices in the existing
ETS in the analysis period if carbon pricing were the key driver of additional emission
reductions (on carbon price impacts in existing and new ETS sectors see also Sections
6.1.2.1.2 and 6.3.2.1). Although the modelling approach was different, some of the
assumptions of the MSR model were based on results of the REF and MIX scenarios
described above. The differences between the model used for the MSR, and the models
referred to here, as well as the assumptions of the model and general guidelines for
interpreting the results are set out in Annex 4, section 9.1.
The ETS carbon price in REF which only reflects currently adopted policies averages at
€29 for the period 2021 to 2030 and €30 for the period 2026 to 2030. Currently observed
carbon market prices already respond to the increased GHG target and vary between €40
and €55. Future carbon prices are by nature uncertain and impacted by policy choices and
market developments. The policy scenarios modelled project for the period 2026 to 2030
63
See Annex 4, Section 9.1.
35
average carbon price ranges between €45 and €70, with projected carbon prices in the
year 2030 ranging between €50 and €85. This is broadly in line with external analyses,
for which the average of price forecasts for 2030 is €71, with a large range between €42
and €8964
, all prices recalculated in €2020.
For the assessment of some impacts, e.g. on auctioning revenues, a carbon price
assumption over the period 2021 to 2030 reflecting the -55% policy context is necessary.
The following rounded central carbon price assumptions are used, derived on the basis of
current ETS carbon market prices, the average of short-term forecasts of different carbon
market analysts of April 2021 and the abovementioned modelled -55% scenarios for
203065
:
 €50 as average for the whole period 2021 to 2030,
 €55 as average for the period 2026 to 2030,
 €45 as average for the period 2021 to 2025 (all values expressed in €2020).
5.2.2 Strengthening of the existing ETS (power and industry installations)
Strengthening of the existing ETS entails a number of elements: a tighter emission cap, a
review of the Market Stability reserve, an improved framework against the risk of carbon
leakages and a review of the Innovation Fund. There are different policy options for each
of these elements which are described below and then first assessed separately. In
Section 7.1.2 possible packages of these options are assessed. The Modernisation Fund
and other elements addressing distributional concerns are covered separately in Section
5.2.5.
64
Summarised in Carbon Pulse Daily of 8 April 2021: POLL: Big boost for EU carbon price forecasts as
several analysts see EUAs topping €100 this decade. See also section 7.3 of ERCST, Wegener Center,
BloombergNEFand Ecoact: 2021 State of the EU ETS Report, April 2021, and ICIS: European carbon
market to shift gear, February 2021. All these publications use nominal carbon prices (not deflated).
65
Market analysts average: €43 for 2021 and €53 for 2025 (Carbon Pulse Daily poll of 8 April 2021).
Average of MIX and MIX-CP in 2025 for existing ETS €37, in 2030 for existing and new ETS €53, for
new ETS €71, Vivid existing EU ETS model average €56 for 2025 and €77 for 2030.
36
Strengthening of the ETS target/cap
5.2.2.1
The ETS cap on emissions determines the ambition level of the ETS. Decreasing linearly
by an annual amount, the cap trajectory is referred to as the linear reduction factor (LRF),
currently set at 2.2% per year66
.
To determine an ETS ambition in line with the 2030-target of -55% requires lowering the
ETS cap. This in turn impacts the distribution of ETS building blocks and the protection
against the risk of carbon leakage. A revised ETS ambition (cap) depends strongly on the
2030 EU wide ambition but also on the following elements:
1. Scope of ETS sector emissions: The current ETS scope includes stationary
(power and industry sector) installations and intra EU aviation. For the analysis,
this current scope is assumed during the 2021-30 period, so without any extension
to new sectors67
.
2. Ambition distribution between the existing ETS and non-ETS sectors: The
following analysis is based on the cost-effective reduction potential in the sectors
covered by the existing ETS compared to the non-ETS sectors68
.
3. Starting year of cap changes: The year from when a new cap trajectory should be
applied for the first time to reach the 2030 ETS cap impacts the overall ETS
ambition. The later the new cap trajectory is applied for the same 2030 ambition,
the steeper it needs to be. To note that for the same 2030 cap (ambition), a later
start of a new trajectory results in a lower overall ambition, because the sum of
the yearly caps for the entire phase 4 (2021-30) is lower69
.
4. Possible rebasing: the ETS cap decreases linearly by an annual amount. The LRF
is applied to the cap of the previous year. Currently, the cap is higher than real
emissions, because over the past decade real emissions have reduced faster than
the cap. To better align the cap (historically set up) with the current emission
66
The LRF is applied from the mid-point of the period from 2008 to 2012 and is calculated for the ETS
emission and sector scope (i.e. stationary power and industry sector and intra EU aviation) based on the
cost-effective ambition result for this scope from the -55% modelling scenarios. The LRF is then applied
to the ETS cap reference.
67
Options to extend emissions trading to maritime transport are analysed in Sections 5.2.3.1, 6.2 and
Annex 6, Section 18. In terms of emissions and increase of ETS cap and free allocation, the impact of
including maritime into the existing ETS would depend on the maritime scope applied.
68
See Section 6.7 of the Impact Assessment accompanying the 2030 Communication for further
discussion.
69
The cumulative cap is an indicator of the overall emission ambition over the period 2021-30.
37
profile, it is possible to have a one-off reduction of the cap (“rebasing”), from
where a new LRF would apply, an option already indicated in the 2030 CTP. This
would lead to a lower LRF.
Regarding the geographical scope, the ETS scope applies to EU MS and EEA countries.
Up to 2020, the UK was a full ETS member and from 2021 the ETS cap was updated to
account for the UK’s withdrawal from the EU and the Northern Ireland protocol70,71
.
The first element is to determine the contribution of the current ETS sectors (including
intra-EU aviation) to the increased 2030 target of -55%. An analysis conducted in the IA
accompanying the 2030 CTP72
determined a cost-effective ETS ambition level of
between -63% and -64% as compared to 2005. The modelling refinement based on the
EU Reference Scenario 2020 resulted in a similar ambition level ranging between -62%
and -63%. The MIX scenario which is considered as best reflecting the 2030 CTP results
in -62%. Therefore, an ETS cost-effective ambition of -62% with current coverage as
compared to 2005 is assumed for the quantification of all of the following options.
Different trajectory approaches can be used to reach the 2030 cap. The following options
are assessed:
Option 1: ETS 2030 ambition with LRF update in 2026 without rebasing (AMB1)
The current ETS phase 4 framework is maintained for the period 2021-2025, with a 2.2%
LRF, and as of 2026 an LRF of 6.24% applies. Applying a revised LRF as of 2026
accommodates the existing ETS phase 4 free allocation implementation that has two
defined periods (2021-25; 2026-30).
Option 2: ETS 2030 ambition with LRF update in 2024 with/without rebasing (AMB2)
Taking into account the proposal timeline and subsequent legislative process, 2024 is
assumed to be the earliest possible start date for a modified cap. Therefore, the current
ETS phase 4 framework is maintained for the period 2021-2023, with a 2.2% LRF and in
2024 the cap trajectory is updated by:
- A linear trajectory with a LRF of 5.09%– AMB2a.
70
Commission Decision on the Union-wide quantity of allowances to be issued under the EU Emissions
Trading System for 2021 (C(2020) 7704 final)
71
Northern Ireland installations producing electricity are within the ETS scope
72
Refer to table 26 on ETS scope extension and projected ambition levels in ETS and ESR for different
sectoral coverages
38
- Emissions are adjusted downwards to better reflect the emission profile. The
rebasing reference is the difference of ETS verified emissions to the annual cap
for the period 2013-2019, on average 163 million EU allowances (EUAs) below
the ETS annual cap, and a new LRF of 3.90% then applies – AMB2b
- Apply a 4,22% LRF from 2021, though delaying its implementation which results
de facto in a rebasing correction of 119 million EUAs in 2024 – AMB2c
Option 3: ETS 2030 ambition with LRF update with rebasing in 2026 (AMB3)
The current ETS phase 4 framework is maintained for the period 2021-2025, with a 2.2%
LRF. In 2026, a new LRF applies and the base year reference is adjusted downwards to
better reflect the emission profile.
In terms of rebasing, i.e. the adjusted reference from where to apply the new LRF, there
are different references to consider:
- Apply a LRF from an early starting year, though delaying its implementation
which results de facto in a rebasing correction in the year it starts applying –
AMB3a (2021 base; 4,22% LRF and 198 million EUAs rebase); AMB3b (2024
base; 5,09% LRF and 113 million EUAs rebase)
- Emissions are adjusted downwards by the difference of ETS verified emissions to
the annual cap for the period 2013-2019163 million – AMB3c. Deducting this
amount in 2026 would lead to new LRF of 4.57%.
Figure 2: ETS cap under the different options
Generally speaking, cap options including rebasing are favoured by NGOs and clean
energy/technology/service providers. Industry stakeholders rather tend to support options
based on an increased LRF, to avoid big step-changes that are considered to impact
predictability in terms of price and free allocation. This was also confirmed by the OPC
survey (see Annex 2 for a comprehensive overview on the results of the stakeholder
39
consultation). The majority of respondents from all stakeholder groups indicated that the
increase of the LRF is the most relevant factor to strengthen the ETS ambition. While a
one-off cap reduction in combination with increasing the LRF was also found important
by a wide range of stakeholder groups (including NGOs, environmental organisations,
academic/research institutions, EU citizens and public authorities), this was not the case
for the private sector, notably not for the manufacturing sector.
Market Stability Reserve
5.2.2.2
The main purpose of the MSR is to reduce the surplus of allowances in the ETS and
therefore the rules on when and how the MSR absorbs allowances are crucial to its
functioning. Currently, allowances are put in the reserve if the total number of
allowances in circulation (TNAC) is above a predefined upper threshold (833 million
allowances) and are released from the reserve, if the TNAC is below a predefined lower
threshold (below 400 million allowances). These thresholds are based on an assessment
of how much liquidity the market needs to function well, which crucially depends on the
need for installations to manage their carbon price risks through ‘hedging’ part of their
need for allowances in advance.
If the TNAC is above 833 million, then 24% of it is placed in the reserve (the ‘intake
rate’). The 24% intake rate is lowered to 12% after 2023. If the TNAC is lower than 400
million, then 100 million allowances (the release amount) are released from the MSR and
put on the market (auctioned) immediately. The MSR also features an invalidation
mechanism: after 2023, allowances held in the reserve above the total number of
allowances auctioned during the previous year would be invalidated.
While the MSR has wide support across stakeholder groups, there was no consensus
about the future changes of the MSR. Overall, civil society, including NGOs and EU
citizens, expressed relatively more support for a strengthening of the parameters of the
MSR than the private sector73
.
73
As regards the thresholds, 46% of respondents to the OPC, including the majority of private sector
respondents, public authorities and trade unions, considered that they should not be changed, compared
to 37% that thought the thresholds should be decreased, including the majority of NGOs, environmental
organisations and parts of the private sector (in particular the energy sector). A minority of 18%
respondents from different stakeholder groups considered that the thresholds should be increased. There
was also no agreement about maintaining, increasing or decreasing the intake rate. The private sector
and trade unions preferred to keep the intake rate as per the current regulation at 12% beyond 2023
(followed by the option to keep it at 24%), while NGOs’ and environmental organisations’ preferred
option was to increase the intake rate above 24%. Finally, a minority of respondents (11%) pointed to
40
Possible options for these fundamental MSR design elements are presented and
combined in three policy options, which are summarised in the table below:
Table 2: Summary of the MSR options
MSR0+74
MSR as
legislated +
aviation
MSR1
Update current
parameter values
(from 2024) +
aviation
MSR2
More dynamic
parameters
(starting from
2024) + aviation
MSR3
MSR2 with addition
of short term response
mechanism (from
2024) + aviation
Intake75
12% of TNAC 24% of TNAC
33% of TNAC
minus upper
threshold76
33% of TNAC minus
upper threshold
Injections77
100m 100m
25% of lower
threshold
25% of lower
threshold
Upper threshold 833m 700m
700m in 2024,
declines with cap
after 2025
700m, either fixed or
declining with cap
after 2025
Lower threshold 400m 400m
400m in 2024,
declines with cap
after 2025
400m, either fixed or
declining with cap
after 2025
the need for the MSR to be able to react faster to address unexpected demand or supply shocks, while
12% of respondents considered that a carbon price floor would also be necessary. There was support
across stakeholder groups for maintaining the invalidation rule: the majority (63%) of respondents
suggest that the invalidation rule should remain in place, either unreservedly (38%) or with an
amendment (25%). 27% of respondents were instead in favour of abolishing the invalidation rule,
including parts of the private sector (in particular the manufacturing sector). Participants at the two MSR
expert workshops organised by Vivid Economics as part of the MSR review study also generally
supported keeping the thresholds in line with future hedging needs, including aviation in the TNAC
calculation, removing the dependency of the invalidation rule on past auction volumes, and updating the
intake rate, in particular in order to remove the threshold effect.
74
In particular for the MSR, the performance of the current MSR as legislated was assessed in option
MSR0+. In order to render all options comparable, aviation was considered as included in the
calculation of the TNAC in all options.
75
For example, for a given TNAC of 1 000 allowances, the intake for MSR0+ would be 12% * 1 000 =
120 million allowances, for MSR1 24% * 1 000 = 240 million allowances, and for MSR2 and MSR3,
33% * (1 000 – 833) = 55.11 million allowances.
76
In this case, if the TNAC is above the upper threshold, 33% of the difference between the calculated
TNAC and the upper threshold would be put in the MSR. This option is different from MSR1, where
simply 24% of the TNAC is put in reserve if the TNAC is above the upper threshold.
77
In this case, if the TNAC is below the lower threshold, the amount shown on the line « injections » is
« released » by being auctioned o during the next 12 months. For MSR0+ and MSR1, if the TNAC were
lower than 400 million allowances, 100 million allowances would be released from the MSR and
auctioned in the next 12 months. For MSR2 and MSR3, if the lower threshold were 360 million
allowances and if the TNAC were lower than 360 million allowances, then 25% of 360 million, or 90
million would be released from the MSR and auctioned during the next 12 months.
41
MSR0+74
MSR as
legislated +
aviation
MSR1
Update current
parameter values
(from 2024) +
aviation
MSR2
More dynamic
parameters
(starting from
2024) + aviation
MSR3
MSR2 with addition
of short term response
mechanism (from
2024) + aviation
Invalidation
mechanism78
Invalidate
excess above
prior year
auction volume
Invalidate excess
above prior year
auction volume
Invalidate
allowances up to
the level of the
lower threshold
Invalidate allowances
up to the level of the
lower threshold
Auction reserve
price79 - - -
25€ in 2025,
increasing by 3%
year-on-year in real
terms
The updated levels of the thresholds are based on estimates of future hedging needs,
which are expected to change over time, for example because the reduction of free
allocation increases the carbon price risk of industrial installations. The assessment of
future hedging needs is presented in Annex 8, Section 24.
MSR1 simply updates the values of the parameters (threshold, intake rate) based on this
analysis.
MSR2 adjusts the thresholds such that they remain a constant share of the cap. This links
the thresholds to the main supply parameter in the ETS: as the cap is lowered, so are the
MSR thresholds. This option calculates intakes as a proportion of the TNAC in excess of
the upper threshold. The intake rate is set at 33% of the difference between the surplus
and the upper threshold. This means that with an upper threshold of 700 million
allowances, a TNAC of 800 million allowances would result in the MSR taking in 33
million allowances the following year.
This option invalidates allowances held in excess of the MSR lower threshold,
decoupling invalidation from auction volumes. This change is proposed because there is
78
For example, if there were 2 billion allowances in the reserve, and the auction volume of the previous
year were 500 million allowances, while the lower threshold were 400 million allowances, for MSR 0+
and MSR1, 1.5 billion allowances would be invalidated, and 500 million allowances would remain in
the reserve. For MSR2 and MSR3, 1.6 billion allowances would be invalidated, and 400 million
allowances would remain in the reserve.
79
An auction reserve prices means that, if the clearing price of an auction of allowances does not reach the
auction reserve price, then the auction is cancelled. In that case, the corresponding volume of allowances
to be auctioned would be added to the MSR, thereby quickly decreasing the supply of allowances to the
market.
42
no clear rationale to let the invalidation volume be determined by the auction volumes in
the previous year, especially since these auction volumes are themselves influenced by
the MSR’s intakes or releases.
Option MSR3 introduces an auction reserve price, as an additional short-term response
mechanism. The MSR in its current structure is not meant to address short term volatility
and disturbances. In particular when carbon prices were low, different groups of
stakeholders have asked the Commission to look into the possible implementation of a
carbon price floor. Under this option, on top of the changes brought by MSR1 or MSR2,
a minimum price level would be set at a fixed or dynamic level. If the clearing price of an
auction does not reach this level, the auction is cancelled, and the auction volume would
be added to the MSR instead. The level of this price would be set at 25 euros to begin
with, with annual increases of 3%.
Framework to address the risk of carbon leakage
5.2.2.3
The level of free allocation granted to a stationary installation to address the risk of
carbon leakage is the result of a calculation which takes into consideration the relevant
benchmark values, the historic activity level of the installations, the carbon leakage
exposure factor (CLEF) and the cross-sectoral correction factor (CSCF). The value used
for the CLEF depends on if a sector is deemed to be at risk of carbon leakage or not. The
CSCF is a factor which, if applied, reduces free allocation in a uniform manner across all
sectors (see Annex 9 for more details). The free allocation rules were updated as a result
of the previous review of the ETS Directive and are applicable for phase 4. However, a
more ambitious emission reduction target implies that these rules may need to be
updated. The options analysed in this impact assessment include:
Baseline CL0: The baseline relies on the current post-2020 free allocation rules
combined with an overall GHG emission reduction target of -55% compared to 1990.
This baseline was chosen to compare the impacts of options to modify the framework to
address the risk of carbon leakage. Different cap trajectories were considered to reflect
the ETS contribution to the overall -55% emission reduction objective (see
Section 5.2.1.1).
Option CL1: More targeted free allocation with tiered approach
Considering that the overall number of free allowances is limited, in particular in view of
the increased level of ambition of EU climate policies, policy option CL1 aims at better
targeting free allocation to those sectors at higher risk of carbon leakage. The current
ETS legislation foresees only two groups with respect to the risk of carbon leakage. A
sector or subsector is deemed to be at risk if the carbon leakage indicator, defined as the
trade intensity multiplied by the emission intensity, exceeds a value of 0.2. Otherwise,
the concerned sector or sub-sector is not deemed to be at risk except if other, more
43
detailed criteria are met. The assessment of sectors or subsectors against these more
detailed criteria resulted in significant additional work and protracted discussions. In
practice, the impact of the distinction between sectors at risk of carbon leakage and
sectors not at risk is limited, as around 94% of the emissions from industrial installations
originate from sectors at risk.80
A total of 63 sectors and subsectors is deemed to be at risk of carbon leakage in phase 4.
This approach does not take into account that there are significant differences in the trade
and emissions intensities between industry sectors deemed to be at risk, as can be seen
from the large variations in the values of the carbon leakage indicator ranging from 0.2 to
more than 20 (see Annex 9). In order to better target free allocation,90
tiers with carbon
leakage indicator thresholds and more differentiated carbon leakage exposure factors
could be introduced. This was already contemplated in the 2015 impact assessment for
the revision of the ETS Directive. Under this option, three tiers are considered.
The tiered approach is assessed from 2026 onwards, as free allocation for the period from
2021 to 2025 will be granted in 2021 based on the current ETS Directive. The free
allocation at benchmark level (i.e. the carbon leakage exposure factors) for sectors at
medium risk was chosen at an intermediate level of the current legislation which applies
30% (no risk) and 100% (risk) of the relevant benchmark levels. The thresholds were
chosen in order to allow for a reasonable differentiation between sectors. Sectors with a
carbon leakage indicator of more than 2 would represent approximately 72% of the
emissions, while sectors with a factor of more than 1 would represent approximately
91%. A threshold of 1 was discarded, as it would only provide a marginally improved
differentiation compared to the current threshold of 0.2 for which the concerned sectors
represent 94% of the emissions.
Table 3: Tiered approach assessed
Baseline Tiered approach
Risk categories
and thresholds
Carbon leakage
exposure factor
(CLEF)
Risk categories
and thresholds
Carbon leakage
exposure factor
(CLEF)
No risk:
CLI ≤ 0.2
30% (1
)
No risk:
CLI ≤ 0.2
30% (1
)
80
European Court of Auditors, The EU’s Emissions Trading System: free allocation of allowances needed
better targeting, 2020.
44
Risk:
CLI > 0.2 100%
Medium risk:
0.2 < CLI ≤ 2
60%
High risk:
CLI > 2
100%
NB: CLI = carbon leakage indicator.
(1
) Declining from 30% in 2026 to 0% in 2030, as in the current ETS Directive.
Option CL2: More targeted free allocation with strengthened benchmarks
More targeted free allocation could also be achieved by addressing another element of
the allocation formula: the benchmarks. The present rules for the benchmark value
updates foresee an annual reduction within the range between 0.2% and 1.6%, compared
to phase 3 values which were based on the average performance of the 10% most
efficient installations in 2007/2008. This approach avoids abrupt changes of benchmark
values, but does not fully reflect the technological progress. For the update of the
benchmark values for the period from 2021 to 2025, the maximum update rate has been
applied for 31 out of 54 benchmarks. For a number of benchmarks, the average emission
factor of the 10% most efficient installations in 2016/2017 is already lower than the
updated benchmark values for the period from 2021 to 2025.81
An increase of the maximum annual update rate from 1.6% to 2.5%82
would better reflect
the actual emissions of the different sectors, while also reduce the total free allocation. A
maximum update rate of 2.5% would also better align free allocation with the need to
decarbonise industry in view of reaching zero emissions by 2050, as it is close to a linear
trajectory to zero in 2050.
A design element which can be changed for options CL1 and CL2 is to make free
allocation conditional on decarbonisation efforts. Such conditionality provisions could be
similar to the ones that were recently introduced with the revised state aid rules for
indirect cost compensation.16
The conditionality of free allocation is assessed in Annex 9.
Another design element which can be changed for options CL1 and CL2 is the
broadening of the scope of free allocation. Ongoing and future technological
81
Commission Implementing Regulation (EU) 2021/447 of 12 March 2021 determining revised benchmark
values for free allocation of emission allowances for the period from 2021 to 2025 pursuant to Article
10a(2) of Directive 2003/87/EC of the European Parliament and of the Council. OJ L 87/29, 15.3.2021.
82
For the period from 2026 to 2030, the application of a maximum annual update rate of 2.5% would lead
to a reduction of the benchmark values of 50% compared to phase 3 values, while a maximum annual
update rate of 1.6% would instead lead to a reduction of 32% compared to phase 3 values.
45
developments to reduce GHG emissions might lead to situations where installations
would partly or completely lose their free allocation when decarbonising their production
activities. In such cases, the free allocation regime could lead to unequal treatment of
industrial installations and effectively act as a barrier to the use of decarbonisation
techniques such as green hydrogen and the electrification of industrial processes.
Possibilities to broaden the scope of free allocation are assessed in Annex 9.
The framework to address the risk of carbon leakage due to indirect carbon costs is
assessed in Annex 9.
The Commission will also present a proposal for a Carbon Border Adjustment
Mechanism (CBAM). Depending on the options chosen, CBAM may replace free
allocation in the selected sectors. The impact of CBAM as well as the transition between
CBAM and free allocation is presented in the CBAM impact assessment. This impact
assessment presents options for free allocation that would apply for sectors outside
CBAM, or until the entry into force of CBAM for selected sectors.
A large majority of replies to the OPC, around 80%, were in favour of amending the
current carbon leakage framework, while 20% preferred to keep it as it is. However,
opinions on the modification options were divided. The introduction of other measures to
further incentivise GHG reductions received comparatively highest support (31%). On
the other hand, the introduction of conditionality (14%) or of a tiered approach (17%) as
well as the replacement of the current carbon leakage framework with a CBAM for
selected sectors (18%) each were favoured by less than 20% of the replies. Preferred
options varied by stakeholder type. Both NGOs’ and private sector respondents’ most
selected option was the introduction of other measures to further incentivise GHG
reductions, however, for NGOs followed by all of the other amending or replacing
options, while for the private sector followed by the option to maintain the current carbon
leakage framework without changes. Among trade unions, the introduction of other
measures or no changes received the most support. This outcome of the OPC survey is
also in line with the positions expressed by social partners from both the employer and
employee side in a meeting with the Commission. For other stakeholder groups,
including academic/research institutes, EU citizens, and environmental organisations, the
replacement of free allocation with a CBAM for selected sectors was the most selected
option.
Regarding possible changes to benchmark-based allocation, stakeholders were divided
whether a modified method to determine benchmark values should be introduced to
ensure faster incorporation of innovation and technological progress. This option
obtained support from a wide range of stakeholder groups but not from the private sector.
46
Improving support for low-carbon investment and innovation through
5.2.2.4
the existing Innovation Fund
The current ETS Directive sets the size of the Innovation Fund at 325 million allowances
from the free allocation share, 75 million allowances from the auction share, 50 million
allowances from the MSR and the leftovers from the NER300 programme, to a total size
of over 450 million allowances.
The main policy options analysed for the Innovation Fund concern increasing its size
while keeping its sourcing the same in terms of proportions, complemented with changes
to certain design elements improving its functioning. 83% of OPC respondents from a
wide range of stakeholder groups argued that the size of the Innovation Fund should be
increased.
Option IF0: Baseline
No change to current Innovation Fund size, as well as main design elements (funding rate
stays at maximum 60% of the additional cost of the innovation technology and not of the
total financial gap to the market price). With a carbon price of EUR 50, the total size of
the Innovation Fund for the period 2021-2030 amounts to EUR 22.5 billion.
The first call for large scale projects was significantly oversubscribed (over 20 times the
available budget) with projects across all sectors, technologies, and MS. The Innovation
Fund is running two calls per year (one for large-scale and one for small-scale projects)
of total value around EUR 1.3 billion. By 2026 it will have run around 12 calls for
around EUR 7.5 billion. Assuming an average grant size of EUR 100 million, by 2026
the IF may be expected to have financed around 75 clean tech projects covering a good
mix of first-of-a-kind commercial projects across all sectors (based on the applications to
the first call83
).
Option IF1: Increasing the size of the Innovation Fund to 550 million allowances
Increasing the size of the Innovation Fund to 550 million allowances is expected to
generate EUR 27.5 billion (with a EUR 50 carbon price which takes into account the
increased carbon price as a result of the reduced cap). The additional 100 million
allowances would come from the extension of the scope of emissions trading. The
increase can be implemented once the revision of the ETS Directive is concluded, the
47
required implementing legislation is put in place, and the allowances are monetized. This
would allow running call for projects with the additional amounts in the second half of
the decade, and may also require increasing the size of the actual calls. The monetization
of the additional allowances would need to take place with due care for the stability of
the carbon market. The increase of the size can be combined with the enhancement of the
functioning of the instrument via an increased funding rate combined with additional
instruments. Administrative capacity will need to be strengthened accordingly.
Option IF2: Further increasing the size of the Innovation Fund to 700 million
allowances
Increasing the size of the Innovation Fund to 700 million allowances is expected to
generate EUR 35 billion with a EUR 50 carbon price. The additional 250 million
allowances can come mostly from the extension of the ETS (200 million) and from free
allocation (50 million). Out of the 83% respondents to the OPC in favour of an increase
of the Innovation Fund, 45% indicated that it should be increased by using more
allowances from the auction share, while 9% indicated that the allowances should come
from free allocation. The same considerations as for Option IF1 are valid to an even
greater extent. However, the management of such a significantly increased programme
would require significantly reinforced administrative capacity.
A design element which can be changed across all options is the funding rate of the
Innovation Fund which can be increased to ensure a full coverage of the financial gap
that would speed up the deployment of innovative technologies. This can be done with a
direct increase of the percentage, possibly coupled with introduction of complementary
carbon contracts for difference (CCfDs)84
. CCfDs are similar to the support to
renewables auctions: they are long term contracts with a public counterpart paying the
difference between an agreed CO2 strike price and the actual CO2 price in the ETS and
thus minimise the required amount of funding and optimise the use of the available
resources. The producer of the low-carbon product would effectively benefit from a
guaranteed carbon price for a certain limited period of time. The extra funding required
needs to be assessed against potential benefits, such as the use of competitive tendering
84
The relevance of these possible changes to design elements was confirmed by the results of the OPC.
74% of respondents argued for the maximum funding rate to be increased, 55% highlighting the need to
allow better risk-sharing for risky and complex projects and 19%, including the majority of NGOs
indicating that it should only be increased in case of competitive bidding (e.g. CCfDs). 88% of
respondents from a wide range of stakeholder groups were in favour of introducing such additional
supporting instruments to support full market deployment of low-carbon products through the
Innovation Fund.
48
processes, the reduction of regulatory risk for the investor, the reduction of financing
costs (enhanced bankability), the creation of a one-stop shop, and build-in reduction of
support with increasing carbon prices (see Annex 11 for more analysis).
5.2.3 Extension of emissions trading to maritime transport and alternatives
Architectural options
5.2.3.1
Following the 2030 CTP, this impact assessment looks at the options detailed below as
regards the extension of emissions trading to maritime transport. All options are based on
maritime emissions linked to the EEA (i.e. route-based scope), regardless of the
nationality of the ship or where the company has been registered in order to avoid
evasion through reflagging of ships and distortion of competition. In addition, they
reflect the impact of the FuelEU Maritime initiative by considering higher shares of
renewable and low-carbon fuels, in line with the MIX scenario.
Option 1: Inclusion of maritime transport emissions in the existing ETS (MAR1)
This policy option would extend the ETS to cover maritime transport emissions. It would
work by setting a cap on GHG emissions from the maritime sector and creating new
emission rights in the Union registry. Regulated entities from the maritime sector would
then need to acquire and surrender emission allowances for each tonne of reported GHG
emissions. The amount of allowances to be surrendered would be derived from the
emissions data coming from the EU maritime transport monitoring, reporting and
verification (MRV) system. The system could allow both maritime regulated entities and
ETS operators to purchase and surrender the same type of allowances, or alternatively, it
could only give that flexibility to maritime operators (similar to what was done initially
for aviation in the ETS).
Option 2: A separate ETS for maritime transport (MAR2)
Under this option, maritime transport emissions would be capped and included under a
separate emissions trading system, not part of the existing ETS. A new market would be
designed for the maritime allowances and exist in parallel to the existing ETS. The
amount of allowances to be surrendered would be derived from the EU maritime MRV
system. Regulated entities would only be able to trade maritime allowances amongst
themselves as no out-of-sector emission reductions would be rewarded, unlike in MAR1.
All emission reductions would happen in the maritime sector. In the future, a possible
linkage of the separate maritime ETS with the ETS could be envisaged if desirable,
following the same linking options as envisaged for the ETS extension to other sectors
than maritime transport.
49
Option 3: Alternative carbon pricing option: levy on ship GHG emissions (MAR3)
This measure would impose a levy on maritime emissions reported by eligible entities as
part of the EU maritime MRV system. As opposed to the maritime fuel tax option
assessed under the revision of the Energy Tax Directive 2003/96/EC, the levy on ship
GHG emissions would be applied to ship operators/owners based on their reported
annual emissions and not on the quantity of fuel bunkered in EU ports. It would therefore
take the form of an annual payment. The levy rate could be reviewed regularly (e.g. up to
yearly adjustments) and gradually increased to send an appropriate price signal and
accelerate the uptake of mitigation measures in the sector. A levy on CO2 emissions is
one of the market-based-measures contemplated by some market actors at global level, as
an alternative to cap-and-trade system.
Option 4: Extension of the ETS to maritime emissions in combination with standards
(MAR4)
This policy option considers complementing the extension of the ETS to maritime as
described in MAR1 with an operational carbon intensity standard, whereby vessels
calling at EEA ports would be obliged to meet a certain level of carbon intensity to be
defined in the legislation (expressed as the amount of GHG emissions per transport work
and defined for every ship size and type). By mandating a certain level of carbon
intensity improvements, such a standard would complement the price signal coming from
the ETS, while leaving it to shipping companies to decide which measures to implement
to achieve the standard. It would thereby contribute to further accelerate the
implementation of mitigation measures in the maritime sector, such as energy efficiency
improvements or the uptake of renewable or low-carbon fuels. A similar standard is
being discussed at IMO for ships of 5,000 gross tonnage and above based on a new
operational carbon intensity indicator.
Key common design variants for all maritime transport options
5.2.3.2
The effectiveness and efficiency of the identified policy options are highly dependent on
the following key design elements (see Annex 6 for further details).
(a) Options for the maritime geographical scope
The geographical scope is defined by the starting and finishing point of the covered ship
movements (based on the first and last port of call within or outside the EEA, as detailed
in Annex 6) and thus defines the level of emissions covered. In line with the 2030
Communication calling for the coverage of at least intra-EU voyages, there are a variety
of options in terms of the ship movements linked to the EEA that could be covered:
50
 Option 1: Cover 100% of emissions from intra-EEA voyages, 100% of extra-
EEA voyages (incoming and outgoing) and all emissions at EEA berth
(MEXTRA100) – follows the same scope as the EU maritime transport MRV
Regulation;
 Option 2: Cover 100% of emissions from intra-EEA voyages, 50% of all
incoming and outgoing extra-EEA voyages (one of the options considered in
UNFCCC, or 100% of all incoming extra-EEA voyages, or 100% of all outgoing
extra-EEA voyages) and all emissions at EEA berth (MEXTRA50);
 Option 3: Cover 100% of emissions from intra-EEA voyages and all emissions at
EEA berth (MINTRA) – similar to the scope of aviation in the ETS under the
time-limited derogation that is currently being applied and in line with the
minimum scope foreseen in the 2030 CTP.
It should be noted that emissions from intra-EEA voyages include both emissions from
domestic voyages (that depart and arrive in the same MS) as well as emissions from
voyages between two distinct MS. Domestic emissions are covered by the Effort Sharing
Regulation (ESR) and represent around 10% of the sum of domestic and international
navigation emissions reported in the EU GHG inventory. A substantial part of these
emissions would not be covered by the proposed policy options. These uncovered
emissions would typically include emissions from various ship types involved in
domestic navigation such as inland waterway vessels or small ferries, motor boats or
workboats not covered under the EU maritime transport MRV regulation.
(b) Regulated entities and ships
The companies liable under the EU maritime transport MRV regulation would be the
regulated entity held accountable to comply with the legislation. These companies are
defined as the legal entities owning the ship and any other organisation or person which
has assumed the responsibility for the operation of the ship from the shipowner, such as
the manager or the bareboat charterer. These companies would also be the ones that have
agreed to take over all the duties and responsibilities imposed by the International
Management Code for the Safe Operation of Ships and for Pollution Prevention. This is
in line with the new definition of companies proposed by the European Commission in
its proposal to amend the EU maritime transport MRV regulation85
. In addition,
implementing the policy at company level instead of ship level would considerably
85
Proposal for amending Regulation (EU) 2015/757 in order to take appropriate account of the global data
collection system for ship fuel oil consumption data, COM(2019) 38 final, 2019/0017 (COD)
51
reduce the number of entities involved in each policy option (from around 12.000 to
1.600).
In terms of regulated ships, all options would apply the scope of the EU maritime
transport MRV regulation that excludes ships below 5.000 gross tonnage86
and exempts
specific ship categories such as warships, naval auxiliaries, fishing vessels or government
ships used for non-commercial purposes. It also excludes inland waterway transport and
all voyages for purposes other than transporting cargo or passengers for commercial
reasons.
(c) Type of greenhouse gas emissions
All policy options should progressively cover the broader range of GHG emissions.
While CO2 emissions are the primary GHG emitted through maritime transport activities,
other GHGs, such as methane and nitrous oxide are getting increasingly important,
notably in view of the increasing uptake of LNG87
. Due to the EU maritime transport
MRV Regulation currently being limited to CO2 emissions, other GHGs would have to
be included in a later phase once the monitoring approaches and emission factors of these
gases have been agreed. A similar approach is taken in the FuelEU maritime initiative,
which envisages including other non-CO2 greenhouse gases, in particular methane and
nitrous oxide.
(d) Phase-in period with a gradual coverage of maritime emissions
To ensure a smooth transition, a phase-in period of e.g. 3 years could be envisaged where
regulated entities would only be obliged to purchase allowances (or pay a levy in case of
MAR3) for a portion of their emissions, gradually rising to 100%. This transition period
could help market actors get acquainted with the new system. In the targeted
stakeholders’ consultation, the majority of stakeholders expressed the need for a
transition period for the maritime sector with some arguing that the maritime sector is
complex and requires time to adapt.
86
By limiting the monitoring requirements to ships above 5.000 gross tonnage, the Regulation covers
around 90% of all CO2 emissions, whilst only including around 55% of all ships calling into EEA ports.
87
CO2 emissions cover 98% of current GHG shipping emissions, According to the 4th IMO GHG study,
methane emissions from ships have increased by more than 150% from 2012 to 2018, largely due to a
surge in the number of LNG ships. Such a trend could have a significant climate impact as over a 100-
year period methane the global warming potential of methane is 28 times higher than of CO2.
52
Design elements specific to maritime ETS options (MAR1, MAR2,
5.2.3.3
MAR4)
a) Method for cap setting
The emission cap for ETS allowances for maritime transport can be determined using
historical maritime transport emissions. Historical maritime emissions could be based on
the reporting years 2018-2019, on the basis of the data collected under the EU maritime
transport MRV system while taking into account the impact of the UK’s withdrawal from
the EU.
In addition, a trajectory from current emission levels to the target level in future years
will need to be constructed so that a linear reduction factor for the cap can be set for each
year. In this assessment, we consider that the number of allowances allocated to maritime
emissions should be reduced in line with the same linear reduction factor applicable to
stationary installations and aviation, in a manner commensurate with the 2030 climate
ambition and with a long-term trajectory towards climate neutrality by 2050. This would
ensure that maritime transport contributes to the EU climate efforts in line with the
collective ETS emission reduction objective, which applies to all ETS sectors.
b) Allocation of allowances
Maritime allowances could be auctioned, which is the basic principle for allocation in the
ETS, as it is generally considered to be the most economically efficient system88
. It also
eliminates possible windfall profits and puts new entrants on the same competitive
footing as existing operators. Moreover, the application of the flag neutrality principle
would already virtually eliminate the risk of competitive distortion between
ships/companies and therefore no free allowance allocation is needed to safeguard a level
playing field. Auctioning could also raise revenues to support climate action and other
purposes (see Section 5.2.4.3). Free allocation of maritime allowances will thus not be
analysed under this impact assessment.
c) Simplified measures
Some simplification could be thought for the regulated entities responsible for small
amounts of emissions, including specific exemption rules or exclusion criteria subject to
equivalent measures (see Annex 6).
53
5.2.4 Extension of emissions trading to the buildings and road transport sectors or to
all combustion fuels outside the existing ETS
Scope options
5.2.4.1
The 2030 CTP announced that a further expansion of emissions trading could be
envisaged but left open if the scope would cover emissions from road transport and
buildings or all emissions of fossil fuel combustion. As the existing ETS has shown, the
development of a new market requires setting up functioning monitoring, reporting and
verification and can benefit from transitional arrangements or a pilot period before being
gradually integrated into the existing system, as indicated in the 2030 CTP. In light of
these considerations, an immediate extension of the existing ETS as well as a
downstream approach have been discarded (see Sections 5.3.3.1 and 5.3.3.2) and this
impact assessment looks at the options detailed below as regards the scope of a separate
EU-wide emissions trading.
Baseline: No expansion of emissions trading (EXT0).
Fossil fuel emissions from road transport, direct heating of buildings and other sectors
would be regulated only by the ESR and EU and MS sector specific legislation with MS
deciding if their policy instruments include carbon pricing.
Option 1: A separate EU-wide upstream emissions trading system for buildings and road
transport (EXT1)
Under this option direct CO2 emissions from buildings and road transport are included
under a new emissions trading system which is distinct from the existing ETS. This
would cover around a third of EU GHG emissions in 2030. The new ETS and the
existing ETS run in parallel at least until 2030.
Option 2: A separate EU-wide upstream emissions trading system for all emissions from
the combustion of fossil fuels not covered by the ETS (EXT2)
Under this option, all GHG emissions from the combustion of fossil fuels not covered by
the existing ETS would be covered by a new emissions trading system, covering in
addition to EXT1 small non-ETS industries, fossil fuel use in agriculture and forestry and
off-road machinery, non-electric railway, and the military sector. The new emissions
trading system and the current ETS would run in parallel at least until 2030.
This approach for a separate emissions trading system for buildings and road transport
(or all combustion of fossil fuels) is supported by the results of the OPC, where
respondents, including the majority of NGOs and private sector respondents and trade
54
unions clearly preferred a separate EU-wide system among the presented policy options.
The majority of the responses, including from NGOs, private sector respondents and
trade unions, expressed a negative view on the integration of new sectors into the current
ETS. Only less than one-third of responses, including the majority of EU citizens and
academic/research institutions, saw an integration favourable. 18% of responses referred
to “other” (positive or negative) effects, with half of them arguing against the
introduction of emission trading for new sectors and the other half being open to consider
an extension as an option, generally either after a careful assessment of the impacts and a
trial period or in a separate temporary or permanent ETS. In the OPC and beyond, several
stakeholders also expressed more general scepticism with regard to the extension of
emissions trading to buildings and road transport, even if in a separate system. Such
concerns were, for instance, expressed in a meeting between the Commission and social
partners from both the employer and employee side, who pointed in particular to the
impact of rising heating or transport fuel prices on consumers.
Only very few MS participated in the OPC survey, while some MS responded with a
position paper. Overall, MS’ views on the extension of emissions trading to the buildings
and road transport sectors (or all combustion of fossil fuels) were mixed with some MS
in favour, some against and several MS stressing the need for a thorough impact
assessment. Also in the European Parliament, views of the political groups differ. The
Parliament supported as of early 2020 market-based measures, expressed reservations
and asked for further analysis on the ETS inclusion of buildings, while rejecting the
setting-up of a separate ETS system or direct ETS inclusion for the transport sector89
.
Linking options with the existing ETS
5.2.4.2
For EXT1 and EXT2 options, the possible linking or merging of the existing ETS with
the new ETS could happen in different ways.
Option 1: As part of a general review clause at the end of phase 4 (in 2030) of the
existing ETS, determine whether and under which conditions the merging of the two
systems could happen (ELINK1). This would be justified by the need for a sufficient
period to understand the functioning of the new market.
Option 2: Provisions for development of one-way or two-way flexibility with existing
ETS that could increase over time to eventually lead to full integration with the current
system (ELINK2).
89
European Parliament resolution of 15 January 2020 on the European Green Deal (P9_TA(2020)0005)
55
For both linking options a new type of allowance is created, as currently for aviation. If
and when the systems are linked, one would need to determine to what extent the
allowances of one system can be used for compliance in the other system.
In the OPC, most respondents (46%), including the majority of NGOs, private sector
respondents and trade unions, indicated that both systems should stay independent. Only
19% of respondents, including the majority of EU citizens, argued in favour of two-way
flexibilities between the two systems to increase cost-efficiency considerations. Further
33%, including most of academic institutions, gave various replies, in particular stressing
the need for a thorough impact assessment before integrating the two systems.
As regards the question whether a gradual integration of the two systems should already
be foreseen in the ETS revision, views were divided. 45% of respondents, including the
vast majority of NGOs, environmental organisations and trade unions and almost half of
private sector respondents (in particular from the manufacturing sector), replied that the
risks associated with an integration are too high and that the legislation should not pursue
such a step. However, 43% of respondents, including the majority of academic/research
institutions, public authorities and EU citizens as well as the slight majority of private
sector respondents (in particular from the energy sector), were open to a possible gradual
integration. These respondents preferred to foresee a review to determine whether and
when integration is desirable (26%) over a fixed date for such an integration (17%).
Design elements on the possible ETS extensions
5.2.4.3
The environmental effectiveness and practicability of the policy options depends on some
key design elements which are set out below. Technical details on the design elements
and their impacts are analysed in Annex 5.
a) Cap setting and linear reduction factor
Extension of emissions trading through a separate ETS will require to set a cap for those
sectors. The later the system starts to apply, the higher its cap trajectory referred to as the
linear reduction factor (LRF) will have to be to achieve the necessary ambition reduction
by 2030, therefore a cap with LRF should apply as soon practically feasible.
The cap and LRF for the separate ETS would be set in line with cost-effective emission
reductions in 2030 resulting from a mix of carbon pricing and other policies in the sectors
concerned. Applying a LRF from 2026 would deliver a clear signal about the trajectory
needed for emissions reductions in the new sectors. A consistent LRF with a trajectory
starting from ESR ambition levels in 2024 is for EXT1 5.15%, corresponding to 5.43% if
compared to 2025, the year for which MRV based emissions would be available. The
corresponding EXT2 LRF would be 5.14% compared to the ESR ambition level for
2024, corresponding to 5.42% compared to 2025.
56
For further analysis of cap setting and the LRF see Annex 5, Section 10.
b) Regulated entities
When designing an emissions trading system, the point at which regulation applies is a
key element. Emissions considered under the new system under EXT1 and EXT2 are
combustion emissions from fossil fuels. As already indicated in the 2030 CTP and its
impact assessment, an upstream system lowers significantly the number of participants,
thus limiting participant transaction costs and administrative costs. While a downstream
design would present advantages in terms of direct citizen involvement, its complexity
and the heavy administration needed have led to discard this option (see also Section
5.3.3.2 and Annex 5, Section 12).
In the upstream system the act triggering a compliance obligation is not the emission of
GHG but the releasing on the market of fuels for combustion in the sectors concerned.
Emissions would be determined indirectly via the fuel quantities put on the market. To
the extent possible and subject to further analysis, the existing ETS system of
standardised fuel emission factors per energy content would be applied. The precise point
for regulation to apply would be identified in terms of technical feasibility, the ability to
pass-on the ETS related carbon costs to the consumers, and the administrative costs.
The system of excise duty of Council Directive (EU) 2020/26290
, with the necessary
adaptations, is a useful anchor to identify the regulated entities in the new system, as this
Directive has already set a robust control system for quantities of fuels released for
consumption for the purposes of paying excise duties.
In the case of oil, there is a European harmonized excise duty system operated through
the existence of tax warehouses. As tax warehouse operators already have in place an
MRV system for tax reasons, regulation can be set at their level. For gas, the point of
regulation considered most appropriate are the fuel suppliers that supply directly the end-
users. In most MS gas suppliers are the entities obliged to pay the excise duty.
With respect to coal, the market is complex and less regulated than the markets for oil
and gas. Not all coal products necessarily pass through an excise duty point and where
they do practices are not harmonised at EU level. There are many and often small end
suppliers of coal, which makes it challenging to regulate coal supplies in a manner that
limits administrative burden and minimises the risk of fraud. The excise duty
90
Council Directive (EU) 2020/262 of 19 December 2019 laying down the general arrangements for
excise duty (OJ L 058 27.2.2020, p. 4).
57
infrastructure could also play a role in identifying the regulated entities and monitoring of
the end use of coal. In most MS that do apply excise duty to coal, the seller to the final
customer is the excise duty payer, but there are exceptions91
. The excise duty payers are
subject to registration in accordance with Directive 2003/96/EC on energy taxation. For
any cases not covered by these options, or if several persons are jointly and severally
liable for payment of the same excise duty, the MS should be able to designate the
regulated entities in accordance with their national law.
Additionally, it should be recalled in this respect that at the European level coal plays
only a small role in heating and small industry and is been phased out, whereas in some
MS coal still plays a considerable role.
If the level of regulation is set at tax warehouses for oil (about 7.000), regional and local
suppliers for gas (about 1.400), and for coal (about 3.000) there would be 11.40092
regulated entities under the new ETS. This compares with 9.200 to 9.500 regulated
entities in the existing ETS (11.000 before UK’s withdrawal from the EU).
When establishing the point of regulation for the different fuel types, it has to be kept in
mind that the model needs to fit the different EU MS.
Annex 5, Section 12 contains further analysis on the regulated entities.
c) Allocation method and auction starting phase
The method of allocation in the new ETS under option EXT1 would be auctioning, as the
risk of carbon leakage in the transport and building sectors is small or zero93
.
Under option EXT2 there would be the need for a limited quantity of free allocation or
another compensation mechanism in order to address the risk of carbon leakage due to
91
In Czechia, France, Croatia, Italy, Latvia and Slovakia the supplier to end-consumer of coal is the party
that pays the tax whereas in Germany, Ireland and Spain the first supplier of coal is appointed as the
responsible party for paying the tax. In the vast majority of countries multiple entities can be liable for
paying the tax depending, amongst others, on the moment when the coal duty/tax becomes chargeable.
This includes parties such as tax warehouse owners, producers, importers, suppliers, traders, consumers
or the tax representative of one of these parties.
92
Sources: ICF et al. (2020); CEER, Enstog, Eurostat.
.93
The road transport sector has no significant competitive pressure from outside the EU, except some tank
tourism in limited border regions. For the buildings sector, competitive pressure is not relevant.
58
competitiveness impacts on small industry which is currently excluded from the ETS
Directive if under a certain size or under Art. 27 and 27a94
.
The compliance cycle would be identical to the existing ETS, with an obligation to
surrender allowances equal to the emissions from the regulated entities during the
preceding calendar year by 30 April each year at the latest.
In order to ensure a smooth start of the system and taking into account the need for
regulated entities to hedge or bank allowances in order to mitigate their liquidity risk
under the new system, auctions of the ETS in the first year would start with a higher
volume than the cap of the first year95
. This front-loading of auctioning volume would be
deducted from auctioning volumes in future years to preserve environmental integrity.
For further analysis see Annex 5, Section 11.
d) Market Stability Mechanism
In order to avoid the risk of significant market imbalances (whether a surplus or a deficit
of allowances) and a resulting too weak or too strong price signal, a rules-based market
stability instrument similar to the MSR for the existing ETS system could be introduced.
This is important for market participants as it helps manage market expectations about
future market supply and may mitigate excessive price movements linked to market
fundamentals. It is thus suggested to use the same instrument as in the current ETS with
features adapted to the new sectors.
A certain quantity of allowances should be placed in the reserve at the start of its
operation. In addition, a provision allowing to react to excessive price fluctuations would
be necessary in order to contribute further to market stability96
. These elements are
further detailed in Annex 5 Section 11.
94
In some sectors only plants above a certain size are included. Furthermore, Articles 27 and 27a of the
Directive were added because transaction costs for MRV were considered too high for small
installations compared to larger emitters in the EU ETS. By introducing the option to opt out these small
installations, the articles aimed to improve the cost-effectiveness of the system for these installations.
95
Similar to the start of phase3 of the EU ETS when “early auctions” took place to allow regulated entities
to purchase allowances at the time they sell their output (often on a forward basis for some sectors) to
mitigate the risk of price fluctuations.
96
A provision which would make it possible to adapt the supply if the price evolution does not correspond
to changing market fundamentals.
59
5.2.5 Using ETS revenues to address distributional aspects between Member States
A strengthening and possible extension of the ETS will generate significant revenues (see
Section 6.3.2 and Annex 13 for an overview), and the use of these revenues is an
important element of the policy debate, notably as a tool to address distributional impacts
between MS.
The discussion on use of ETS revenues is linked with the discussions on using ETS
auction revenues as an EU own resource. According to the inter-institutional agreement
of 16 December 2020 between the European Parliament, the Council and the
Commission, the Commission will propose a new own resource based on the ETS for
repayment of the borrowings for the NextGenerationEU Recovery and Resilience
Facility, of which 37% are allocated to support the green transition.
In this impact assessment therefore no assumptions are taken on which amount of
auctioning revenues will be available for which purpose. The assessment assumes that
the allowances needed for the Innovation and Modernisation Funds and other solidarity
provisions are not affected by the own resource needs. 53% of respondents to the OPC
argued for an increase in the Modernisation Fund, with further 4% indicating that the size
of the Modernisation Fund should remain unchanged in terms of the absolute amount.
36% of respondents replied that the Modernisation Fund should remain at a 2% cap. The
table below describes the needs and current instruments provided by the ETS Directive
for the period 2021-2030 to address distributional aspects, which have to be considered
for the development of options on the use of revenues.
Table 4: Needs and instruments to address distributional aspects
Need Instruments
With a strengthened ETS cap the
adequacy of existing solidarity and
support provisions need to be
assessed
Moreover, some MS are questioning
the overall distribution of auction
revenues in the existing ETS more
Solidarity redistribution provision consisting of the
redistribution of 10% of the auctioned allowances to 16
low income MS (around 5% of the current overall cap or
around 700 million allowances over the 2021-30 period)
Modernisation Fund (2% of the overall cap or around
275 million allowances over the 2021-30 period)97
97
In addition, Member States had the possibility to transfer own Article 10c and solidarity allowances to
the Modernisation Fund, and five of the beneficiaries (CZ, HR, LT, RO and SK) took advantage of this
option, leading to a total size of the Modernisation Fund of 643 million allowances amounting to more
than EUR 25 billion (at EUR 40 carbon price). These transfers are not “additional” revenue for those
Member States.
60
generally, and are requesting a
bigger role of the support and
solidarity mechanisms in addressing
that.
The MSR intake until 2025 is only based on the 90%
regular auctioning shares, exempting the 10% solidarity
shares.
Article 10c derogation applies to 10 low income MS69
that can opt to give free allocation (of up to 40% of their
regular auction volume) to investments in power
generation for the modernisation of the energy sector
(totaling about 630 million allowances over the 2021-30
period)
In the perspective of a possible
transitionary ETS system for new
sectors with specific distributional
characteristics, the need for
solidarity and support mechanisms
should be assessed.
By definition, no solidarity and support mechanisms
exist today. The potential new sectors have very
different characteristics:
 If the shipping sector were to be brought into the
existing ETS, this would add the question if existing
mechanisms are adequate for this sector.
 For the buildings sector, the availability of finance
for renovations is an issue, and more so the risk of
energy poor and low income households. The
possibility of ETS revenues contributing to
addressing at least the latter needs to be borne in
mind.
 For the road transport sector, there could also be a
need for specific solidarity mechanisms. While the
lowest income groups might partly have no or small
cars, they also use less fuel efficient second hand
cars. Some households are capable of switching to
zero emission vehicles, hence there may be a need
for measures supporting the competitive supply of
zero carbon vehicles and adequate charging
infrastructure, also in rural areas. In addition,
support measures could be envisaged that encourage
a shift to public forms of transport.
Annex 13 further analyses mechanisms for the distribution of ETS revenues between MS
in the existing ETS and illustrations for the use of revenues of a new ETS based on
existing mechanisms to address distributional impacts between MS.
Discarded policy options in the context of this impact assessment
5.3
5.3.1 Discarded options to strengthen of the existing ETS (power and industry
installations)
Strengthening options that go beyond the -62% (compared to 2005) cost-effective
emission reduction are discarded since it would require an increased emission reduction
61
burden to ETS sectors which is expected to result in unbalanced distribution of efforts
between sectors.
This approach is also supported by the results of the OPC. In fact, only about 10% of
respondents, mainly NGOs, environmental organisations and EU citizens, argued for a
higher contribution of the current ETS sectors beyond what their potential for cost-
effective emission reductions would indicate. About 40% of respondents from a wide
range of stakeholder groups indicated that the current ETS sectors should increase their
contribution in line with the new target and based on cost-efficiency considerations
(another 40%, mainly from the private sector, replied “other”, with many respondents
agreeing with the cost-efficiency principle but arguing for a thorough impact
assessment). About 10% of respondents, mainly from the private sector, argued for a
lower contribution.
The strengthening options starting earlier than 2024 are discarded in view of the
legislative process required for the revision. Similarly, an update later than 2026, though
possible to achieve the -62% ETS ambition, would translate into a steeper LRF update
and a less gradual transition. Additionally, the assessment of strengthening options
starting in 2026 with rebasing has been limited to AMB3c because other options
(AMB3a and AMB3b) are considered to fall under the analysis interval.
Also an increase of the current 57% auction share independently from possible
adaptations to the initiative on a Carbon Border Adjustment Mechanism (see Section
6.1.2.2.5) is discarded. While some stakeholders, including the majority of EU citizens
and academic/research institutes, argued for an increase in the auction share, many
private sector respondents preferred the continuation of the current auction share of 57%.
Initial assessment, presented in Annex 9, Section 25, for the example of an increase to
70%, demonstrates that such increase would have disproportionate effects on the risk of
carbon leakage and more specifically the ability to avoid a cross-sectoral correction
factor, which may be triggered between 2 and 5 years earlier and lead to a 20% to 31%
lower free allocation budget compared to the baseline.
5.3.2 Discarded maritime options in the context of this impact assessment
Two maritime policy options have been discarded, namely the use of a “baseline and
credit” system and the establishment of “GHG Emission Control Areas”. The option of
taxing bunker fuels sold at EU ports has not been considered as it is assessed in the
impact assessment accompanying the revision of the Energy Taxation Directive.
Baseline and credit system
5.3.2.1
This measure would set an operational carbon intensity baseline for each ship type and
size. Any improvements below the baseline would be certified as tradable credits. The
62
baseline-and-credit system is similar to the ETS in a way that it allows for emission
reductions to happen where it is the cheapest. However, given that this policy option
relies on a metric based on carbon intensity and that it includes a buy-out option, it does
not provide certainty in terms of absolute GHG emissions reduction. It provides a clear
emission intensity reduction pathway.
This option would require significant effort for development and implementation due to
its complexity. Some of the preparation steps would include calculation of the emission
pathways for each ship type and size, establishment of a trading system as well as
issuance and trade supervision of credits. This would result in increased cost and
administrative burden, which would undermine its implementation feasibility, its cost-
effectiveness and acceptability.
GHG Emission Control Areas
5.3.2.2
This measure would expand the scope of Emission Control Areas (ECAs) by including a
carbon intensity requirement. The legal feasibility of such an option is weak as it would
require a decision at IMO. However, emission restrictions can also be introduced by the
EU in its territorial waters, which then may or may not be formalised by the IMO as part
of the ECAs.
Current legislation only allows for specific control of NOx and SOx, and it would
therefore require amendments to include carbon intensity standards. The environmental
impact of such a measure would highly depend on the share of GHG emissions covered
under the ECAs and it would require additional monitoring efforts to track the carbon
intensity of ships in the selected areas. For all these reasons, this measure has been
discarded in the context of this impact assessment.
5.3.3 Discarded options for the extension of emissions trading to buildings and
transport or all fossil fuels
Expansion of emissions trading through the existing ETS
5.3.3.1
The Impact Assessment underpinning the 2030 CTP included an analysis of the option to
expand emissions trading through inclusion in the existing ETS. The 2030 CTP is clear
that the development of a new carbon market can benefit from transitional arrangements
or a pilot period before being gradually integrated into the existing ETS. The extension to
buildings and transport or all fossil fuels requires an upstream approach to regulated
entities and the set-up of a new system for monitoring, reporting and verification.
Therefore, the extension of emissions trading to the new sectors needs to start with a
separate EU emissions trading system with, depending on the assessment of the linking
options ELINK1 to ELINK2, the possibility to merge this new ETS with the existing one
at some point in time.
63
This approach is founded on the potential impacts on the sectors already covered by the
existing ETS and differences in abatement costs among sectors, in investment cycles,
implementation and administrative challenges, as well as in the cost-effective sectoral
potentials for decarbonisation and the related reduction path for greenhouse gas
emissions.
As described in Section 5.2.3.1, the approach to start with a separate emissions trading
system for the new sectors is also supported by the majority of stakeholders responding
to the OPC.
Downstream approach
5.3.3.2
A downstream design of the ETS extension as in the existing ETS would obligate
directly the many million individual house and car owners and small companies98
. It
would present advantages of citizen empowerment and a direct demand side price signal.
However it would increase very significantly the number of regulated entities in
comparison to the existing ETS. This increase is not administratively practicable and is
not an efficient option due to the high transaction costs that would derive from the large
number entities and private persons that would be regulated, both for the regulator and
for the participants. For further details see Annex 5 Section 12.
The creation of separate systems for road transport and for buildings
5.3.3.3
This option would assume that two new ETS would be created, one for road transport
and one for the buildings sector, in addition to the existing ETS. Despite the fact that
some design elements could be shared under both new systems, from an economic
perspective this option has been discarded from the beginning due to the reduction of the
cost-effectiveness potential in creating two new different and non-integrated markets.
Other problems related to the functioning of the market, such as active participation, the
market power of some entities, or related to social impacts can be more pronounced in a
smaller market99
.
A high upstream approach for one ETS covering all fossil fuels
5.3.3.4
This option would assume that the existing ETS is replaced with a new EU wide-all-
fossil-fuels upstream emissions trading system. This would mean a complete overhaul of
98
195 million households in EU-27 (2019, source: Eurostat), 237 million passenger cars in EU 27 (2018,
source: Eurostat), 29 million Light duty vehicles and 6 million trucks (2018, source ACEA)
99
ICF et al. (2020).
64
the ETS, which has proven to work well. Therefore a very high upstream regulation for
all sectors, including those included in the existing ETS, has been discarded from the
beginning in the 2030 CTP Impact Assessment.
6 WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?
Strengthening of the existing ETS (power and industry installations)
6.1
This section assesses the impacts of an increased ambition of the current EU ETS (power
and industry installations) in line with the -55% target and goes on to assess the impacts
on the related aspects: the Market Stability Reserve, the auction share, the Innovation
Fund, and the provisions to address the risk of carbon leakage. For some of the latter
analyses, the increased ambition is taken as starting point.
6.1.1 Environmental impacts
Strengthening of the EU ETS target/cap
6.1.1.1
The environmental performance of the ETS in terms of reduced emissions is primarily
determined by its cap on the total number of allowances. This determines the limit on
emissions allowed, corresponding to allowances, to ensure the emission reduction
foreseen is achieved.
As described in Section 5.2.1.1 the cap strengthening options are set proportional to the
MIX scenario’s cost-effective emission reduction opportunities of ETS sectors (where
power sector reduces more and industry less) of -62% in 2030 (compared to 2005). This
is in line with the overall -55% target (compared to 1990), and determines the cap figure
in 2030 (same 2030 cap in all options). Compared to REF, this implies an additional
reduction of 11% over the period 2021 to 2030 (-17% for 2026-30), while emissions
between 2013 and 2019 decreased by 16%. The impacts for individual MS are analysed
in Annex 13. Comprehensive MS scenario data is presented in a separately published
technical note100
.
Cap options that include rebasing of the cap generally lead to a lower total amount of
allowances than the options based only on a change of the LRF.
100
See the “Technical Note on the Results of the “Fit for 55” core scenarios for the EU Member States”
65
Regarding the strengthening options, each option reflects a different trajectory to reach
the 2030 outcome. The environmental impact is assessed by:
1. Cumulative cap - is an indicator of the overall environmental impact and the
smoothness of the cap trajectory over the period 2021-30. It allows comparing the
environment impact balance over time of the options with different years for LRF
change, with or without rebasing and different LRF levels
2. Average relative deviation between the cap and the projected emissions under the
MIX scenario (before MSR application) compared to the baseline cap/emission
difference – this is an indicator for the alignment of the ETS cap with the
projected emissions101
. The lower the relative deviation the higher the
cap/emission alignment (see ection 6.1.1.2 for further details on market surplus)
Table 5: Overview of existing ETS cap options with cumulative budget and average delta
to emissions
Baseline AMB1 AMB2a AMB2b AMB2c AMB3c
LRF 2021-23 2,20% 2,20% 2,20% 2,20% 2,20% 2,20%
2024-25 2,20% 2,20% 5,09% 3,90% 4,22% 2,20%
2026-30 2,20% 6,24% 5,09% 3,90% 4,22% 4,57%
Rebase Y/N no no yes yes yes
How big no no 163 119 163
1) Total cap (2021-30) - EU27+EEA
13781 12596 12201 11712 11845 12270
(2) Average relative deviation difference between the cap and projected emissions per year
compared to the baseline difference
-30% -40% -53% -50% -39%
Option AMB1, though the LRF increase is highest, has the highest cumulative cap, i.e.
lower overall environmental impact, because the LRF update is applied only in 2026
without rebasing. This is also reflected in a higher value of indicator (2) on the cap to
emissions relative deviation.
For options AMB2a and AMB3c the cumulative cap indicator results in a similar 2021-
30 total cap, and similar relative deviation of cap to projected emissions.
101
Projected emissions based on PRIMES-GAINS
66
Option AMB2b and AMB2c have a similar 2021-30 total cap, and similar delta of cap to
projected emissions, i.e. a bigger alignment to projected emissions.
In addition to GHG emissions, many installations covered by the ETS, which remain
within the scope of the Industrial Emissions Directive, also emit a significant amount of
other air pollutants (e.g. NOX, SOX and dust). In general, it is expected that the
decarbonisation of industry and power generation will also lead to further emission
reductions of those air pollutants,102
with the corresponding positive effect on air quality,
and consequently on health and well-being.
For example, GAINS modelling indicates that 2030 sulfur dioxide (SO2) emissions
compared to 2015 decrease by 57% in REF and 69% in MIX103
. The modelling also
projects in 2030 13% less use of biomass as fuel in MIX compared to REF, and 2% less
than in 2020, mitigating conflicts with objectives for sustainable land/forest use and
biodiversity. It is thus expected that the strengthened ETS target/cap will overall
contribute to the zero pollution ambition of the EU Green Deal. In this respect, the ETS
and the Industrial Emissions Directive will reinforce one another to reduce emission of
GHGs and other air pollutants.
Market Stability Reserve
6.1.1.2
The environmental effects of the MSR are determined by how it functions in terms of
eliminating the historical surplus, and thus making the ETS more resilient in relation to
supply-demand imbalances.
In addition to the direct impacts on emission reductions, a more stable and stronger
carbon price signal should also allow the ETS to better support the achievement of the
EU wide 2030 targets for renewable energy and energy efficiency.
The analysis has shown that, for a given cap pathway, the choice of the MSR option does
not influence emissions in a significant manner, since in the model, companies optimise
their behaviour in the long term, looking at the cap level in 2030, which is the same for
all options (see Figure 4 in Section 6.1.2.1.2 below). Emissions under MSR2 are slightly
102
Wood, Wider environmental impacts of industry decarbonisation, 2021; Vandyck et al., Air quality co-
benefits for human health and agriculture counterbalance costs to meet Paris Agreement pledges, Nature
Communications 2018, vol. 9, p. 493 ff.
103
For Member State results see the “Technical Note on the Results of the “Fit for 55” core scenarios for
the EU Member States”.
67
lower relative to MSR0+ and MSR1. Under the MSR0+ and MSR1, 2030 emissions
reach 1,013 MtCO2e and 1,003 MtCO2e respectively. This compares to 2030 emissions
of 968 MtCO2e under MSR2. However, it should be noted that these emissions
projections are not directly comparable to those from energy system models which
optimise for the entire energy system. The key insight from these numerical projections
is that MSR intakes play a minor but positive role in reducing emissions further under the
EU ETS.
Framework to address the risk of carbon leakage
6.1.1.3
The environmental outcome of the ETS in terms of GHG emissions in the EU is
determined by its overall cap and is in principle independent of the level of free
allocation. The risk of carbon leakage occurs when a reduction in domestic production is
replaced by more emissions intensive production in other jurisdictions. This is important
to consider since it may appear that the carbon price has reduced emissions. However, if
production has simply moved to a jurisdiction with less stringent environmental
regulation, emissions could fall in the European Economic Area but increase overall.
An effective carbon leakage protection mitigates the risk that more ambitious EU
emission reductions are offset by emission increases outside the EU. A strengthened cap
in the ETS Directive could affect the protection against the risk of carbon leakage by
triggering the cross-sectoral correction factor (CSCF). The impact of the tiered approach
(option CL1) and the strengthened benchmarks (option CL2) on the triggering of the
CSCF is assessed in Section 6.1.2.2.4. .
Options CL1 and CL2 provide also some incentives to reduce emissions in the EU by
exposing some sectors to higher carbon costs.
Innovation Fund
6.1.1.4
The IF was set decided with a clear objective of funding the commercial demonstration
of innovative low-carbon technologies, aiming to bring to the market industrial solutions
to decarbonise Europe and support its transition to climate neutrality.
68
The 311 projects submitted under the Innovation Fund’s first call for proposals promise
to reduce around 1.2 Gt of CO2 emissions in their lifetime. Option IF1 and even more so
IF2 would enable more of the projects which cannot be funded by the current size of the
Innovation Fund to receive support and can help materialise a higher share of the GHG
emissions that the applicant projects can realise104
.
Further analysis of the applications105
shows the main technological pathways employed
in the eligible sectors are in line with the long-term decarbonisation strategies of the
sectors and can contribute significantly to EU transition to climate neutrality. The
Innovation Fund is able to support a very wide variety of clean tech solutions, reducing
emissions in multiple sectors in a synergistic and cross-cutting manner. More analysis is
available in Annex 11.
6.1.2 Economic impacts
The transition to a climate-neutral economy will be transformative. This initiative
expects to have a direct impact by steering investment and growth in the ETS sectors
towards sustainable products and processes. The Impact Assessment accompanying the
2030 CTP found that by 2030 the investment stimulus and the use of carbon pricing
revenue for the reduction of distortionary taxes or green investment can stimulate GDP
growth by up to 0.5%, but highlighted the asymmetric challenges and opportunities
associated with structural change. For high-emitting activities, the cost of emitting and
cost of transformation may be higher106
.
The economic impacts of the cap options cannot be dissociated from the MSR options
because it is the combination of both that will determine the market balance and resulting
price signal. In the same way, the competitiveness assessment of sectoral impacts on
energy intensive sectors are primarily driven by the carbon leakage protection options.
Therefore, in this section the economic impacts are divided in two assessments: market
balance and competitiveness.
104
Deployment of innovative technologies for decarbonisation will generally also have a positive direct
impact on air emissions, particularly of NOx and SOx. Reduction of atmospheric pollutant emissions
limits their deposition in water bodies and soils and in this way reduces risks associated with the
contamination of water and soil deriving from conventional technologies. See Wood (2021).
105
https://ec.europa.eu/clima/sites/clima/files/innovation-fund/large-scale_call_statistics_en.pdf
106
SWD(2020)176, Section 6.4.2
69
Market balance
6.1.2.1
In this section we assess the impacts of different MSR options combined with different
cap options on the total number of allowances in circulation, the carbon price, price
stability and revenues. We explore the performance of alternative MSR options under the
central cap option AMB2a (LRF that will take effect in 2024). This cap option was
selected because it is central in terms of cumulative cap outcome, but also because the
final outcomes with different cap options are quite similar in terms of outcomes in 2030,
emissions and modelled price trends. The outcomes were also tested against a range of
shocks (see Annex 8, Section 22), for other cap options (AMB1, AMB2b) and for several
policy sensitivities, including more extreme cap scenarios (see Annex 8, Section 23).
Details on the modelling approach and assumptions used, as well as guidance on
interpreting the modelling results are provided in Annex 4, Section 9.1. It is important to
note that the modelling outputs are not intended to be used as forecasts for prices and
emissions. However, when combined with qualitative and quantitative insights, they can
provide useful indications of the direction and size of impact.
Consistent with recent price developments, modelled behaviour suggests that the
expectation of substantially enhanced ambition in the EU ETS increases short term price
expectations. These increased prices, alongside the economic shock accompanying
COVID-19, contribute to substantial hedging over Phase 4 of the EU ETS.
Market surplus (TNAC) and MSR dynamics
6.1.2.1.1
With the central cap scenario, the TNAC diverges across MSR designs in the middle of
this decade, before trending towards a level of 450 million in 2030. However, the TNAC
trend is uncertain in the near term as the speed of economic recovery and industrial
activity following the COVID-19 impact remains unclear. In the modelling analysis,
TNAC lies above 800 million before 2025 across all MSR options, resulting in
continuous MSR intakes during this period. The evolution of TNAC over time is jointly
determined by annual supply of allowances and the emissions pathway. A more stringent
MSR removes a larger supply of allowances through intakes (downward effect on
TNAC), with a secondary effect of lowering annual emissions by encouraging
expectations of future scarcity in the market (upward effect on TNAC). On balance, the
first effect dominates the second. The pathway for TNAC under respective MSR options
is shown below.
A comparison of the MSR options must also take into account the levels of the thresholds
retained, in particular of the upper threshold, and the evolution of the TNAC in relation
to that upper threshold. For instance, for similar TNAC outcomes, an option with an
upper threshold of 833 million could be more effective than an option with a lower
70
threshold, in particular taking into account the uncertainties in terms of future liquidity
needs of the market (including hedging needs, as set out in Annex 8, Section 24)
Figure 3: TNAC under different MSR options with central cap scenario AMB2a
Source: Vivid Economics
Over the period of 2021-30, cumulative MSR intakes under MSR1 and MSR2 are 1.5
and 1.6 billion respectively, compared to 1.2 billion under MSR0+. The volume of
intakes under MSR1 is greater than MSR0+ because of the higher intake rate. By
contrast, MSR2 results in larger MSR intakes, as the TNAC is higher.
MSR0+ is not able to reduce the TNAC sufficiently, due to its lower intake rate. The
TNAC remains above the upper threshold until the end of the period.
The ability of MSR1 to reduce TNAC relatively quickly comes at the expense of a
threshold effect, when TNAC dips below the intake threshold. The threshold effect
occurs when the volume of MSR intakes drops suddenly, which is the result of
calculating intakes as a fixed percentage of the TNAC and of having a fixed upper
threshold. The threshold effect is visible as a jump in auction volumes and a kink in the
TNAC pathway. In the given scenario for MSR1, this occurs in 2027/28. The presence of
such a threshold effect can introduce uncertainty to market participants, who face
ambiguity about the short-term auction supply as TNAC approaches the upper threshold.
The realisation of TNAC being right above or below the threshold can represent a
sizeable shock to annual auction volumes, resulting in sharp changes in prices.
By contrast, MSR2 is able to avoid the threshold effect. This is because intakes under
option 2 are calculated as a percentage of the difference between TNAC and the intake
threshold, resulting in smaller intakes as TNAC approaches the intake threshold.
71
MSR3 should result in a similar market surplus to MSR2. MSR3 follows the design of
MSR2, with the only difference being the introduction of an auction reserve price. In all
cases explored in the modelling analysis, the price under MSR2 does not fall below the
auction reserve price.
Invalidation
Across all options, the vast majority of allowances that are placed into the MSR
eventually get invalidated:
 MSR0+, as currently legislated, invalidates allowances within the MSR in excess
of the prior year auction volume.
 MSR1 follows this invalidation mechanism, resulting in a similar downward trend
in the stock of allowances held in the MSR.
 MSR2 and MSR3 however, invalidate allowances in excess of the lower
threshold, and do not completely remove the MSR stock. As a result, the residual
MSR stock under MSR2 and MSR3 remains at around 400 million allowances,
which are available for injections in the case of supply shortages. Across all MSR
options, modelling shows releases would only take place in the 2030s with a
cumulative size of 400 to 500 million allowances. This is relatively small when
compared to the cumulative MSR invalidations that range from 3 billion under
MSR0+ to 3.5 billion under MSR2.
The precise design of the invalidation mechanism is not consequential to market
outcomes in 2021-30, given that almost all allowances placed in the MSR are invalidated.
Given the constrained foresight of market actors assumed in the analysis, as long as there
are no significant volumes of release from the MSR in the 2020s or 2030s, the market’s
forecast of the future supply of allowances is independent of the timing in which
allowances get invalidated within the MSR. What matters to market participants is the
supply of allowances in the medium term, which is more influenced by MSR intakes
rather than releases. The presence of the invalidation mechanism remains important as a
guarantee that allowances stored in the MSR will not be released back into future
auctions in large volumes.
Stylised impact on carbon prices from different options
6.1.2.1.2
This section assesses how different MSR options combined with cap scenarios, can
impact the carbon prices. As indicated, the modelling outputs are not intended to be used
as forecasts for prices and emissions. In particular the modelling focuses on carbon prices
as adjustment variable and does not well cover the overall policy mix. Moreover, the
expectations of firms on the future supply of allowances (even past the 2030 horizon)
plays a big role in the model, in terms of emissions, hedging and carbon prices (see also
72
Annex 4 Section 9.1). However, when combined with qualitative and quantitative
insights, the model can provide useful indications of the direction and size of impact.
Other models discussed in this Impact Assessment (see Sections 5.1 and 8) have
provided different carbon price values. The MIX and MIX-CP -55% policy scenarios of
the PRIMES energy system model, which both assume a parallel strengthening of
renewable energy and energy efficiency policies, albeit less strong in MIX-CP, as well as
foresight of market actors on future emission reduction requirements, project for the
existing ETS an increase of carbon prices in 2030 from €30 in REF to €48 and €52.5 (in
constant 2015 prices), and see stronger increases only after 2030. The characteristics of
the Vivid ETS MSR model used here are set out in Annex 4, Section 9.1. A key
difference is the way other policies are modelled. The results of both models for 2030 fall
within the very broad range of 2030 carbon price projections of carbon market analysts
for 2030107
.
Figure 4: Stylised representation of emissions and carbon prices across different MSR
scenarios for the central cap option AMB2a.
Note: Prices are presented in constant 2015 prices.
Source: Vivid Economics
107
Carbon Pulse Daily of 8 April 2021: POLL: Big boost for EU carbon price forecasts as several analysts
see EUAs topping €100 this decade; ICIS: European carbon market to shift gear, February 2021.
73
With the central scenario AMB2a, modelled prices are the highest under MSR2, because
MSR2 leads to the highest intakes into the MSR, which then affects the scarcity
expectations of market participants. Prices are lowest under MSR0+, i.e. ca 7 % lower
than in MSR2 scenario. MSR1 sees higher prices than MSR0+ in the first half of this
decade driven by larger intakes and therefore tighter supply. However, as intakes under
MSR1 come to an end earlier than under MSR0+, their price paths converge towards
2030.
Modelling outcomes under MSR3 are the same as MSR2, though the inclusion of short-
term responses should mitigate short run price volatility. The inclusion of an auction
reserve price under MSR3 simply introduces a lower bound to the range of prices in the
market. In the assumed policy environment, this lower bound is not breached throughout
the time horizon in the absence of large shocks (see sensitivity analysis in Annex 8,
Section 22).
Modelling indicates that the increase in EU ETS ambition through changes to the cap is a
much more significant driver of the price trajectory than the MSR.
The variation in prices under different cap scenarios is small, as less stringent cap
scenarios face higher intakes to the MSR during 2021-2030. For instance, with MSR0+,
differences in adjusted supply across cap variations become even smaller, leading to less
price variation. Caps which are initially less stringent, such as AMB1, have a higher
surplus of allowances in earlier periods due to greater annual supply. This increases the
TNAC during 2021-2030, which subsequently increases intakes into the MSR, reducing
auctioned allowances and the effective cap. This leads to similar price outcomes across
the different caps.
Price volatility
6.1.2.1.3
The smooth price paths depicted in the graph above is a result of modelling assumptions
and the annual reporting period in the model. In practice, shocks will introduce short
term volatility within time spans of weeks or months. These short-term shocks are not
captured through the quantitative model deployed for this Impact Assessment. This
section examines how the MSR can influence price stability in the short term, while
Annex 7, Section 22 discusses the MSR in response to longer term, structural shocks.
In the context of MSR design, clear and predictable intakes will help reduce supply side
uncertainty.
74
As noted in the previous section, both the MSR0+ and MSR1 are prone to a threshold
effect108
, depending on the level of TNAC. This represents a major source of uncertainty
to market participants as TNAC approaches the upper threshold, a very plausible case for
the decade 2021-30. Prices may become volatile as market expectations regarding the
level of TNAC swings back and forth depending on forecasted emissions, as the precise
number of TNAC will be influential to allowance supply.
Predictability is one of the main advantages for the intake design proposed for MSR2.
Intakes under MSR2 are proportional to the difference between TNAC and the upper
threshold, resulting in a smooth response function. This will prevent the price volatility
associated with the threshold effect as in the case of the baseline and option 1. At the
same time, option MSR2 may be more complex and more difficult to understand by
market participants, thereby contributing negatively to price volatility.
In order for MSR1 and MSR2 to contribute to price stability, they should not reduce the
surplus to an unreasonable extent and thus provide sufficient market liquidity. For the
market to operate effectively, the TNAC needs to be high enough to allow for hedging as
well as efficient banking to spread out intertemporal abatement costs. Therefore, the
MSR thresholds play an important role in ensuring that the TNAC stays at a reasonable
range. The analysis showed that the intake threshold analysed in MSR1 and MSR2,
starting at 700 million in 2024, sits within the range of the estimated amount of market
surplus required for hedging between 2025 and 2030. At the same time, the MSR0+
threshold of 833 million could also be appropriate in the first part of the decade,
providing additional liquidity and reassurance to the market, by avoiding short-term
situations in which the liquidity would be too tight.
MSR3 may provide additional stability by constraining market expectations regarding
potential extreme price outcomes. The introduction of an auction reserve price would
create a floor on market price expectations, which would reduce uncertainty in the event
of downside shocks, such as a negative demand shock. At the same time, this option
could introduce speculation opportunities and volatility in the case the carbon price is
close to the price floor.
Auction revenues
6.1.2.1.4
Auction revenues for the existing ETS were conservatively estimated using reference
carbon prices in line with Section 5.2.1, and the auction volumes after the application of
108
If TNAC is just above the intake threshold, the MSR will remove over 100 million allowances from
subsequent auctions, compared to zero intakes if TNAC is just below the intake threshold
75
the MSR that resulted from the Vivid EU ETS model (see Annex 13). Under MSR1 and
MSR2, the cumulative auction revenues at the end of 2030 are lower than the baseline
due to larger reductions in auction volume.
The size of auction revenues is jointly determined by the volume of auctions and the
EUA price. Due to larger intakes under MSR1 and MSR2 as compared to MSR0+,
cumulative auction volumes are 3% lower with MSR1, and 6% lower with MSR2,
relative to MSR0+ between 2021 and 2030. As a result, compared against the baseline,
auction revenues are 4% lower in MSR1 and 6% lower in MSR2.
Competitiveness
6.1.2.2
Strengthening of the EU ETS target/cap
6.1.2.2.1
Even though all cap options achieve the 2030 target, they each have an impact on the
overall amount of allowances and therefore different impacts the risk of carbon leakage.
The risk of carbon leakage in turn affects competitiveness of EU firms, with potential
impacts on growth and jobs. If international competitors do not need to comply with
equally stringent carbon regulation, the carbon price creates a differential in production
costs. As a result, domestic firms are competing in markets (through imports or exports)
where foreign producers may not face an equivalent carbon price. This potential loss of
competitiveness can cause firms to reduce their production or investments into
productive capacity, with implications for local growth and employment. The evidence
on the existence of carbon leakage in scientific literature is summarised in the CBAM IA.
This section investigates the impact of options on the framework to address the risk of
carbon leakage, on the compliance costs at sector level and the possibilities to pass on
these compliance costs to consumers. This analysis is supplemented by a qualitative
assessment on incentives for innovation which will determine carbon costs in the long-
term.
The analysis carried out in the context of the 2030 Climate Target Plan included detailed
modelling of economic impacts, including sectoral impacts, which indicated that without
increased global action, increasing climate ambition in the EU typically results in a
negative impact for the energy-intensive sectors. Impacts are significantly limited with
free allocation. Sectoral production can be positively impacted if the climate policy and
any associated carbon revenues are seen as boosting investment and economic
76
development109
. None of the modelling assumed any additional measures to protect
against the risk of carbon leakage.
Compliance costs depend on the carbon price, the level of free allocation, and the amount
of emissions released during production. The carbon price is not directly impacted by the
modalities for the distribution of free allocation, as the total amount of allowances
available (the cap) has been fixed in advance (see Section 5.2.3.1 on the strengthening of
ETS target) and is not affected by the modalities of allocation (auctioning or free
allocation).
The compliance costs borne by sectors are ultimately dependent on their ability to pass
through carbon costs to their customers. The ETS Directive already recognises this fact
emphasising that the level of carbon leakage risk faced by sectors depends on the extent
to which it is possible for these sectors to pass through their costs without losing market
share. A general understanding is that carbon-intensive sectors are able to pass through at
least a part of the carbon costs, but it remains to date difficult to quantify the exact rate of
costs passed through per sectors or products.
At the same time, it is reasonable to assume that climate policies will become more
stringent in other countries over time, which could lead to increased, or at least stable,
cost pass-through rates for some products. As the number of allowances will decrease
over the next decade, it is likely that industries will face increased compliance costs after
2020 but this will ultimately depend on the ability to increase carbon efficiency in
production, and the ability to pass on carbon costs, e.g. through more specialised
products. Considering that a share of carbon costs is likely to be passed through, it can
effectively limit carbon cost increases for industrial sectors. In some cases, additional
carbon costs may be more than fully offset by increases in product prices.
For the free allocation element, the more stringent the cap update, i.e. lower total cap for
the period 2021-30, the lower the total volume available for free allocation. Table 6
provides the overview of the cap update options with the resulting free allocation budget,
where the reference allowance distribution is the current legislative framework with 57%
auction share, 3% free allocation buffer and existing fund size framework. The
calculation of the year when the CSCF is triggered and of its average value in the period
from 2026 to 2030 is described in Annex 4.
109
SWD (2020), Section 6.4.2, Table 16 and Annex 9.5.3, Table 49
77
Table 6: Impacts of the cap trajectory options on free allocation
Baseline AMB1 AMB2a AMB2b AMB2c AMB3c
Total cap (2021-30)
- EU-27+EEA
13 781 12 596 12 201 11 712 11 845 12 270
Free Allocation
(excluding amount
earmarked for
Innovation Fund)
5601 5091 4921 4711 4768 4951
Free allocation
buffer (3%)
413 378 366 351 355 368
Delta to baseline for
total free allocation
- -9% -12% -16% -15% -11%
Year when CSCF is
triggered
- 2030 2029 2028 2028 2029
Average CSCF for
the period 2026-30
100% 94% 88% 79% 82% 89%
Option AMB1 (new LRF from 2026, no rebasing) would trigger the application of the
cross-sectoral correction factor (CSCF) in 2030 while Option AMB2c (new LRF from
2024, rebasing by 117 million allowances in 2024) will likely do so from 2028 onwards.
For the period 2026 to 2030, the average CSCF would be 94% for AMB1 (that means
that free allocation amounts would be reduced by 6%) and 82% for AMB2c. The use of
the CSCF will reduce the amount of free allocation across all industry sectors,
independent of the degree to which they are actually at risk of carbon leakage.
In order to assess the economic impacts of the strengthened emission cap, the estimated
free allocation was subsequently compared with the projected emissions for 10 ETS
sectors which together receive more than 85% of the total free allocation (i.e. cement,
lime, refineries, iron and steel, fertilisers, ceramics, non-ferrous metals, chemicals, pulp
and paper, glass). For each of the sectors, a yearly improvement in the greenhouse gas
efficiencies ranging from 1% to 2% was assumed. The potential carbon costs were then
calculated by multiplying the assumed EU allowance price with the difference between
projected emissions and free allocation (see Annex 4). Table 7 shows selected economic
impacts of the options for strengthening the EU ETS Target on these 10 ETS sectors. The
table only shows carbon costs and does not include investment and operating costs
needed to abate emissions.
Potential carbon costs range from EUR 38 to 52 billion, depending on the cap trajectory,
as compared to costs of EUR 18 billion in the baseline scenario. This translates into
carbon costs in the range of 1.8% to 2.5% per value added for the different cap
trajectories, while the carbon costs in the baseline scenario would amount to around 0.9%
per value added. The cost increase from the baseline scenario to AMB1 is in the order of
78
EUR 20 billion and is mostly due to the projected carbon price increase. The cap scenario
AMB2b with the highest cumulated cap reduction would increase carbon costs to EUR
34 billion due to increased carbon prices and reduced free allocation. Under the described
assumptions, the increase in the EUA price will likely have a bigger influence on the
carbon costs than the reduced free allocation.
Table 7: Economic impacts of different cap trajectory options for 10 ETS sectors
Impact Unit
Cap trajectory option
Baseli
ne
AMB
1
AMB
2a
AMB
2b
AMB
2c
AMB
3c
Cumulated free
allocation for the
period 2021-30
million EUAs 4892 4757 4598 4401 4455 4626
Cumulated
projected emissions
for the period
2021-30
million t CO2
equivalents
5706 5706 5706 5706 5706 5706
Difference between
emissions and free
allocation
million EUAs 813 948 1108 1305 1251 1080
% of
emissions
14% 17% 19% 23% 22% 19%
Net direct carbon
costs
EUR billion
NPV 2021-
2030 (2015
prices)
18 38 45 53 50 43
% of value
added
0.88% 1.8% 2.1% 2.5% 2.4% 2.1%
% of
production
value
0.17% 0.34% 0.40% 0.47% 0.45% 0.39%
% of
EBITDA
1.8% 3.7% 4.3% 5.0% 4.8% 4.2%
NB: The figures only refer to 10 ETS sectors: cement, lime, refineries, iron and steel,
fertilisers, ceramics, non-ferrous metals, chemicals, pulp and paper, glass.
Market Stability Reserve
6.1.2.2.2
As regards in particular the MSR, there are two expected channels by which the cap
setting and the MSR option chosen, and thereby the total number of allowances in
circulation, may affect competitiveness:
• Volatility: by reducing price volatility, which reduces uncertainty for the longer term;
• Carbon prices: by contributing to increasing prices, which increases production cost for
emitters.
79
Direct estimates of the MSR’s impact on competitiveness and growth through reducing
volatility are currently limited. Venmans (2016) found that allowance price volatility was
seen as an incentive for abatement investment by some but a disincentive by others.110
This means that it is difficult to predict the effect that the MSR will have on
competitiveness through the volatility channel without more study on behavioural
responses of firms.
Given their largely comparable and limited impact on price levels (see Section 6.1.2.1.2
above), the different MSR options will have minimal differences in terms of carbon
leakage and competitiveness. Given the lack of adverse impacts on competitiveness and
leakage so far from the EU ETS price in general, the small levels of price rise driven by
the various MSR options are unlikely to bring significant negative competitiveness
impacts. With regards to the price level, the stringency of cap is much more
consequential than the MSR design.
The design of MSR2 and MSR3 may able to improve the predictability of the occurrence
of intakes as compared to the baseline and MSR1, representing a minor advantage for
competitiveness. As intakes are more predictable and continuous throughout the time
horizon, MSR2 and MSR3 can reduce uncertainty on the supply side (see Section
6.1.2.1.1). The exact impact on competitiveness has not been quantified in the literature.
However, the magnitude of such an impact is likely much smaller than that of the
expected increase in prices and the phasing out of free allocations that may accompany
the introduction of a CBAM.
Framework to address the risk of carbon leakage
6.1.2.2.3
As shown in Section 6.1.2.2.1, the options for the cap trajectory and the auction share
likely mean that the cross-sectoral correction factor (CSCF) will be applied, whereby free
allocation is adjusted downwards in a uniform manner across all sectors. To reduce the
likelihood or the extent to which the CSCF would need to be applied, the tiered approach
(CL1) aims at better targeting free allocation to ensure that the sectors at highest risk of
carbon leakage continue to receive free allocation at 100% of the benchmark level. Table
8 shows that the tiered approach avoids the application of the CSCF for most of the cap
trajectories (compare with Table 6).
110
Venmans, F. (2016) - "The effect of allocation above emissions and price uncertainty on abatement
investments under the EU ETS", Journal of Cleaner Production
80
Table 8: Impacts of a tiered approach from 2026 onwards on free allocation for different
cap trajectory options
Baselin
e (CL0)
AMB
1 and
CL1
AMB2
a and
CL1
AMB2
b and
CL1
AMB2
c and
CL1
AMB3
c and
CL1
Year when CSCF is triggered - - - 2029 2030 -
Average CSCF for the period
2026-30
100% 100% 100% 92% 94% 100%
Strengthening the benchmark values by increasing the maximum update rate (CL2) also
aims at better targeting free allocation. Table 9 shows that this approach does not avoid
the application of the CSCF for most cap trajectories, but that the average CSCF applied
is around 7% higher compared to the cap trajectories without strengthened benchmark
values (compare with Table 6).
Table 9: Impacts of strengthened benchmarks from 2026 onwards on free allocation for
different cap trajectory options
Baselin
e (CL0)
AMB1
and
CL2
AMB2
a and
CL2
AMB2
b and
CL2
AMB2
c and
CL2
AMB3
c and
CL2
Year when CSCF is
triggered
- - 2030
2029
2029 2030
Average CSCF for the period
2026-30
100% 100%
95% 86% 88% 96%
Table 10 below provides figures for the projected cumulated emissions and free
allocation over the period 2021 to 2030 for the most important industry sectors. The
cumulated free allocation was estimated for the two cap trajectory options AMB1 and
AMB2b, in combination with the tiered approach (option CL1) or the strengthened
benchmarks (option CL2).
As can be seen from the average CSCF, both the tiered approach and the strengthened
benchmarks reduce the extent to which the CSCF would need to be applied. In the case
of the cap trajectory AMB1, the application of the CSCF could be avoided.
81
Table 10: Projected cumulated emissions and free allocation over the period 2021 to
2030 per industry sector for cap trajectory options AMB1 and AMB2b in combination
with a tiered approach (option CL1) or strengthened benchmarks (option CL2)
Option
All options
AMB1
and
CL0
AMB1
and
CL1
AMB1
and
CL2
AMB2b
and
CL0
AMB2b
and
CL1
AMB2b
and
CL2
Average
CSCF for
the period
2026–2030
NA 94% 100% 100% 79% 92% 86%
Sector
Projected
cumulated
emissions in
million t
Cumulated free allocation in million EUAs from 2021 to
2030
Cement 1079 903 929 929 834 891 864
Lime 238 158 131 145 146 127 137
Refineries 1014 764 786 784 708 754 731
Iron and
Steel 1609 1440 1481 1457 1332 1420 1358
Fertilizers 286 263 271 261 243 260 244
Ceramics 61 44 36 40 41 35 38
Non-
ferrous
metals 163 139 114 137 128 111 128
Chemicals 891 703 583 683 651 565 639
Pulp and
Paper 209 233 194 209 216 189 197
Glass 156 109 91 110 101 88 103
Other
sectors
ND
712 641 661 661 622 624
Total ND 5469 5259 5417 5062 5062 5062
NB: ND = not determined.
In terms of total free allocation, two cases can be distinguished. In the case of the cap
trajectory AMB1, the total free allocation is reduced both by the tiered approach and the
strengthened benchmarks. This is, first, because the total amount available for free
allocation determined by the minimum auction share is not exceeded and, second,
because the tiered approach reduces free allocation for sectors that are not deemed to be
at highest risk (e.g. chemicals, pulp and paper, other sectors) or because the strengthened
benchmarks reduce free allocation for sectors where high benchmark update rates were
applied for the period of 2021 to 2025 (e.g. pulp and paper, other sectors). However, in
the case of cap trajectory AMB2b, the tiered approach and the strengthened benchmarks
82
do not affect the total free allocation, as the total amount available for free allocation is
determined by the minimum auction share. Therefore, the overall carbon costs remain
unchanged by the application of the CL options, while sectoral impacts differ.
Both the tiered approach and the strengthened benchmarks lead to a redistribution of free
allocation between sectors. A sector with less free allocation will face increased carbon
costs while a sector with more free allocation will face reduced carbon costs. In the case
of the tiered approach, free allocation is more focused on sectors at highest risk of carbon
leakage (i.e. cement, refineries, iron and steel, fertilizers) while it decreases for sectors at
medium risk (i.e. lime, ceramics, non-ferrous metals, chemicals, glass, other sectors).
In the case of strengthened benchmarks, a similar tendency can be observed, although it
is generally less pronounced. Depending on the sector, free allocation increases (i.e. for
cement, refineries, iron and steel), remains roughly constant (i.e. for fertilizers, non-
ferrous metals, glass) or decreases (i.e. for lime, ceramics, chemicals, pulp and paper,
other sectors), reflecting the sectors’ emissions efficiency improvements. Free allocation
would be reduced most in those sectors where emission intensities from the best
installations are furthest below the existing benchmark values, either because benchmark
values were historically set at too high values or because of improvements in emissions
intensity. The option thus better reflects the actual emission intensity improvements of
different sectors and reduces the risk of granting free allocation above the emission levels
to sectors in which an important share of the installations is operating below current
benchmark levels.
Implementing the tiered approach (option CL1) would imply revising the list of sectors
deemed to be at risk of carbon leakage and to implement a more complex methodology in
which different levels of risk can be identified. If the analysis is kept at a quantitative
level based on the current carbon leakage indicator (based on the trade and emissions
intensity of the sector), this additional burden would be limited. The strengthened
benchmarks (option CL2) would not imply any additional administrative burden
compared to the baseline. Under the current legislation, the benchmark values to be
applied during the period from 2026 to 2030 will be based on data for the years 2021 and
2022. Changing the maximum update rate that can be applied to a benchmark will not
impact the level of complexity of the exercise, only its possible final result.
To conclude, the likelihood or the extent to which a CSCF would need to be applied
would be reduced by option CL1 and, to a lesser, but still significant extent, by option
CL2. This is particularly relevant for cap scenarios with rebasing. In cases where there is
no shortage of free allowances, options CL1 and CL2 reduce the total amount of free
allocation. However, this should not substantially increase the risk of carbon leakage as
the most exposed sectors maintain their free allocation in option CL1 or experience a
lower reduction under option CL2 as the revised benchmarks better reflect the actual
83
performance of the installations. In addition, some positive economic impacts from
additional auctioning revenues could be expected. Both the tiered approach and the
strengthened benchmarks lead to a redistribution of free allocation between sectors
whereby the available free allocation is better targeted to sectors at highest risk of carbon
leakage.
Improving support for low-carbon investment and innovation through the
6.1.2.2.4
existing Innovation Fund
The Innovation Fund will further incentivise innovation and research in sustainable
technology, products and processes and carbon removals solutions, including possibly in
new sectors included in the ETS. The ETS Innovation Fund can already now support
production, use and storage of zero-emission fuels in buildings and transport as well as
other activities relevant for these sectors, such as substitute products (e.g. innovative
wood construction instead of bricks and cement).
In the existing ETS, 450 million allowances are used for the Innovation Fund of which
325 million allowances are taken from the total amount available for free allocation.
Under option IF1, the latter amount would not change and therefore the application of the
CSCF will not be affected in comparison to the baseline. Under option IF2, additional 50
million allowances from the free allocation budget are earmarked for the Innovation
Fund. This leads to a small increase of the impact of the CSCF (before applying CL1 or
CL2, see Table 13 below in comparison to Table 6 above). Out of the 83% respondents
to the OPC in favour of an increase of the Innovation Fund, 45% indicated that it should
be increased by using more allowances from the auction share, while 9% indicated that
the allowances should come from free allocation.
Table 11: Impacts of a further increase of the Innovation Fund (option IF2) from 2026
onwards on free allocation for different cap trajectory options
Baseline
AMB1
and
IF2
AMB2a
and IF2
AMB2b
and IF2
AMB2c
and IF2
AMB3c
and IF2
Delta to baseline for total
free allocation
- -10% -13% -17% -16% -12%
Year when CSCF is
triggered
- 2030 2029 2028 2028 2029
Average CSCF for the
period 2026-30
100% 93% 86% 78% 80% 87%
Both options IF1 and IF2 will enable more projects to be funded that will bring emission
reductions, improve the competitiveness of the companies behind them, make them
global leaders in exporting clean tech solutions and create clusters of low-carbon
innovation all across Europe with the associated economic and employment benefits. The
84
negative effects of the increased likelihood of triggering the CSCF in option IF2 may be
offset by these positive effects and the increased resilience of companies that invest in
clean tech solutions.
Carbon Border Adjustment Mechanism (CBAM)
6.1.2.2.5
The assessment of a CBAM as a measure to address the risk of carbon leakage is part of
a separate impact assessment accompanying a separate legal proposal. That impact
assessment covers the selection of sectors for the CBAM, its design and the modelling of
related impacts. The introduction of a CBAM is likely to have an impact on the existing
framework to address the risk of carbon leakage and in particular on free allocation. This
is because both free allocation and the CBAM share the same objective: to prevent the
risk of carbon leakage. They are therefore alternative measures.
Depending on the actual design of the CBAM, two cases can be distinguished.
In the first case, a CBAM option is chosen that does not affect free allocation (e.g.
CBAM IA option 6: consumption charge). In this case, no changes to the free allocation
mechanism are necessary.
Alternatively, a CBAM is established for selected sectors whereby importers pay for the
embedded emissions in the imported products and free allocation is gradually reduced for
these sectors (e.g. during a transitional period) until free allocation is completely
abandoned (i.e. all options in the CBAM IA based on a notional ETS or import tax). If
such an option is chosen and gradually phased in, the reduction of free allocation should
mirror the pace of increase of the CBAM charges, in order to ensure that an adequate
level of carbon leakage protection is maintained and at the same time no double
protection occurs.
As free allocation is reduced, the question arises whether, when and by how much the
minimum auction share in the ETS Directive should increase, because the selected
sectors will need to buy their allowances on the market. If the auction share in the ETS
Directive is kept unchanged, it means that the same amount of free allocation remains
available to a smaller number of sectors. An obvious response to the reduced entitlements
to free allocation would therefore be to increase the auction share corresponding to the
reduction of free allocation of the CBAM sectors. In such a case there should be no
impact on the likelihood and the extent of the CSCF.
If, for example, iron and steel, cement and fertilisers were covered by the CBAM, the
impact on the quantities of allowances allocated for free would be significant, as these
three sectors are expected to receive more than 45% of the total free allocation in the
period from 2021 to 2025.
85
The sectors falling under the CBAM would need to buy additional allowances compared
to the current situation. Not allocating these allowances to the auction share could result
in increasing scarcity and carbon prices in the short-term, depending on when unused
free allocation (if any) would be auctioned. If the auction share were increased to
incorporate all the free allowances destined for the three aforementioned sectors (i.e. iron
and steel, cement, fertilisers), the auction share is estimated to increase from 57% to
77%.
6.1.3 Social impacts of strengthening the ETS
Impacts on employment
6.1.3.1
The macro-economic analysis conducted as part of the Impact Assessment accompanying
the 2030 CTP concluded that the impact of an increase in climate ambition to -55% on
aggregate employment would be relatively limited, ranging between -0.26% and +0.45%.
The employment impacts are positive if carbon pricing revenues are recycled to lower
other taxes or to support green investment111
.
A strengthening of the ETS as in options AMB1 to AMB3 and MSR1 to MSR2 is hence
expected to have small effect on the employment as a whole. However significant shifts
in the sectoral composition of employment and associated job changes that workers will
have to go through are expected over the next decade, which would generate challenges
for the labour force and potential mismatches between skills available and the skills
requirements. These have been analysed in the Impact Assessment underpinning the
2030 CTP based on scenarios which assumed either global action with mitigation efforts
that are compatible with the achievement of the 1.5°C target or “fragmented action” only
assuming the implementation of Nationally Determined Contributions under the Paris
Agreement as of 2018.
Employment in the coal sector, in particular, is expected to be around 50% below
baseline by 2030. While this is not consequential in terms of total employment at the EU
level, it has significant implications for some regions and local communities.
Employment in the gas sector is expected to fall significantly as well, though less
severely than for coal.
111
SWD(2020)176, Section 6.5.1
86
Table 12: Impacts of 55% GHG reduction on EU sectoral employment in existing ETS
sectors (deviation from baseline in 2030, in percent)
Employment vs. baseline,
2030
Fragmented action Global action
Coal -49.1 | -48.3 -47.1 | -46.3
Gas -11.2 | -8.5 -7.9 | -5.8
Electricity supply
including renewables
2.8 | 3.3 5.7 | 6.6
Ferrous metals -4.1 | 0.1 2.2 | 7.0
Non-ferrous metals -2.2 | -0.1 3.6 | 6.3
Chemical products -0.8 | -0.1 0.6 | 1.4
Paper products -0.4 | 0.1 0.0 | 0.7
Non-metallic minerals -2.1 | 0.3 -0.1 | 2.7
Source: SWD(2020)176, JRC-GEM-E3 model
Conversely, electricity supply is likely to gain most significantly from a higher level of
climate ambition by 2030, through increased green employment. The electrification of
the economy and the switch to renewables, which tend to be relatively labour intensive,
are naturally expected to generate higher employment in the sector.
For the industrial sector the direction of the impact depends on the extent of climate
action in other parts of the world as well as on the carbon leakage protection framework.
Therefore a just transition is an important aspect. The ETS recognises the asymmetric
distribution of its impacts on certain regions and MS with lower GDP.
The transformation is likely to affect education and vocational training systems as re-
skilling can enable impacted regions to capitalise on all possible new opportunities in
sustainable technology development, products and processes through the transformation
of their labour forces. For example, through Cohesion Policy and the Just Transition
Mechanism, investments in renewable energy technologies are expected to be deployed
across the EU, including in coal regions. In addition, investments from the Just
Transition Mechanism will compensate the negative impacts of the transition for the
territories identified in the Territorial Just Transition plans. ETS auctioning revenues
could further contribute to mitigating social impacts.
It can be expected that differences of sectoral employment impacts across different
options for strengthening of the ETS target and reviewing the MSR are limited.
The described macroeconomic modelling results assume that industry at risk of carbon
leakage receives free allocation. Under a more targeted free allocation (options CL1 and
CL2), the carbon costs for the sectors that receive less free allocation will be higher
87
unless they can pass on the costs in the product price (less international competition). If
there is no possibility to pass on costs in the product price, market shares could be
reduced, which could lead to employment losses. However, since the reason for the lower
allocation to some sectors would be the ability to pass on costs, this should limit the
employment effects.
Overall, it is expected that the impact of the options to modify the framework to address
the risk of carbon leakage are less pronounced than the impacts induced by the
strengthened cap.
Other social impacts
6.1.3.2
This initiative also addresses the increasing concern of European citizens, and
particularly younger generations, that urgent action is needed on climate change to ensure
the wellbeing of future generations.
This initiative is likely to contribute to positive health impacts, reducing avoidable
healthcare costs and mortality by reducing air pollution caused by fossil fuels and high-
emission industrial processes, such as carcinogens and particulate matter. 2030 health
damages in MIX are EUR 17.6 to 35.2 billion per year lower compared to REF.
Extension of emissions trading or alternatives for the maritime emissions
6.2
This section considers the four main policy options described in Section 5.2.3.1, which
include the extension of the ETS to maritime transport (MAR1), a separate sectoral ETS
(MAR2), a levy on ship GHG emissions (MAR3) and the extension of the ETS to
maritime in combination with standards (MAR4). A summary of the policy options
analysed is included in Annex 6.
For the purpose of this assessment, a comprehensive set of tools has been used ranging
from specialised datasets and dedicated modelling tools such as the PRIMES-Maritime
module and the GEM-E3 economic model. Details of this assessment are given in Annex
10 and details on the methodology used for the assessment of impacts is explained in
Annex 4.
6.2.1 Environmental impacts
This chapter aims to assess how the different policy options can reduce the negative
impact of maritime transport on climate change, air quality and marine biodiversity.
88
Changes in emissions of GHG
6.2.1.1
In the baseline scenario, GHG emissions from international navigation are expected to
grow by around 14% between 2015-2030 and by 34% between 2015-2050, wiping out
the positive effect of technical and operational energy efficiency measures and practices
put in place since 2008. It would also make the increased EU climate objectives harder to
achieve as it requires stepping up EU actions in all sectors, as highlighted in the 2030
communication.
In this context, the four policy options considered in this impact assessment have been
developed in a way to ensure a reduction of GHG emissions commensurate with the
increased climate effort expected in the ETS112
. Depending on the policy option, the
reduction in GHG emissions would either come from mitigation measures implemented
in the maritime sector itself, or from the purchase of general ETS allowances (out-of-
sector abatement). The impact of policy options in terms of absolute GHG emissions
reduction will highly depend on the selected geographical scope. In principle, the
broader the geographical coverage, the higher the climate impact ought to be. This,
however, should be tempered by the fact that the geographical scope can also have an
effect on the effective implementation of carbon pricing measures (e.g. risk of evasion).
The table below shows the level of CO2 emission reductions that would be triggered in
2030, assuming different combinations of policy options and geographical scope. The
first group of columns provides information about the maritime CO2 emissions covered
by carbon pricing. It includes information about the absolute level of CO2 emissions
projected in 2030 in the baseline scenario and in each option, the emissions cap, the
expected in-sector abatements induced by the price signal and other policies and the
expected demand for out-of-sector allowances. The second column shows how the
maritime emissions not covered by carbon pricing would change in 2030 as a result of
other policies. The last column shows the total amount of in-sector and out-of-sector
abatements that would originate from the considered maritime policies in 2030.
All the in-sector emission reductions take into account the impact of the FuelEU
Maritime initiative, in line with the MIX assumptions. However, reductions related to on-
shore power requirements are not quantified in this chapter as well as reductions coming
from future IMO short-term measures yet to be adopted.
112
In MAR1, MAR2 and MAR4, the emissions cap is subject to the same linear reduction factor as for
stationary installations and aviation. In the mid- and long-term, the cap follows a trajectory until 2050 in
view to reduce the maritime emissions in a way compatible with the climate neutrality objective. The
model assumes a similar level of emission reductions in MAR3.
89
Table 13. CO2 emission reductions from maritime policy options and scopes in 2030
Maritime emissions covered by carbon pricing
Other
maritime
emissions
Total
emission
reductions
Policy
option
2030 BAU
emissions
(REF)
2030
Projected
Emissions
2030
Emissions
cap
In-sector
reductions
vs baseline
Demand for
out of
sector
allowances
In-sector
emission
reductions
vs baseline
In-sector
and out of
sector
emission
reductions
MtCO2 MtCO2 MtCO2 MtCO2 M EUA MtCO2 MtCO2
Scope: MINTRA (emissions from at-berth and intra-EEA voyages)
MAR1 46 41 26 5 15 11 30
MAR2 46 26 26 19 0 15 34
MAR3 46 min 26 n/a up to 19 0 15 34
MAR4 46 40 26 6 14 13 32
Scope: MEXTRA50 (emissions from at-berth, intra-EEA and half of extra-EEA voyages)
MAR1 92 81 53 11 28 6 45
MAR2 92 53 53 39 0 8 47
MAR3 92 min 60 n/a up to 39 0 8 up to 47
MAR4 92 79 53 13 26 7 46
Scope: MEXTRA100 (emissions from at-berth, intra-EEA and extra-EEA voyages)
MAR1 138 120 79 18 41 n/a 59
MAR2 138 79 79 59 0 n/a 59
MAR3 138 min 79 n/a up to 59 0 n/a up to 59
MAR4 138 117 79 21 38 n/a 59
Note: numbers are rounded
Source: PRIMES Maritime module
In MAR1, the extension of the ETS to the maritime sector would result in a total
reduction of 59 Mt of CO2 emissions in 2030 for the largest geographical scope
(MEXTRA100), 45 Mt for the intermediate one (MEXTRA50), and 30 Mt for intra-EU
voyages and at-berth emissions (MINTRA). That would be equivalent to reducing the
total maritime emissions from the baseline by 22% to 43%. A significant share of these
reductions (up to 69%) is associated with out-of-sector abatements, assuming a carbon
price in the range of EUR 45113
. The demand for general ETS allowances in 2030 is
therefore estimated at between 15 and 41 Mt CO2 depending on the selected geographical
113
Lower band of the carbon price assumptions from the MIX scenario
90
scope. The in-sector abatements would primarily come from the increased use of
alternative fuels promoted through the FuelEU Maritime initiative114
, with the ETS price
signal contributing to this growth. In the short-term, MAR1 applied to MEXTRA100
would roughly trigger one third of the reductions in the sector and the two thirds outside.
Higher ETS prices would further accelerate the implementation of mitigation measures in
the sector.
In MAR4, the combination of carbon pricing with a carbon intensity standard would
result in a total of 59 Mt of CO2 emission reductions in 2030 for MEXTRA100, 46 Mt
for MEXTRA50, and 32 Mt for MINTRA when compared to the baseline. Following the
same logic as in MAR1, companies would be expected to purchase a significant amount
of general ETS allowances in 2030 (between 14 and 38 million EUA depending on the
selected geographical scope). The operational carbon intensity standard, as modelled in
this impact assessment115
, would modestly increase the level of in-sector abatements
expected by 2030.
In MAR2, the separate maritime ETS would lead to total emission reductions in 2030 of
59 Mt for MEXTRA100, 47 Mt for MEXTRA50, and 34 Mt for MINTRA. All
abatement of emissions would take place in the maritime sector as shipping companies
would not be able to purchase allowances from other sectors. In MAR3, the emissions
levy could result in similar emissions reductions because the price signal is assumed to
be comparable to the one observed in the separate maritime ETS. However, the level of
projected emission reductions would be much more uncertain compared to the other
policy options where maritime emissions would be capped.
As shown by these results, the geographical coverage has a very strong influence on the
mitigation impact of each policy option. Extending the geographical coverage beyond
intra-EEA emissions to MEXTRA50 would increase the total amount of emission
reductions by 50% while covering all maritime emissions would increase it by around
97%.
The geographical scope would also have a strong effect on the type of covered shipping
activities. As shown in the figure below, a measure focusing on MINTRA would cover
114
The MIX scenario assumes that renewable and low-carbon fuels would represent around 8-9% of the
maritime energy mix in 2030. The impacts of the FuelEU Maritime initiative are described in a separate
impact assessment.
115
The model obliges the modelled fleet to improve its operational carbon intensity by at least 40% in 2030
compared to 2008 levels and to follow a linear trajectory over the period 2030-2050 to reach the
operational carbon intensity improvements observed in 2050 in MIX.
91
most of the short-sea shipping emissions, whereas addressing extra-EEA emissions
would significantly increase the proportion of emissions coming from deep-sea shipping.
Figure 5: Distribution of intra-EEA and at-berth emissions vs extra-EEA emissions per
ship type
Source: THETIS-MRV data 2018 and 2019, based on EEA (including EU28)
Changes in GHG emissions also depend on the type of GHG emissions covered. While
CO2 emissions represent around 98% of all maritime GHG emissions, non-CO2
emissions have been growing over the past years. The model shows that in all policy
options (MINTRA scope), the share of non-CO2 emissions would represent around 3.5%
to 4% of all GHG emissions by 2050. This projection is mostly related to higher levels of
methane slippage, as a result of a larger uptake of decarbonised gaseous fuels. However,
this high share of non-CO2 emissions would be reduced substantially if significant
progress were achieved on methane slip control.
Changes in emissions of black carbon are also important as the fuel burned in shipping
engines can result in atmospheric black carbon and surface deposition that can accelerate
the melting of ice and snow, in particular in the arctic region. According to the model, all
policy options would result in a reduction of black carbon emissions of at least 7% in
2030 compared to the baseline.
Impacts on air pollution
6.2.1.2
Shipping emissions can impact air quality in coastal areas but also on land, as emissions
from ships are transported in the atmosphere over hundreds of kilometres. All policy
options are expected to have a positive impact on public health compared to the baseline
as ships would emit less air pollutants. These decreases are driven by the uptake of fuels
92
with lower emission factors, the use of cleaner energy sources at berth and energy
efficiency improvements. The table below shows the level of maritime air pollutant
emissions reduction that would be achieved in 2030 compared to the baseline, assuming
different policy option applied to the intermediary geographical scope (MEXTRA50).
Table 14: Reduction of air pollutant emissions by 2030 for different maritime policies
(scope MEXTRA50)
Air emission reduction by 2030 compared to REF (%) – Scope
MEXTRA50
NOx CO NMVOC PM10 SOX
MAR1 -7% -6% -7% -7% -8%
MAR2 -10% -6% -9% -10% -10%
MAR3 -10% -6% -9% -10% -10%
MAR4 -8% -7% -8% -9% -10%
Source: PRIMES Maritime module
Use of energy
6.2.1.3
In terms of energy efficiency, all policy options are expected to boost the uptake of
energy efficiency measures as the cheapest available in-sector abatement measures. The
analysis carried out in the fourth IMO Greenhouse Gas Study confirms that energy
efficiency measures such as speed reduction, hull coating, wind power, propeller
improvements, improved auxiliary systems or main engines have much lower abatement
costs than other options such as the use of alternative fuels. As an example, it estimates
the cost to reduce one tonne of CO2 based on speed reduction at around 14 EUR/t-CO2
while a reduction of one tonne of CO2 based on the use of alternative fuel at between 213
to 343 EUR/t-CO2 in 2030.
The following table illustrates the energy efficiency improvements expected in the model
from the different policy options, assuming a MINTRA geographical scope.
All scenarios show that energy efficiency improvements are expected to take place
compared to the baseline. By 2030, the model indicates that MAR1 applied to all intra-
EEA emissions would increase the average energy efficiency of freight vessels by 6.9%
compared to 2020 (8% when applied to MEXTRA50). In MAR4, the combination of
carbon pricing policies with an operational standard would make freight vessels 8.1%
more energy efficient in 2030 compared to 2020 considering a MINTRA scope (9.2% if
applied to MEXTRA50). In MAR2, the requirement to achieve in-sector emission
reductions would lead to slightly higher energy efficiency improvements estimated at
8.8% for MINTRA (similar trends could possibly observed in MAR3).
93
Table 15: Average energy efficiency (energy consumption per tonne-km)
improvements of freight vessels
Average energy efficiency improvements
(energy consumption per tonne-km) of
freight vessels – index 100= 2020 levels –
MINTRA scope
2020 2030
Baseline 100 97
MAR1 100 93
MAR2 100 91
MAR3 100 up to 91
MAR4 100 92
Source: PRIMES Maritime module
These levels of energy efficiency improvement come in particular from the purchase of
more energy efficient vessels. In the next decade, new ships are expected to be at least
15%-25% more energy efficient through improved machinery and electricity systems
(including hybridisation) and the use of waste heat recovery116
. However, the relatively
slow replacement rate of vessels and their long lifetimes explain why the average energy
efficiency improvement of the entire fleet is not so pronounced until 2030. In addition,
the model also considers operational energy efficiency improvement such as speed
reduction. In the feedback received from stakeholders, most market actors confirmed the
potential to further improve the energy efficiency of the sector, which varies for different
ship sizes and types and which are not all captured in the model.
In terms of the use of renewables and low-carbon fuels, all policy options are expected
to reinforce the aims of the FuelEU Maritime initiative. In particular, carbon pricing
would make the switch to sustainable alternative fuels more affordable by supporting
energy efficiency improvements, resulting in less fuel to be purchased by shipping
companies. It would also help bridge the price gap between conventional and alternative
fuels (to an extent which would depend on the level of the carbon price). By 2030,
MAR1 would have limited contribution to achieving the goals of the FuelEU maritime
initiative in terms of uptake of alternative fuels as an ETS price in the range EUR
45/tCO2 would improve the cost competitiveness of alternative fuels compared to fossil
fuels but it would not be sufficient to bridge the whole price gap. However, in the long-
term, MAR1 would further accelerate the demand for alternative fuels. MAR4 would
have a positive effect on the short-term as companies would be able to fulfil their
116
UNEP Emissions Gap Report 2020
94
operational carbon intensity requirement by notably purchasing more alternative fuels.
MAR2 and possibly MAR3 would lead to a more rapid uptake of alternative fuels
(representing more than 19% of the fuel mix by 2030) as a result of higher carbon prices.
Risk of evasion
6.2.1.4
As for other sectors, it is necessary to assess the risk of evasion linked to each maritime
policy option. In practice, market actors could decide to reduce their exposure to carbon
price by:
a) adding a new port call outside the EEA in a journey to minimise the amount of
emissions in the ETS scope (Evasive port calls);
b) unloading goods in a non-EEA port and loading it into another ship to reach the
final destination (Transhipment);
c) shifting demand to other transport modes, although there would be no leakage if
these other modes are covered by the ETS;
d) using ships below the threshold defined in the EU maritime MRV regulation
(smaller vessels);
e) assigning their best performing vessels to EU related voyages while keeping the
less performing ones for non-EEA trade routes (fleet optimisation).
This would reduce the effectiveness of the policy options in reducing GHG emissions
and would shift carbon emissions to other geographical areas or other transport modes.
The risk of carbon leakage depends on practical feasibility, the carbon price level and the
geographical scope.
(a) Evasive port calls
Evasion becomes lucrative when the cost of compliance exceeds the costs associated
with the evasive port call (i.e. additional port, fuel, operational, administrative and
opportunity117
costs). As compliance costs increase proportionally to the carbon price, the
risk of evasion can be characterized by a ‘turning point price’ that represents the carbon
price above which the evasion could become profitable from an economic point of view.
The decision to add an evasive port call also depends on other aspects such as its
practical feasibility (e.g. additional time to the incoming/outgoing leg particularly in
relation to certain commodities, e.g. perishable goods).
Figure 6 below estimates that with a carbon price of EUR 60 per tCO2, the share of
voyages tempted to evade is between 0.1% and 10%.
117
revenue lost from the evaded journeys
95
The EU maritime transport MRV regulation already requires ships to load or unload
cargo in order for the stop to fall under the port call definition. This stringent definition
represents an important additional barrier to evasion and could be strengthened to further
mitigate the risk.
Figure 6: Share of voyages tempted to evade for different ETS price (considering that all
intra-EEA and half of extra-EEA voyages are covered by the carbon price)118
Source: T&E, 2020
Case studies building on a recent T&E (2020) study119
(Annex 10) analysed the risk of
evasion for three major EU seaports in close proximity to a non-EEA port: Greece
(Piraeus), Spain (Algeciras) and the Netherlands (Rotterdam). They considered three
types of ships: container ships, bulk carriers and oil tankers, due to their high level of
activity in extra-EEA shipping relative to other vessel types. For container ships,
opportunity costs increase more significantly in relation to their size than for bulk carriers
and oil tankers. Large containers are thus less likely to evade. For bulk carriers and oil
tankers, the larger vessels have lower turning point prices and therefore have higher risk
118
ETS penalties are paid by the operators who fail to comply with their obligation to surrender allowances
under the ETS
119
https://www.transportenvironment.org/sites/te/files/publications/ETS_shipping_study.pdf
96
of evasion. Longer routes present a higher risk of evasion due to higher fuel and
operational costs making the additional costs of evasion lower in comparison.
The options with the highest carbon price (MAR2 and MAR3) present the highest risk of
evasion. In the mid- to long-term, higher ETS prices are likely to increase the risk as
shown in the figure below (considering option MAR1 with MEXTRA50 scope). At an
ETS price of around EUR 100/tCO2, the risk of evasion would concern 20% of the
voyages that could be tempted to evade if third country climate policies stay the same.
In terms of geographical scope, the risk of evasion would be the highest in case extra-
EEA voyages are covered. Under the MEXTRA50 scope, the risk of evasion is zero at
EUR 30/tCO2, but at EUR 50/tCO2 it concerns 4.8% of all voyages, representing 8.2% of
the emissions covered. Under the MEXTRA100 scope, 6.7% of all voyages would be
tempted to evade at EUR 30/tCO2.
In addition, the risk of evasion could increase if the cost of compliance from other EU
initiatives would add to carbon costs.
The risk of evasion would be cancelled if the main departure or arrival countries outside
the EEA would apply similar carbon pricing policies.
Additional measures to limit the risk of evasion might be considered after the proposed
measures enter into force, based on the monitoring for evasive port calls practices. Such a
monitoring could rely on vessel tracking information (AIS data) and maritime freight
statistics.
(b) Transhipment
To evade EU measures, transhipment activities could be relocated to nearby ports outside
the EEA. Transhipment is a competitive sector where hubs compete for the traffic related
to a specific region or market. Shipping companies already use nearby alternative
competing transhipment hubs and could be tempted to increase transhipment activities in
those ports, should these appear more competitive.
Delocalisation of transhipment activities could particularly impact voyages from
container vessels. For other types of vessels, transhipment is uncommon and setting up a
transhipment for the sole purpose of evasion is unlikely. Adding an additional port call
with transhipment will significantly increase the cost of the voyage (e.g. cargo handling,
delays in deliveries, additional charter, logistic and administrative costs, etc.) and
increase the voyage length.
The practical feasibility of changing transhipment hub depends on a range of important
factors, including port location, proximity to primary routes, cities and ports, berth
availability, draft constraints, transit time, cost, frequency and service quality. The
financial attractiveness of changing transhipment port is at present largely linked to the
97
port fees, and to a much smaller extent to fuel, operating and opportunity costs (as very
minimal deviation from the original route would be required). For the two ports analysed
in the case study (Annex 10), Algeciras and Tanger Med, a significant difference in
transhipment costs already exists. Competition for transhipment activities is currently
strong between the two ports. However, the risk of changing transhipment port in favour
of Tanger Med as an evasive behaviour might increase if the gap between the costs of
transhipment between the two ports is exacerbated due to the carbon price, in particular
for MAR2 and MAR3.
None of the geographical options would exclude the risk of transhipment relocation. The
longer the voyages, the higher the risk is in terms of delocalisation of transhipment
activities, MEXTRA100 therefore being more at risk of evasion than MEXTRA50.
Impact on the amount of emissions evading the scope will be smaller for MINTRA.
The risk of transhipment has been highlighted by ports (e.g. port of Algeciras), port
associations and World Shipping Council in the OPC, as well as for North Sea ports in
relation to competition from UK ports. This risk would be strongly limited if equivalent
measures were to be adopted in neighbouring countries. The UK has adopted legal
requirements for ships that call at UK ports to report their greenhouse gas emissions120
and the UK’s sixth Carbon Budget will incorporate the UK’s share of international
aviation and shipping emissions. However, at the time of this analysis, the UK has not
yet decided to include shipping emissions in its national Emissions Trading System121
.
(c) Modal shift
The increased cost of shipping resulting from carbon pricing could cause a shift from
maritime transport to other modes of transport such as road or rail. However, modal shift
would only occur if there is no similar carbon pricing applied to road transport as the
majority of railway activities are already covered by the ETS. Road transport under the
MIX scenario will be subject to a number of decarbonisation policies fostering the use of
more sustainable modes of transport. Risk of modal shift under MAR1 is therefore
considered inexistent. Options for initiatives are detailed in the Smart and Sustainable
Mobility Strategy122
. In addition, modal shift would only concern intra-EEA maritime
120 https://www.legislation.gov.uk/uksi/2018/1388
121 https://www.legislation.gov.uk/uksi/2020/1265/made
Accompanying document to the Smart and Sustainable Mobility Strategy: COM(2020) 789
122
98
transport activities as deep-sea shipping is less likely to compete with other modes of
transport. Annex 10 provides a detailed analysis of the risk of modal shift.
(d) Smaller vessels
For all policy options, market operators could decide to operate ships below 5.000 gross
tonnage to evade carbon pricing. This risk may occur in specific shipping sectors where
the use of smaller vessels is common and where the gain in efficiency related to the use
of larger vessels would be less than the compliance costs. This aspect is further
developed in the next chapter about economic impacts. The risk would be higher, in
relative terms, for MINTRA than for MEXTRA scopes and the options MAR2 and
MAR3 with a higher carbon price will create a higher incentive to use ships under the
threshold. It should be noted that, if there were deliberate evasion of this type, the
Council and European Parliament could lower the relevant thresholds.
(e) Fleet optimisation
The risk of seeing companies optimising their fleet by assigning their best performing
vessels to EEA related voyages and keeping the less performant ones for other trade
routes may occur for deep-sea ships having no fixed routing, such as trampers. The risk is
considered to be limited as companies would not directly evade carbon pricing. In
addition, the implementation of such a strategy might be more difficult to put in place
when ships are chartered, which characterises the tramp shipping industry. However, the
risk would still be higher for MAR2 and MAR3 (higher carbon prices) as well as for
MAR4 as it includes mandatory carbon intensity requirements. Fleet optimisation would
decrease the total emissions emitted in the geographical scope and increase emissions
outside the scope. The adoption of global measures such as the technical and operational
carbon intensity foreseen to be adopted at IMO or equivalent carbon pricing measures
outside the EEA would reduce this risk.
Impacts on ecosystems and biodiversity
6.2.1.5
The impacts of ship emissions on ecosystems and biodiversity are highly site-specific but
can cause damage through acidification and eutrophication. Ship movements can also
negatively affect natural habitats and certain species. In addition, climate change can
produce changes in water temperature, increasing CO2 levels and decreasing pH, changes
in nutrients and dissolved oxygen due to changes in circulation and stratification, extreme
weather events and sea level rise.
By reducing GHG emissions and the release of air pollutants, all the proposed policy
options are expected to contribute to reducing the negative impacts of shipping activities
on ecosystems and biodiversity. Carbon pricing would also encourage the further
deployment of slow steaming practices that can reduce underwater noise and reduce
negative impacts on habitats. The positive impact of each policy option on maritime
99
ecosystems and biodiversity is expected to be proportional to the level of in-sector
abatement triggered, meaning that more benefits would come from MAR2 and MAR3
where the purchase of EUA from other sectors is not an option.
6.2.2 Economic impacts
Direct economic impacts
6.2.2.1
In all policy scenarios, maritime transport activity is expected to grow in the long-term
although not as much as in the reference scenario, which does not reflect the
transformation of the EU economy towards climate neutrality and the lower dependence
on oil imports. By 2030, the policy options are projected to have a minor impact on total
shipping activities in comparison to the baseline (e.g. from -0.8% for MAR1 to around -
1.2% for MAR2 and MAR3 in 2030 when applied to intra-EEA emissions). A broader
geographical scope would also lead to higher impacts (e.g. -0.9% for MAR1 with
MEXTRA50 and -1.1% for MAR1 with MEXTRA100). In addition, short sea shipping is
expected to be slightly more affected than deep-sea shipping as carbon pricing would
result in higher relative costs.
In terms of direct costs, all policy options would incur some additional direct costs for
regulated entities in the form of ETS/carbon levy payments, as well as additional capital,
fuel, operational and administrative costs, partially compensated by fuels saving.
However, from a society perspective the ETS/carbon levy payments do not represent a
net cost, as there are corresponding auctioning or tax revenues (see Section 6.3.2.3).
When looking at the additional costs, it is important to keep in mind that the sector
currently benefits from a wide range of tax exemptions and reductions that are de facto
forms of fossil fuel support. A detailed analysis is carried out in the impact assessment
accompanying the revision of the Energy Taxation Directive.
The graph below shows how costs are likely to vary considering different policy options
and different geographical scope.
Figure 7: Costs breakdown in 2030 for different maritime policy options and scope
(billion EUR 2015)
100
Source: PRIMES Maritime module
MAR1 would increase the total direct costs for users by 3% in 2030 if applied to intra-
EEA emissions. This cost increase can be explained by the estimated ETS payment that
would represent an amount of around EUR 1.9 billion123
. The slightly higher fuel costs
coming from the use of more expensive renewable and low-carbon fuels (as induced by
the FuelEU Maritime initiative) would be compensated by the fuel savings expected in
2030. In this scenario, the short-sea shipping industry would be more impacted than the
deep-sea shipping sector as they mostly perform intra-EEA voyages. If applied to
MEXTRA50, MAR1 would become 7% more expensive than the baseline, mainly due to
increased ETS payments amounting to around EUR 3.7 billion. It would also mean a
bigger contribution from the deep-sea shipping sector. Finally, if all emissions were
covered under MAR1, the measure would be 12% more expensive compared to a
business as usual scenario and the ETS payment would peak to around EUR 5.5 billion.
MAR4 would result in similar outcomes. Fuel costs would be comparable as more
energy efficiency improvements would be implemented together with a slight increased
use of alternative fuels.
When applied to intra-EEA emissions in 2030, MAR2 would substantially increase the
total costs by around 16%. This increase is mainly due to higher operational costs linked
to the closed ETS. Regulated entities would pay high carbon prices estimated at around
EUR 268 per tonne of CO2, which would represent an overall amount of EUR 7 billion in
123
For MAR1 and MAR4 assumption based on the lower band of EU ETS carbon price ranges in the
policy scenarios represented by MIX (Section 5.2.1). For MAR2 and MAR3, result of the modelling.
0
10
20
30
40
50
60
70
80
90
Billion
euros
'2015
Payments for ETS
or carbon levy
Capital cost
Operation costs
and variable non-
fuel costs
Fuel costs
101
2030 reflecting the abatement costs of the various measures that would have to be
implemented in the sector to stay below the emissions cap (same cap as in MAR1 and
MAR4 but with no flexibility). The increase in total costs would also come from the use
of more expensive alternative fuels. Similar impacts are assumed for MAR3 as the levy
option would have to apply comparable carbon prices to generate sufficient emission
reductions, although without any guarantee.
In terms of compliance costs predictability, MAR3 stands out for having the highest
certainty because the costs per unit of emissions would be specified in the regulation,
unlike the costs of the ETS allowances which would be subject to market fluctuations.
However, the certainty linked to MAR3 would depend on whether the levy is adjusted
regularly or not. In contrast, MAR2 could have fluctuating ETS prices. MAR1 and
MAR4 would be less exposed to such a risk as the Market Stability Reserve has the
ability to reduce price volatility and because maritime emissions would only represent a
small share of the overall ETS market.
In the long-term, all policy options are expected to lead to an increase in total costs of
approximatively 16-20% by 2050 as a result of the high penetration of renewable and
low-carbon fuels, which implies higher fuels costs and higher capital costs. At the same
time, carbon pricing in the maritime sector would lead to progressive energy efficiency
improvements, in particular, in the time horizon after 2030, which would contribute to
reducing the fuel costs.
In terms of external costs, all policy options would generate important economic savings
as they would lead to substantial air pollutant reduction. Depending on the selected
policy option and scope, external costs savings are estimated at around EUR 345 to 540
million in 2030 relative to the baseline and at over EUR 13.7 billion over the period
2020-2050 in terms of Net Present Value (e.g. up to EUR 18.1 billion for MAR1 when
applied to MEXTRA100). These estimates aggregate health effects, crop loss,
biodiversity loss and material damage.
Impacts on Administrative Burden
6.2.2.2
All policy options will create administrative tasks for the regulated entities, the national
public authorities involved and the European Commission (see also costs estimations in
Annex 3).
Administrative burden on regulated entities
For regulated entities, administrative burden will be very limited as a monitoring,
reporting and verification system for CO2 emissions is already in place. All policy
options would rely on data coming from this MRV system, therefore MRV activities
102
would not generate any substantial additional administrative burden. Regulated entities
have already incurred one-off costs for the preparation of monitoring plans, the
development of IT systems and the establishment of MRV procedures. Since 2019,
companies submit every year to the Commission and to the relevant Flag State authority
an emissions report, which has been verified by an independent accredited verifier. The
costs of MRV compliance were estimated at about 6.700 EUR per ship per year (Faber &
Schep, 2016). The only additional MRV costs that would be induced by the policy
options would relate to the preparation of emissions reports at company level but this
task could be supported by the IT system behind the EU maritime MRV system
(THETIS-MRV). It could automatically aggregate all relevant data at company level.
For the ETS based policy options, there would also be a one off costs to open a registry
account or become familiarised with the requirements of the system. Annual costs would
include costs linked to the purchase and surrender of allowances, keeping records or
supporting requests from competent authorities. Experience from the ETS shows that
these activities generate much less administrative burden than the monitoring, reporting
and verification of emissions. Non-MRV costs are estimated to represent around 10%124
of the MRV costs.
In MAR3, the carbon levy would imply some set-up costs but the annual levy payment
would be part of the overall tax management system of companies and is likely to
represent marginal costs.
Option MAR4 would require additional verification activities to validate the attainment
of the carbon intensity reduction target, but these could be part of the verification process
under the EU maritime transport MRV system.
 The case of SMEs
Unlike other sectors already covered by the ETS, SMEs represent the significant majority
of enterprises in the shipping sector, with 76% of freight companies and 86% of
passenger transport companies having fewer than 10 employees. By limiting the scope of
the measure to ships above 5.000 gross tonnage, it would reduce the number of ships
covered by at least 44% and exclude around 95% of maritime transport SMEs. For the
remaining covered SMEs, impacts will be proportionally higher than for bigger
124
This share is consistent with a survey in the UK (BEIS, 2016), which indicates that non-MRV
administrative costs represent around 5% of total ongoing administrative costs for stationary
installations and 10% for small emitters. Moreover, non-MRV costs for aviation represent around 7% of
ongoing administrative costs (European Commission, 2014).
103
companies due to a lack of economies of scale and SMEs are likely to rely on
intermediaries to help them fulfil their obligations.
Responses to the targeted stakeholder consultation suggest that SMEs might be more
exposed to unfair competition on a global scale, in particular under ETS options, due to
SME’s limited administrative capacity and know-how to deal with an ETS.
Administrative burden on public authorities
MRV related costs will be the same under all options. Public authorities will have to
ensure that regulated entities are capable of monitoring and reporting emissions, they will
also have to review the amount of emissions reported by regulated entities, based on
information verified by independent accredited verifiers. This is estimated to entail
relatively limited additional costs. The European Maritime Safety Agency (EMSA) could
potentially assist MS competent authorities in this task with their expertise on MRV data
and related IT tools (e.g. by facilitating the exchange of information, developing
guidelines and criteria). This would increase costs to EMSA, but reduce costs and
improve efficiency for MS. Since 2018, EMSA is successfully running the IT tool
(THETIS-MRV) that supports the implementation of the EU Maritime MRV regulation.
Under the ETS options (MAR1, MAR2 and MAR4), the main additional administrative
costs will stem from the administration of the registry, compliance and enforcement.
Such processes can build on the ones existing under the ETS and thus the incurred
administrative costs will be very limited. The establishment of a fully separate ETS
(MAR2) would however lead to some additional costs if not build upon existing tools. In
terms of enforcement, the surrendering of required allowances will be registered
electronically in the registry and the system will allow for a rapid identification of non-
compliant companies. In case of non-compliance, public authorities will have to recover
non-surrendered allowances and ensure that non-compliant regulated entities are held
liable for the payment of an excess emissions penalty.
An estimation of the cumulated ETS costs for national authorities is provided in the table
below based on previous ETS experience.
Table 16: Estimated administrative costs for all competent national authorities
ETS administrative costs for all competent authorities
One-off costs (costs per period) (million euros) 0.5 – 1.5
Annual costs (million euros) 0.5 – 6.4
Source: Ricardo, 2021
104
MAR3 would also require the setting up of a new mechanism but which would be
simpler compared to an ETS registry. The carbon levy could for instance be implemented
as an annual single transaction based on EU maritime transport MRV data and collected
based on existing tax systems at national level. However, depending on how the levy is
redistributed, there might be a need to set up and manage a new tax registration system
for those shipping companies whose business is registered in one MS but have ships
registered in another MS. This could result in additional set up and monitoring costs.
Costs for compliance checks and enforcement will impact national authorities of the 22
Port States, but these will be very limited. For MAR4, Port State Control officers will
check the availability of Documents of Compliance certifying that carbon intensity
requirements are met. Verifying the availability of certificates is a routine activity for
Port State Control officers. There is an opportunity to use of electronic certificates that
could remove the need for a physical check in its entirety, a possibility already being
discussed for the revision of the Port State Control and Flag State Directives.
The various EMSA tools in support of enforcement activities (THETIS, THETIS-EU,
RuleCheck and the EMSA Academy) and EMSA’s expertise in this field, could support
the correct implementation and enforcement at national and EU level. During visits to
MS, EMSA could also provide assistance to monitor the implementation of the carbon
pricing policy, organise workshops to share experience and lessons learnt.
For the European Commission, the main additional administrative costs would come
from the update of the IT system behind the EU maritime transport MRV Regulation, the
transposition and conformity checks of national legislation, the administering of the EU
registry (MAR1 and MAR4) or the creation of a separate registry for the maritime system
(MAR2). It could also include the development of delegated or implementing acts (e.g.
operational carbon intensity thresholds per ship type and size in MAR4).
Impact on revenues for Member States/Union
6.2.2.3
The level of revenues varies across the policy options and according to the geographical
scope. An ETS which covers 50% extra-EEA emissions generates a higher level of
revenues than one that covers only intra-EEA voyages as it covers more emissions.
The table below presents the additional revenues that could be generated at EU level in
2030 (as estimated in the PRIMES Maritime module). It considers different policy
options and geographical scope as well as the fact that purchasing ETS allowances from
other sectors does not generate additional revenues.
In the case of a levy, revenues are expected to be distributed at MS level, which will
decide on the revenue use.
105
The discussion on use of ETS maritime revenues is linked with the discussions on using
ETS auction revenues as an EU own resource.
Table 17: Additional revenues generated by policy options (billion Euro 2015)
POLICY OPTIONS
ETS or levy
additional revenues
in 2030 (billion EUR
2015)
Assumptions in
terms of ETS or
levy price in 2030
(EUR/tCO2))125
MAR1 –MINTRA 1.2 b EUR 45,5
MAR1 _MEXTRA50 2.4 b EUR 45,5
MAR1 –MEXTRA100 3.6 b EUR 45,5
MAR2 and MAR3_MINTRA 7 b EUR 268
MAR4 –MINTRA 1.2 b EUR 45,5
Source: PRIMES Maritime module
Impacts on the European internal market and trade
6.2.2.4
As detailed in Annex 10, no significant impacts are expected as regards the level playing
field. Due to the flag neutrality imbedded in all options, EU shipping operators would not
be put in a disadvantaged position compared to non-EU shipping operators. However,
threshold effects may occur between ships right below and above the 5.000 GT threshold,
particularly for general cargo ships and chemical tankers. By retaining the 5.000 GT
threshold, the competition effects between shipping and other transport modes, in
particular road, is being limited, as smaller ships are typically more exposed to such
modal shift.
As also recognised in the impact assessment accompanying the revision of the Energy
Taxation Directive, the current exemption of the maritime sector from the energy
taxation represents de facto fossil fuel support, which is not in line with the objectives of
the European Green Deal. This creates a fragmentation of the transport internal market
and distorts the level playing field across the different transport modes and the involved
sectors of the economy. A carbon price on the maritime sector will aim at ensuring a
level playing field among various transport sectors and improve the functioning of the
internal market by addressing unfair competition.
125
For MAR1 and MAR4, based on the lower band of carbon price ranges in the policy scenarios
represented by MIX.
106
Table 18: Description of possible economic impacts from a maritime carbon pricing
policy
Impacts Description
1) Transport costs
Maritime carbon pricing would lead to increased running costs for
shippers in the form of increased voyage costs (e.g. purchase of
ETS allowances, use of more expensive fuels) or capital costs (e.g.
investments in new vessels or technologies). At the same time, the
adoption of GHG mitigation measures and the possible use of
revenues can contribute to reduce these costs. In the mid- to long-
term, higher ship running costs are expected to lead to higher
freight rates.
2) Transport
choices
Higher transport costs may change shippers’ modal, route, and port
selection (detailed in the carbon evasion section 6.2.1.4).
3) Import prices
An increase in transport costs, if substantial, may increase import
prices of goods, since transport costs are a component of
commodities’ market price. However, this increase in import prices
is generally not proportional to increase in transport costs given
that import prices depend on several other factors, such as the share
of maritime transport costs in product prices and the ability of
importers to transfer costs to the consumers.
4) International
trade
If substantial, the changes in import prices of goods may trigger
changes in trade flows. States may trade more with geographically
closer producing/consuming States and trade less with more
remotely located trade partners. Another possible impact is the
increase in consumption of domestic products in place of imports.
Moreover, fossil fuels reduction as a result of implementing the
policy options will positively impact the trade balance.
Impact on trade
Due to its central role in enabling economic activity, applying a carbon price to shipping
would affect the whole spectrum of economic agents: raw material suppliers,
manufacturers and service providers, the shipping industry, retailers and eventually
consumers. The ultimate impact on these agents will depend on the relative levels of
costs, the savings generated by the policy measures in the long-term and investment
choices. The direct change in ship running costs resulting from the selected policy would
be expected in turn to impact on freight rates, depending on the ability to pass these
additional costs or savings through the maritime supply chain, as described in the table
below. Final consumers will only bear the portion of any cost variation that is passed-
through by manufacturers and retailers.
An analysis of ten relevant commodities for European trade (detailed methodology in
Annex 10) suggests that an open ETS covering 50% of extra-EEA emissions (option
107
MAR1 with MEXTRA50 scope) would have relatively small impacts on prices, even by
2050.
Even in the case of full cost pass-through, prices of commodities such as iron ore and
cereals would rise by less than 2% by 2050. Goods such as crude oil, organic chemicals
or perishable goods would largely be unaffected by an increase in shipping costs.
Furthermore, the change in price is not expected to be noticeable by consumers to the
extent to drive significant changes in their behaviour. Effects on demand is therefore
projected to be very limited, with some of the largest likely potential long-term effects
being shown for iron and steel and organic chemicals.
The table below presents a summary of the impacts on price and demand for each
selected commodity by 2030 and 2050.
Table 19: Summary table of impacts on commodity price and demand from open ETS
(MAR1)
Commodity
Change in price (%) Change in demand (%)
2030 2050 2030 2050
Crude oil 0.2% 0.6% 0.0% -0.1%
Refined petroleum products 0.5% 0.1 to 1.3% 0.0 to -0.4% -0.1 to -1.0%
Natural gas 0.4 to 0.5% 0.5 to 1.3% 0.0% -0.1%
Iron ore 0.3 to 0.7% 0.8 to 1.8% -0.1 to -0.2% -0.2 to -0.4%
Iron and steel 0.3 to 0.4% 0.6 to 1.1% -0.1 to -0.6% -0.4 to -1.5%
Cereals 0.3 to 0.6% 0.8 to 1.6% 0.0 to -0.2% 0.0 to -0.5%
Perishable goods 0.0 to 0.4% 0.0 to 1.0% 0.0 to -0.3% 0.0 to -0.8%
Office and IT equipment 0.2 to 0.4% 0.4 to 1.0% -0.1 to -0.4% -0.3 to -1.0%
Motor vehicles 0.0 to 0.4% 0.0 to 0.9% 0.0 to -0.1% 0.0 to -0.3%
Organic chemicals 0.0 to 0.3% 0.0 to 0.6% 0.0 to -1.0% 0.0 to -2.4%
Source: Ricardo analysis, GEM-E3, 2021
Note: A number of factors, including complex supply-chain relationships as well as supply and demand
factors influence the price of commodities. Political and economic uncertainties arising from the
withdrawal of the UK and the COVID-19 pandemic may also have strong implications for the assumptions
underlying this analysis, including consumption levels, the market share of producers, and ability of
producers to pass through costs onto consumers or the next step in the supply chain.
 Global perspective
The majority of the main global trade partners have a significant share of their export and
import trade flows with the EU, but only those where the main export products have a
108
low economic value to weight ratio (i.e. Russia, China, India) may be significantly
affected by the measures (see Annex 10 for figures). Some third countries are more
vulnerable to increases in maritime transport costs, as the Small Islands Developing
Countries and Least Developed Countries, and could be relatively more impacted by
increased transport costs with the EU. Their already lower connectivity makes them
already pay comparatively higher premiums in terms of shipping costs. Moreover, they
are more likely to export lower value products to the EU. Furthermore, some goods
imported to or exported from these countries could be transhipped in EU ports on their
route, leading to a price increase for non-EU voyages126
if those are covered under the
measure. The more costly the measures (MAR2, MAR3) and the broader the scope
(MEXTRA50 and MEXTRA100), the more likely the impacts will be on trade flows.
In contrast, third countries could benefit from the energy efficiency improvements
induced by carbon pricing, should these vessels operate globally and not only in the
EEA. The global shipping sector would also benefit from an EU context supporting
innovation, in particular if part of the revenues are used for that purpose. Some
neighbouring countries could also benefit from the EU initiative if evasion is taking place
(e.g. Morocco, Russia).
When it comes to global measures, a political economic analysis (see in Annex 10)
suggests that countries are more likely to agree on a global Market Based Measure once a
regional measure is implemented. Some countries could however see benefits for their
competitiveness if carbon pricing is only impacting the EU economy, but this is less
likely to happen in a context where major economies are committing to long term net
zero GHG emissions goals (e.g. Japan, China, Korea, the US, Canada, New Zealand).
The compatibility of an EU measure with a potential global measure is difficult to assess
at this stage as no decision on such a global measure will be taken before 2023127
.
Divergences may come from the different regulated entities, policy objectives and levels
of stringencies. Once an IMO measure is adopted, the EU measure should be reassessed.
It should also be mentioned that some international partners and stakeholders criticised
the intention of the EU to implement a regional market based mechanism claiming that it
would cause a negative impact on the global maritime decarbonisation discussion.
126
World Shipping Council communicated in the OPC that in a 2015 study, it was estimated that 12% of
the containers passing in EU ports were in transit.
127
as per the IMO Initial GHG Reduction Strategy
109
6.2.3 Social impacts
Impacts on employment
6.2.3.1
It is estimated that the EU shipping industry supported a total of 2 million jobs in 2018,
both through its supply chain and through expenditure of workers (ECSA, 2020). In
terms of direct jobs, the shipping sector employed 685,000 people in 2018 in various sub-
sectors across the EU. This includes 365,000 jobs (53%) in freight transport (including
towing and dredging), 255,000 jobs (37%) in passenger transport, plus a small number of
jobs in service and offshore support vessels; renting and leasing. The split of land to sea
is 17% - 83%.
Two types of impacts can be distinguished on jobs: the direct impact on employment and
the indirect impact, related to changes of skills and knowledge of employees.
It is expected that all options could lead to an increase in employment in the wider
shipping sector associated with the development of abatement technologies, new
sources of energy, digitalization and increased energy efficiency of shipping. A
closed ETS (MAR2) has the potential to increase jobs particularly in the shipping sector
as this option focuses on in-sector emissions reductions and therefore could result in
greater or more rapid innovation in the sector. MAR 4 requires carbon intensity
reductions and is therefore likely to further encourage innovation in the sector. Revenues
generated by the different options will support this tendency as long as revenues are
spent in maritime decarbonisation. An extra-EEA scope will have more actors
incentivised to innovate thus making it more likely to generate a larger impact on the jobs
market.
Employment in European ports and distribution hubs is expected to rise along with an
expected growth in trading activities128
. However, if carbon evasion occurs, it could lead
to a decreased level of shipping activities in certain ports and distribution hubs and lead
to a potential reduction in employment. This could potentially have wider reaching
impacts on the whole supply chain and the local community in which the port is located.
All policy options have little or no effect on the employment in the commodity sectors
which rely on shipping for trade. The impact on employment largely follows the pattern
of production in these sectors. The impact on jobs takes into account the direct effects
128
UNCTAD Review of Maritime Transport 2020
110
from increasing transportation costs (i.e. higher prices for the goods transported) but also
the indirect effects (higher production costs for industries which face higher costs of
intermediate inputs) and induced effects (changes in final demand due to changes in
income). The net impact of MAR1 applied on MEXTRA50 (including the FuelEU
Maritime initiative) is negative but very small (2,500 fewer jobs in 2030 and 10,000
fewer jobs in 2050 at the EU level). Sectors will be impacted differently, with e.g.
negative impacts on fossil fuel companies in 2050 and positive impacts for others (see
Annex 10). However, the small negative effects on certain commodity sectors will be
compensated by the overall positive impacts on employment in the broader maritime
sector associated with the increase in innovation and more energy efficient technologies.
In the longer term, as new technologies and alternative (low/zero carbon) fuels become
more prevalent, some job requirements will change and seafarers noticeably will
require adequate trainings (this was also highlighted in the public consultation). Such
changes will be linked to an increased digitalisation of the sector (e. g. smart routing)
which will increase the demand for information systems jobs in the shipping sector.
However, impacts on job requirements due to fuel changes would be primarily driven by
the FuelEU Maritime initiative.
Impact on vulnerable households
6.2.3.2
Certain goods that rely on sea transport, for example fuels used for road transport, can
make up a considerable proportion of household expenditure and variations in the price
of these commodities can therefore have direct impacts on the disposable income of
households. Changes in transportation costs could potentially affect household disposable
incomes both through the supply (commodity prices) and the demand channels
(employment and wages). The impact is differentiated by household income class
depending on the consumption pattern and sources of income of each class. The
estimated overall impact on welfare129
is negative but small (EUR 77 million at the EU
level in 2030, see detailed figures in Annex 10). When the effect is normalised to the
income of each household class then the lowest income households seem to have a higher
welfare loss than the average by 2050. However, the welfare loss for the low income
decile is still marginal (around 0.015% of their income in 2050). This impact is based on
MAR1 MEXTRA50, which also include the effect of the FuelEU Maritime initiative.
129
Measured using hicksian equivalent variation which is a monetised welfare indicator and shows how
much money must be given to the consumer to reach the new state of welfare. A positive number
indicates a welfare improving effect.
111
While the impact on vulnerable households is estimated to be minimal, they could also
potentially benefit from the generated revenues.
Extension of emissions trading to buildings and road transport/ all fossil fuels
6.3
This section analyses the environmental, economic and social impacts of the policy
options for a further extension of the scope of the EU emissions trading beyond maritime
transport as set out in Section 5.2.4 with a view to achieving the overall increase of
ambition of GHG emission reductions for 2030. This includes administrative feasibility
and related costs and synergies and coherence with related policies.
6.3.1 Environmental impacts
Impacts of option EXT1: Extension to buildings and road transport
6.3.1.1
Buildings and transport represent the bulk of fossil fuel CO2 emissions covered by the
ESR, with emissions of around 1.2 Gton130
. To achieve EU-wide -55% GHG emission
reductions compared to 1990, the two sectors are projected to achieve with the inclusion
in an emissions trading system and in the context of a policy mix a reduction of -43% by
2030 compared to the 2005 level131
. This compares to a reduction of -34% in the baseline
scenario which is without changes to the legislative framework, and would thus ensure a
further emission reduction by almost 10 percentage points. All MS would see additional
emission reductions (see Annex 13 Section 47 for an overview table of projected
emission reductions for all MS).
For comparison, under an extended ETS that would include current stationary sectors,
intra-EU aviation and road transport and buildings, these sectors would need to reduce by
55% compared to 2005 by 2030. In the context of the modelled policy mix, the two new
sectors would contribute one third of the absolute emission reductions between 2020 and
2030 of all sectors subject to EU carbon pricing to achieve the EU’s 2030 GHG target,
with the other two thirds of the reduction falling upon the sectors in the existing ETS.
Covering the new sectors under an emissions trading system would provide for increased
certainty in delivering these GHG emissions reductions, since the cap sets a limit on the
emissions that economic operators can account for by surrendering allowances, with any
130
Average 2016-18 emissions; See also Annex 5 Section 10.
131
Results of the MIX scenario. In MIX-CP emission reductions are with -42% similar.
112
excess rendering them liable to high fines. Such certainty is not possible through other
types of measures such as taxation. With buildings and road transport CO2 emissions
included in an ETS, around three quarters of the current total GHG emissions would be
covered by EU-wide caps. Considering the evolution of emissions, the share of total
emissions covered by emissions trading would be more than two thirds by 2030, twice as
much as the existing ETS alone132
.
In an upstream system, it is important that the CO2 price signal is passed on to the end-
consumers of the fuels to create the right incentives for them to reduce emissions. As
further analysed in Annex 5, Section 12.2, it seems very likely that this will be the case.
End-consumers would thus have an additional economic incentive to reduce their direct
emissions. This incentive is likely to counter possible rebound effects on emissions from
efficiency improvements and the resulting cost reductions. It is likely to rise the lower the
emission reductions through other measures are. It would also help in diffusing
decarbonisation technologies more quickly, because the carbon price would reduce the
payback time for energy efficiency or renewable energy investments in proportion to the
increase in the fuel price resulting from adding the carbon price.
The environmental impact in MS also depends on the additionality to national measures
under the ESR and to national carbon pricing measures, i.e. whether those MS that have
carbon taxation will reduce/abolish them with the introduction of an EU wide carbon
pricing system. In this context, the introduction of carbon pricing could foster additional
supportive measures133
. In 2020, only seven MS had explicit national carbon pricing
instruments for buildings and transportation fuels in place: Denmark, Finland, France,
Ireland, Portugal, Slovenia and Sweden. Prices range from 19 EUR/tCO2 in Slovenia to
around 115 EUR/tCO2 in Sweden. The German national emissions trading system started
in January 2021, with fixed increasing carbon prices initially starting from 25 EUR/tCO2.
The relative price impact, and therefore environmental impact will moreover be higher in
MS where the existing level of other taxes on fossil fuels is low. Germany has indicated
its interest to have its system replaced by an EU-wide system.
Specific considerations for the buildings/ heating sector
6.3.1.1.1
Examples of building technologies, which could be implemented profitably at carbon
prices in the range of the PRIMES modelling results134
are early replacement of boiler
132
The exact percentage depends on if and how maritime transport would be also included.
133
CERRE, Feasibility and impacts of EU ETS scope extension, December 2020.
134
2030 carbon price of EUR2015 48 in MIX and EUR 80 in MIX-CP. Both scenarios include a mix of
policies.
113
and other heating or cooling technical building systems, integrated heating and domestic
hot water, insulation solutions, water heater replacements, ground source electric heat
pumps for the commercial sector, biomass heating or electric heat pumps in the
residential sector.
Even though demand for heating fuel is very inelastic to fuel prices in the short term, in
the longer term household energy demand has been more price elastic, meaning that
demand responds to a carbon price with elasticity values ranging from 0.23 to 0.5 in the
EU and its MS135
.
Tackling other market barriers and failures in this sector, for instance due to split
incentives, lack of access to finance, and lack of information, e.g. through the EED and
EPBD revision, as well as the measures that would be encouraged by the Renovation
Wave initiative (see also Section 6.3.5.2), could lead to a greater responsiveness to
pricing but are not reflected in the elasticities. The IA accompanying the 2030 CTP has
shown that adding carbon pricing for emissions from buildings to an unchanged current
policy mix would deliver a ten percentage points higher reduction in emissions by
2030136
.
Specific considerations for the road transport sector
6.3.1.1.2
For the transport sector as well, it is important to emphasise that an emissions trading
system should be considered only as a complementary measure to other transport
policies: given the prevalence of a variety of market failures in the transport system, a
mix of instruments will be required to help transform the sector. The most important
instrument for tackling these issues are CO2 emission standards for vehicles, for which
the revision is the object of a parallel IA, which indicates that strengthened standards as
of 2030 could deliver alone around 40 to 50% of the additional emission reductions in
road transport in 2030137
. The remaining reduction is delivered by all the other policies in
the MIX scenario, including carbon pricing and regulatory measures to increase the
market uptake of renewable and low carbon fuels. The CO2 standards could usefully be
complemented by pricing incentives which impact the fuel use in the entire vehicle stock
(existing and new vehicles) and could increase the demand for more fuel-efficient
vehicles (see also Section 6.3.5.2). Increasing the level of the CO2 standards will
contribute to increasing emission reductions and thus lower the carbon price required to
135
ICF et al. (2020).
136
Comparing the carbon pricing focused scenario CPRICE, with 2030 carbon prices of EUR2015 60, with
the baseline scenario used in that IA.
137
Amendment of the Regulation setting CO2 emission standards for cars and vans.
114
achieve the emission cap for the new ETS sectors set as described in Section 5.2.4.3. And
lower CO2 standard levels will contribute to increase the carbon price to achieve that cap.
Such pricing incentives could in addition support fuel shift towards low-carbon fuels,
modal shift, as well as operational efficiency improvements, for all road transport. The
carbon price would shorten the payback time on investments in more efficient vehicles
and thus increase the incentive to switch to zero-emissions vehicles. Such changes and
the removal of market barriers cannot be incentivised by either carbon pricing alone or
standards alone.
Based on historical data, price elasticities (or how demand responds to a carbon price) in
transport have been estimated to lie between 0.17 on average in the short term and 0.34
in the long term138
. This would lead to reductions of around 1-3% of the fuel demand for
the estimated carbon prices predicted up to 2030. The long-term elasticity of freight
transport is higher than for passenger transport.
However, if policies tackling market failures and barriers are in place and transport
decarbonisation is tackled in a holistic approach, emissions could be more responsive to
pricing than predicted, implying that elasticity based estimates of emission reductions are
on the conservative side. Furthermore, the elasticity based impact estimates could be too
low in a situation where the system is close to a transition to electrification, where, if
price expectations help convince a segment of the market to move to zero emission
vehicles, the market introduction of these vehicles could be sped up. In this medium to
long term, electrification of the road transport system would lead to inclusion of part of
the sector into the existing ETS by default.
Examples of transport technologies which could be implemented profitably at carbon
prices in the range of the modelling results are improved aerodynamics, engine
efficiency, tyre resistance, reducing the weight of vehicles, more blending of biofuels as
well as to a certain extent the switch to electric vehicles139
.
Impacts of option EXT2: Extension to all fossil fuel combustion
6.3.1.2
For an emission scope of all fossil fuels outside of the existing ETS (except maritime
transport), current CO2 emissions are around 1.4 Gton and the modelled level of
reduction of emissions by 2030 compared to 2005 is in MIX also -43%. Two main
sectors would be added to the scope of emissions under option EXT1: small emitters
138
ICF et al (2020).
139
Results from bottom-up modelling by ICF et al. (2020), using carbon prices between €30 and €90.
115
from the industry sector (around 60% of the emissions added to the scope compared to
EXT1140
) and off-road vehicles and machinery in agriculture, forestry and construction.
Fugitive emissions141
would remain in the scope of the ESR.
Reductions compared to modelled emissions in 2025 would be over 24% in 2030,
making the speed of reduction in the second half of the decade roughly comparable to
that expected from the road transport and buildings sector put together.
In the agricultural and forestry sector mitigation options such as biofuels are available,
however with qualifications: for instance, in the case of agriculture and forestry tractors
electrification has not yet achieved any significant market penetration due to the high
investment costs and a limited offer. In the non-ETS industry, most emissions are caused
by gas-generated heat generation for which electric heat is not always a possible
alternative for these companies142
. PRIMES results might overestimate the reductions, as
the separation of small emitters in the modelling is difficult. Other analyses143
find
mitigation costs quickly exceeding €100/tCO2, and higher than for EXT1.
Linking options
6.3.1.3
Neither ELINK1 nor ELINK2 would change the overall environmental outcome if
existing and new ETS are looked at together. Abatement potentials analysis144
indicates
that if the current EU ETS and the new ETS for road transport and buildings were to be
linked from the start as in ELINK2, and if cost-effective mitigation potentials turned out
to be more difficult to realise in new ETS sectors, allowances would flow from the
former to the latter.
6.3.2 Economic impacts
The general economic impacts of increased ETS and ESR ambition and various scenarios
were assessed in Section 6.4 of the IA accompanying the 2030 CTP. The extension of
emissions trading to the new sectors can assist in incentivising the cheapest reductions
across MS, improving cost-effectiveness in these sectors145
.
140
Sources : PRIMES. ICF et. al. (2020).
141
Fugitive emissions are emissions of gases or vapors from pressurized equipment due to leaks and other
unintended or irregular releases of gases, mostly from industrial activities.
142
ICF et.al. (2020).
143
ICIS: Carbon Market Spotlight. Discussing sector extension options for the EU ETS. March 2021
144
ICF et. al. (2020).
145
The Effort Sharing Regulation Impact Assessment includes an analysis of sectoral energy system costs
of the whole Fit for 55 package per Member State group including also the transport and building sector.
116
Introducing carbon pricing of fossil fuel use can contribute to significant savings of fossil
fuel imports (of around €83 billion over the period 2021 to 2030) notably in transport but
also buildings146
. It also contributes to improvements of energy security by reducing the
energy dependency ratio (e.g. for 2030 from 54.5% in REF to 52.9% in MIX-CP).
Strengthening other policies in the mix improves this further (2030 in MIX: 52.5%).
Option EXT1: Extension to buildings and road transport
6.3.2.1
Impact on investment
6.3.2.1.1
Carbon pricing increases energy costs for consumers but at the same time raises revenues
which can be used for reinvestments, for stimulating climate action and to address social
or distributional impacts of carbon pricing. The annual revenues could be large, and,
once the new ETS is operational, significantly higher than in the existing ETS (see
Annex 13), as all the allowances in the new ETS would be auctioned.
The IA for the 2030 CTP147
recognised that there is an investment challenge linked to the
higher climate ambition in particular in the residential and tertiary buildings sectors
irrespective of the scenario concerned. It found that the additional investments needed in
the MIX scenario to meet the higher ambition targets compared to baseline would remain
skewed towards the demand side, dominated by residential investment. In order to
achieve the additional level of private and public investment, EU wide around EUR 40bn
for residential and around EUR 15bn for tertiary would need to be mobilised annually.
The bulk of the increase is required to improve thermal efficiency of buildings and to
reduce share of fossil fuels in heating, with substantial additional investment also in
office buildings in the tertiary sector for similar purposes.
Concerning the residential sector specifically, additional investment will be required so
that total investment expenditures as a percentage of household consumption are likely to
rise. Table 20 below gives an estimate of rises in annual capital cost as a percentage of
consumption between Reference, and the MIX and MIX-CP policy scenarios. These
estimates cover cumulative impacts of ETS extension and other policies, e.g.
strengthened energy efficiency and renewable energy policies. The expenditure rises are
provided as an average characterising different groups of MS: those with a GDP per
capita below 60% of the EU average, those with a GDP per capita between 60% and
100% of the EU average, and those with a GDP per capita above the EU average.
146
See SWD(2020)376, Section 6.4.1.4, comparing results of the carbon price driven CPRICE scenario,
with similar 2030 carbon prices as MIX-CP, with BSL.
147
See Sections 6.4.1.3 and 9.5.2.2.
117
The table shows that residential investment expenditures are expected to increase in 2030
in the EU by 0.4 to 0.7 percentage points of household income compared to baseline. In a
more carbon price driven policy setting, investment expenditures increase less strongly
than in a more balanced policy mix148
, while fuel expenditures show the opposite picture
(see below Section 6.3.3.1.1). Investment increases in MIX are well above EU average in
MS with a GDP per capita below 60% of the EU average. However, large fuel
expenditure reductions would be realised as well, if such investment expenditures, in
housing stock renovation and energy efficient equipment, would take place.
Table 20: Annual residential sector capital costs as a percentage of household
consumption in 2030, percentage point difference compared to Reference
Annual residential sector capital
costs
All households Lower income Households
EU
MIX 0.71% 1.43%
MIX-CP 0.38% 0.70%
MS < 60%
GDP/Capita
MIX 0.97% 1.99%
MIX-CP 0.81% 1.62%
MS between 60-100%
GDP/Capita
MIX 0.81% 1.92%
MIX-CP 0.25% 0.48%
MS > 100%
GDP/Capita
MIX 0.62% 1.14%
MIX-CP 0.36% 0.62%
Source: PRIMES.
With regards to road transport, the Sustainable and Smart Mobility Strategy (SSMS) and
the IA accompanying the 2030 CTP have recognised the central importance which
investments aimed at boosting demand for zero- and low-emission vehicles and at
accelerating the rollout of recharging and refueling infrastructure for these vehicles will
play in achieving the goal of decarbonising significantly road transport by 2030.
For example, the SSMS estimated that by 2030, 30 million zero-emission vehicles could
be on the road in the EU and require 3 million publicly accessible charging points (of
which 2 million to be added between 2025 and 2030) together with the development of
148
As the Impact Assessment accompanying the 2030 CTP has shown, investment expenditures increase
most strongly in a -55% policy scenario without extended carbon pricing.
118
home charging. The investment required for the installation of this number of public
charging points, a (which should include equipment, installation and grid upgrades), also
tackled by the revision of Directive 2014/94/EU on the deployment of alternative fuels
infrastructure, and for home charging should be significant149
.
Impact on fuel costs, consumers and economic actors
6.3.2.1.2
The introduction of a carbon price would increase end-consumer prices for fossil fuels
(household heating and cooling expenditure and gasoline for vehicles) to a different
degree depending on the carbon price levels and on the underlying relative level of
existing other taxes on fossil fuels.
Figure 8: Share of Household fossil fuel energy expenditure in total final consumption
expenditure in EU-27 countries grouped by GDP per capita (above EU-27 avg, 60-100%
of EU-27 avg, <60% of EU-27 avg), and country group averages, in Decile 1, 3 and 5, %
Source: ICF et al. (2020) (forthcoming) assessment for the European Commission – Potential extension of
the EU ETS. Data is for the latest available year for all the countries (oldest year: 2010, latest year: 2015).
Split into country groups by GDP/capita, within group ordered by share of expenditure in total final
consumption expenditure in Middle class households (Decile 5), largest to smallest. Fossil fuel expenditure
is without carbon pricing.
The impact of this increase in fuel prices on fuel costs is projected to be mitigated by an
overall decrease in the demand for fossil fuels. In addition, the relative increase in fuel
costs has also to be considered in relation to the current share of fossil fuel costs in
149
See also T&E RechargeEU, Jan. 2020. ICCT working paper 2019-14. The SSMS also targets 1000
public hydrogen refuelling stations by 2025.
119
household expenditure which differs between MS and household groups, as shown in
Figure 8.
In the buildings sector, the impact will be larger for households that use coal for heating,
and even more so in lower income MS that have relatively cheap and low taxed coal
available.
With the introduction of a carbon price, coal end user prices would increase significantly
(see Section 6.3.3.2) in the low income MS concerned. However, at EU level the share of
coal in the overall mix of fuels used for heating is relatively small even though the share
of relative emissions are higher (see Figure 11) so that targeted measures could be taken
to ease the transition for the consumers concerned and support cleaner systems such as
(geothermal) heat pumps.
Figure 9: Energy consumption of the residential sector by fuel (EU-27)
Source: PRIMES, MIX scenario
By contrast, at a similar level of carbon price the impacts on consumer prices for natural
gas and for heating oil are much lower than for coal, because end user prices are
generally higher also in lower income MS (see Figure 13 and Figure 14 in Section 6.2.3.1
for the impacts on end consumer prices).
In the road transport sector, the impact on consumer prices (see Section 6.3.3.1 for more
detail) and therefore on fuel costs will be largest in those MS which currently apply the
lowest excise duties on diesel and on petrol, but the situation is more contrasted than for
the buildings sector as several lower income MS apply high taxes on petrol and diesel.
Clearly, the cost efficiency of the ETS at achieving additional emissions abatements
might be limited by the current heterogeneity of the national fuel tax landscape (see also
Annex 5, Section 16.4).
120
In addition, the initial share of transport fuel costs within total final consumption
expenditure tend to be the higher at least for medium income households, and clearly
lowest for the poorer households (Decile 1)150
. Largely explained by this, an increase in
transport fuel costs would have the relatively largest impact for medium income
households, while the relative increase in transport fuel expenditure (at the expense of
other types of expenditure) is also notable for most countries’ lower-middle class
households (see Figure 11).
Figure 10: Share of Household transport fuel expenditure in total final consumption
expenditure in EU-27 countries grouped by GDP per capita (above EU-27 avg, 60-100%
of EU-27 avg, <60% of EU-27 avg), and country group averages, in Decile 1, 3 and 5,
%)
Source: ICF et al. (2020). Fossil fuel expenditure is without carbon pricing.
Another impact for consumer choice is that covering building emissions with a new ETS
would correct to some degree the current absence of a level playing field in terms of
carbon pricing of domestic fossil-fuelled heating systems with district heating and
electric heating already now covered by the ETS. The latter amount to around 30% of EU
direct and indirect heating emissions, with significantly higher shares in a number of MS.
Covering road transport emissions with the new ETS would also correct the absence of a
level playing field between fossil-fuelled road transport and electric vehicles and
electrified rail, which is already covered by the existing ETS.
150
ICF et. al.
121
A carbon price of around 48€ as in MIX for 2030151
would increase fuel prices by 11 ct/l
(petrol) to 13 ct/l (diesel) which seems unlikely to drive much refuelling and tank tourism
out of the EU. It can be safely assumed that transport companies already exploit existing
fuel price differentials with countries neighbouring the EU, and that the fuel price
increase from the carbon price would not change the situation in any significant way152
.
Impact on the business of regulated entities
6.3.2.1.3
As described in Section 5.2.4.3, the extension of emissions trading to the new sectors
would be an upstream system, whereby the compliance obligation concerns the act of
releasing on the market fossil fuels for combustion in the sectors concerned. Therefore
the regulated entities would not be the emitters and would pass on the carbon cost to the
individual emitters, but would also bear the compliance costs.
In order to acquire the correct number of allowances, the regulated entities must estimate
the fuel volumes they will supply. They will need to manage their carbon allowance
needs and may need to trade allowances if they have a surplus or shortage. They may
need to call upon advisors such as corporate banks to provide them with advice and
services to manage their carbon needs and to hedge against the risk of rising prices. This
would come at a cost.153
There are also costs for regulated entities associated with the
monitoring and reporting of fuel quantities (see Section 6.3.4). The question arises
whether there is a need to provide some kind of exemptions for small entities. This
question is especially pertinent with respect to the regulation of coal, as there are many,
sometimes very small coal suppliers which until now are hardly regulated.
Excluding small entities from the new ETS may seem advantageous in terms of limiting
burden and impact for the entities concerned; however, this advantage would have to be
weighed against the resulting environmental impact. Also, a system with de minimis
thresholds such as the one used for the ETS does not seem appropriate in the case of the
fuel-supply based new ETS. In the case of the new ETS, there is a risk that such de
minimis approach would trigger avoidance of the rules by organising businesses such
that they remain under the thresholds. Alternative mechanisms to reduce the burden can
be considered, such as facilitating the access by small entities to auctions for example by
allowing them to form business groups that can bid on their behalf in auctions.
151
In MIX-CP with less stringent complementary policies the 2030 carbon price for new ETS sectors is
EUR2015 80.
152
ICF et. al. (2020).
153
See in relation to the German domestic emissions trading system: IW-Gutachten, Nationaler
Emissionshandel für Verkehr und Wärme.
122
Option EXT2: Extension of emissions trading to all fossil fuel
6.3.2.2
combustion
The economic impacts of EXT1 apply also for EXT2. Annual ETS revenues for the
period 2026 to 2030 could also be significant (see Annex 13) and higher than under
EXT1, depending on the extent of provisions against the risk of carbon leakage for small
industry. As mentioned in Section 6.3.1.2, in this option around 60% of the emissions
added to the scope of EXT1 would come from small industry.
Small emitters from the industry which fall under the scope of the ETS Directive could
and have largely been opted out subject to measures that should achieve an equivalent
contribution to emission reductions as if they would have under the EU ETS. The reason
for such exclusion was that administrative costs for full MRV154
were found to be too
high for these emitters compared to the carbon price for the emissions. Another reason
for these SMEs was that for some sectors international competitiveness is of high
concern, and the additional administrative complexity and costs which would arise at all
levels (local, national and EU) if carbon leakage measures are required could make
equivalent policy approaches more efficient155
.
A reason for including the small industry as in EXT2 could be if the equivalent measures
were to deliver insufficient reduction in emissions. However, the monitoring under the
ETS Directive for the opted-out installations subject to equivalent measures under Art. 27
suggests that these measures deliver emission reductions as intended156
. In addition,
where there is a risk of carbon leakage for SMEs, a framework for compensation would
need to be considered (see Section 6.3.4) which is likely to generate additional
administrative complexity and costs in view of the large number of these small or very
small emitters.
Linking options
6.3.2.3
According to the abovementioned considerations on the differences in emission
abatement potentials between sectors, and if complementary policies were not as
effective as assumed in MIX, prices in the new ETS could be quite different and
potentially higher than in the existing ETS. This is illustrated by MIX-CP where the 2030
carbon prices are EUR2015 52.5 in the current ETS and 80 in the new ETS sectors.
154
Articles 27 and 27a of the ETS Directive allow for simplified MRV.
155
Umweltbundesamt et al.; Evaluation of the EU ETS Directive, 09/2015.
156
An estimate gives emissions reduction between the average of 2008-2010 and 2018 of around 18%.
123
Allowing for allowances to flow from the new ETS to the existing ETS as in ELINK2
could contain the abatement costs, but it could put pressure on industrial sectors.
A full linking of the two systems as in option ELINK1, , could allow limiting the risk of
high prices in the new ETS and the same GHG reductions could be achieved at lower
cost as without linking157
. However, conversely, linking the systems could increase the
risks for the current EU ETS. Linking the systems gradually, once the price in the new
system has stabilised, could mitigate these risks.
6.3.3 Social impacts
Impact on employment
6.3.3.1
The macro-economic analysis conducted as part of the Impact Assessment accompanying
the 2030 CTP concluded that the impact of an increas if climate ambition to -55% on
aggregate employment would be relatively limited. The employment impacts is positive
if carbon pricing revenues are recycled to either lower other taxes or to support energy
efficiency investment158
.
An extension of emissions trading in both EXT1 and EXT2 options is hence expected to
have small effect on the employment as a whole. However significant shifts in the
sectoral composition of employment and associated job changes that workers will have to
go through are expected over the next decade, which would generate challenges for the
labour force and potential mismatches between skills available and the skills
requirements. These have been analysed in the Impact Assessment underpinning the
2030 CTP. Oil and gas supply belong to the sectors with significant projected
employment decreases.
Table 21: Impacts of 55% reduction on EU sectoral employment related to buildings,
transport and other fossil fuel use (deviation from baseline across scenarios, in percent)
Employment vs. baseline, 2030 Fragmented action Global action
Oil -5.2 | -3.1 -7.9 | -5.7
Gas -11.2 | -8.5 -7.9 | -5.8
Construction 0.3 | 0.6 -0.1 | 0.4
157
ICF et al. (2020).
158
SWD(2020)176, Section 6.4.2
124
Other equipment goods -0.3 | 0.4 2.0 | 2.8
Transport (land) -0.5 | 0.0 -0.7 | 0.1
Market services -0.3 | 0.1 -1.4 | -0.7
Source: SWD(2020)176, JRC-GEM-E3 model (see scenario explanation in Section 6.1.3.1)
Sectors that are likely to gain most significantly include construction, notably through
more green employment. The need for measures to increase the energy efficiency and
decarbonise heating of buildings triggers higher employment in construction and often
also in the equipment goods industry. Employment in land transport is either stable or
could slightly decrease. Market services, by far the largest provider of jobs in the EU,
would be affected relatively little.
Impact on lower-income and vulnerable households
6.3.3.2
Option EXT1: Extension of emissions trading to buildings and road transport
6.3.3.2.1
Energy costs and expenditure on transports represents an important share of total final
expenditure of lower to middle-class households, even in rich countries. The introduction
of emissions trading in road transport and buildings will increase the price of energy and
therefore the energy costs for households, independently from their income. According to
Eurostat data on consumption expenditure159
, energy expenditures rise with income, but
as a share of disposable income, energy expenditures decline with higher incomes.
This means that an emissions trading system for buildings will not affect households
equally, but would likely have a regressive impact on disposable income, as low income
households tend to spend a greater proportion of their income on heating160
. In addition,
the introduction of a harmonised carbon price will have a very different impact on
consumer prices in MS depending on the existing level of taxes on the fuels concerned,
as pre-tax prices of fossil fuels are comparable across MS.
159
ICF et al. (2020); Eurostat Structure of consumption expenditure by income quintile and COICOP
consumption purpose. https://ec.europa.eu/eurostat/web/products-datasets/product?code=hbs_str_t223
160
ICF et al. (2020).
125
Figure 11: Impact of carbon price on consumer prices per Member State – heating oil)
Source: Oil Price Bulletin, EU Commission. Average June 2020 –May 2021 pre-tax prices and taxes and
assuming a carbon price of EUR 48 /tonne CO2. Percentages mentioned in Figures 11 and 12 represent
the increase in consumers prices due to the extended emissions trading
Figure 12: Impact of carbon price on consumer prices per Member State – natural gas)
Source: Eurostat, Note: CY, MT and FI do not report natural gas prices in the household sector. 2020
prices assuming a carbon price of EUR 48 /tonne CO2.
126
With regards to coal, as it is very little taxed the impact on consumer prices of a EUR 48
carbon price would be comparatively much larger than for natural gas or heating oil with
an EU average impact estimated at 52% and up to nearly 100% in few Member States.
For the residential sector specifically, energy poverty issues are of special importance to
investigate. For this it is important to see how the described fuel price increases translate
into increased fuel expenditures for different household groups, which depends on the
investments made to reduce fuel use. Figure 8 in Section 6.3.2.1.2 has shown based on
statistical data that the impact on the lowest income decile is more significant than on the
third decile and fifth decile. Table 24 below gives an estimate of rises in fuel
expenditures as a percentage of household consumption expenditures between Reference
and the MIX and MIX-CP policy scenarios. These estimates cover cumulative impacts of
emissions trading and other policies, e.g. the revision of the energy taxation directive.
The expenditure changes are estimated for low, medium and high income groups as
defined according to modelling, and provided for three GDP groups of MS: those with a
GDP per capita below 60% of the EU average, those with a GDP per capita between 60%
and 100% of the EU average, and those with a GDP per capita above the EU average.
The figures between the income groups are not necessarily comparable, as the high,
medium and low income groups are defined relative to the average income of a MS. Note
that there are therefore uncertainties involved in the aggregation within the groups.
Table 22: Fuel expenditure only as a percentage of household overall consumption
expenditure in 2030 compared to Reference
Fuel Expenditures only
Lower
income
Households
Medium
income
households
High
income
households
All
households
EU
MIX -0.27% -0.11% -0.04% -0.12%
MIX-CP 0.07% 0.05% 0.07% 0.06%
MS < 60%
GDP/Capita
MIX 0.15% 0.08% 0.15% 0.12%
MIX-CP 0.62% 0.30% 0.28% 0.36%
MS between
60-100%
GDP/Capita
MIX -0.42% -0.14% -0.07% -0.18%
MIX-CP -0.09% -0.02% 0.01% -0.02%
MS > 100%
GDP/Capita
MIX -0.29% -0.13% -0.07% -0.14%
MIX-CP 0.04% 0.04% 0.04% 0.04%
Source: PRIMES.
Overall fuel expenditures as percentage of income remain near stable. In the more ETS
driven policy scenario (MIX-CP), they are projected to increase EU-wide on average by
0.06 percentage point. In the more balanced policy scenario (MIX), fuel expenditures as
127
percentage of income are likely to drop by 0.12 percentage point. This means that there
can be fuel expenditure savings despite the price increases, under the condition that the
cost-effective investments to achieve -55% emission reductions (see above Section
6.3.2.1.1) are realised and hence less fossil fuels are used.
As Table 20 in that section also shows that in a cost-effective policy mix the investment
expenditure increases for lower income households would be across all MS income
groups over double of the average household. If these investments are realised, then on
average for lower income households (drop of 0.27 percentage points in MIX) the picture
looks better than for the average household. For the low-income Member State group the
share of fuel expenditures in household consumption expenditures rises across all income
groups, by around 0.12 to 0.36 percentage points on average and by 0.15 to 0.62
percentage points for low-income households.
According to the modelling results, the general key challenge in the residential sector is
hence to ensure that the necessary energy efficiency, refurbishment and renewable
energy investments (see Table 20 in Section 6.3.2.1.1 above) take place including in
lower-income households. Taking this into account, the challenge of fuel price increases
remains limited and focused on lower-income households in low-income MS.
In the case of house heating energy expenses, there is a large variance across countries
due to the initial share of natural gas in households’ energy mix.
Road transport impacts are mixed – typically it is the ‘lower-middle’ and ‘middle’ parts
of the household income classes where the proportion of spending on transport is highest
(because the lowest income households do not have access to a private vehicle)161
.
161
ICF et al. (2020).
128
Figure 13: Impact of carbon price on consumer prices per Member State – (diesel and
petrol for road transport)
Source: Oil Price Bulletin, EU Commission. Average June 2020 –May 2021 pre-tax prices and taxes and
assuming a carbon price of EUR 48 /tonne CO2
Revenues from the auctioning of allowances can be used through different redistributive
mechanisms as compensation to the regulated entities and the consumers (reduction in
129
income tax, employer’s social security contributions and VAT), invest in energy
efficiency or in renewables, or other options. Also rules mitigating excessive short term
price increases could be considered (see Annex 5, Section 11).
The social impacts could be mitigated with a multi-faceted policy approach at EU and
national levels. At EU level, the initiatives include the Energy Poverty Observatory162
which supports MS’ efforts in alleviating and monitoring energy poverty; the Recovery
and Resilience Facility163
has earmarked significant expenditure for climate investment
and the green transition; and the European Pillar of Social Rights action plan aims for a
socially fair and just green transition for all Europeans. At national level, the NECPs
submitted by the MS pursuant to the Governance Regulation164
give a detailed overview
of existing policies tackling energy poverty. Mitigation policies and measures at national
level can be of the following types: aim at improving the energy situation of households
by financing improvements in energy efficiency; provide financial assistance to reduce
energy bills; provide advice view energy audits; introduce measures such as protection
against disconnection for vulnerable households.
The Impact Assessment for the Revision of the Energy Taxation Directive can provide
further insight, as it has considered the impacts on households per income decile in
selected countries. While initial impacts can be mildly regressive, the impact assessment
shows that revenue recycling can, in theory, fully resolve the distributional issues which
arise, confirming a similar result obtained in the IA accompanying the 2030 CTP.
Option EXT2: Extension of emissions trading to all fossil fuel:
6.3.3.2.2
In addition to the impacts explained above under EXT1, EXT2 would cover more
sectors, such as agriculture. It can therefore have a larger impact on rural areas.
Other social impacts
6.3.3.3
In the EU heating of buildings is a main sectoral source of fine particles with a diameter
of 2.5 μg or less (PM2.5), while road transport is the main sector producing NOx
emissions165
. These pollutants have significant adverse effects on human health and can
cause respiratory and cardio-vascular diseases, among others. They are also at the root of
premature deaths. An ETS extension as under EXT1 and EXT2 likely contributes to
162
C(2020)9600 Commission recommendation on energy poverty, October 2020.
163
Regulation (EU) 2021/241.
164
Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action.
165
European Environment Agency: Air quality in Europe – 2020 Report. EEA Report No.9/2020.
130
positive health impacts due to overall reduced air pollution from fossil fuel use. For
example, in 2030 premature deaths and life years lost due to PM2.5 emissions are around
8% lower in MIX than in REF166
. This typically benefits lower-income and vulnerable
households more as they are more affected by air pollution167
.
6.3.4 Administrative impacts
Extending emissions trading to the road transport and building sectors or to all fossil
fuels, implies setting up a completely new system alongside the existing ETS, with
another type of compliance companies (fuel suppliers rather than final emitters). This
brings challenges from a regulatory and administrative point of view, as well as costs for
the public sector and for the regulated entities. For both options EXT1 and EXT2, one-
time administrative costs, regularly occurring administrative costs and cost for disclosure
and sanctioning can be identified due to the establishments of a new ETS system.
Lessons learnt form the experience of existing ETS can be taken into account and
existing infrastructure (such as the Registry) can be used. Additionally, at least for oil
and gas, entities that could be regulated under the new ETS are already regulated for
other policy purposes, and therefore there could be room to use the already existing
corresponding infrastructure also for the purposes of meeting their obligations under the
new ETS.
Extension of emissions trading to the road transport and building sectors or to all fossil
fuels will require to put in place and design a robust and feasible system for Monitoring,
Reporting and Verification (MRV) of emissions. The monitoring and reporting rules that
would be adopted for the upstream regulated entities would in principle not be more
complex as compared to the existing ETS system. This is because in the new sectors,
only sales of largely standardised fuels for combustion purposes would be monitored. As
the Impact Assessment accompanying the 2030 CTP articulates, the calculation of
emissions will continue to rely on emission factors. To the extent possible and subject to
further analysis, the existing ETS system of standardised fuel emission factors per energy
content would be applied.
Provisions related to auctioning, to the use of the Union Registry and to enforcement and
compliance measures will also need to be put in place. The infrastructure of the existing
166
Annex 3 of the Effort Sharing Regulation impact assessment (SWD(2021)611) analyses benefits per
Member State groups.
167
EEA: Unequal exposure and unequal impacts: social vulnerability to air pollution, noise and extreme
temperatures in Europe, EEA Report No 22/2018.
131
ETS, even if used to a certain extent, will need adaptations and reinforcement. Because
the ETS regulatory framework has proven to work well and in light of the fact that a
future linking and/or merging of the two systems is a possibility, it is appropriate to
design the regulatory framework for the new ETS along the same lines and make it as
compatible as possible with that of the existing ETS (Registry, MRV rules, auctioning
rules, compliance cycle).
In the case of option EXT2, a framework on free allocation or alternative compensatory
measures would need to be considered in addition, because of the risk of carbon leakage
at the level of the end-consumers of the fuel.
Secondly, an extension to new sectors will create cost related to the setting in place and
the operating of the system for regulated entities and for the competent authorities,
including in terms of human resources and IT infrastructure. For regulated entities,
participation in the system will at least trigger costs related to obtaining the GHG permit,
open and maintain registry account(s), comply with the MRV rules (preparing and
updating the monitoring plan, implementing its procedures, monitoring and reporting,
verification fees charged by the independent verifier), and purchasing and surrendering
allowances. Administrative costs include fees for the use of the registry, which are
different across MS168
.
Public competent authorities will have at least costs related to the preparation,
implementation and running of the system, and the establishment of a compliance
system. Non-recurring costs to implement the system can also be foreseen as setup
registry accounts and processes. It can also be foreseen recurrent costs as the helpdesk
function, approval of permits, monitoring plans, review verification statement, registry
handling and other costs as preparing guidance documents, translations, meetings,
website updates. The number of regulated entities administered by each MS, the
administrative structure and the allocation of responsibilities among the different levels
of administration can also entail different costs among MS.
Both under option EXT1 and EXT2, as the system would be based on volumes of fuel
supplied, the new MRV system would share more similarities with the MRV applicable
to aviation both in terms of costs and obligations. Under option EXT2, free allocation for
small industry would increase administrative costs for public authorities as well as for
small industry.
168
https://ec.europa.eu/clima/policies/ets/registry_en#tab-0-1
132
Both for EXT 1 and EXT2, it is expected that administrative burden will be moderate in
the case of oil and gas, and high in the case of coal, due to the specificities of the supply
chains. Further details, together with an illustrative cost estimate for coal under EXT1 are
presented in Annex 5, Section 12.3.
As mentioned in Section 5.2.2.3, the point of regulation needs to fit the different EU MS.
In particular with respect to gas and coal where there is no EU harmonised excise duty
system, it could be considered to propose in EU legislation a default point of regulation
while allowing MS to deviate from this if there are justified reasons. Where relevant, this
could allow the MS to limit the administrative impacts, both on the side of the public
authorities and/or the regulated entities.
In setting an upstream system, complexities related to the tracking of fuel over the supply
chain and boundaries issues can arise, together with the risk of double burden and
loopholes. Double burden may occur when an ETS operator surrenders allowances to
comply with ETS obligations and pays a carbon price on fuel used as a result of
obligations under the new ETS. For instance, an industrial installation covered by the
existing ETS that pays a carbon price for the reported emissions downstream and also
pays a carbon price for the fuel purchased at the point of sale. There is therefore a double
coverage of fuel being supplied to installations already covered by the ETS. This may
require compensation regimes as ex-ante exemptions to the fuels suppliers or ex-post
compensation of the downstream regulated entity when double burden occurs and carbon
price is payed twice.
Loopholes would lead to evasion of the carbon price (for example non-ETS gas
consumers in a large industrial zone connected to the TSO that do not purchase their gas
from a supplier). Loopholes and double burden requires the fuel supplier to differentiate
on the intended use and destination of the fuel, and in particular if, when combusted, the
fuel will incur with a compliance obligation. This is also linked with the monitoring,
reporting and verification design for these sectors.
As regards the different linking options there would be little differences as regards
administrative impacts.
133
Finally, difficulties related to implementation can also be identified in the interactions
between the energy efficiency obligation schemes169
under the Energy Efficiency
Directive (EED) and the possible extension of emissions trading to buildings as in option
EXT1. Both instruments would to some extent rely on the same regulated entities, the
energy suppliers. Indeed, not only energy suppliers might be regulated under both
schemes, but also the obligated entities under the energy savings obligation schemes
might be defined differently among the different MS170
. Article 7a of the EED establishes
that MS shall designate obligated parties among energy distributors, retail energy sales
companies and transport fuel distributors or transport fuel retailers operating in their
territory. Annex 5 provides for more details on regulated entities.
6.3.5 Coherence with other elements of the regulatory framework
The vast majority of respondents to the OPC, from a broad range of stakeholder groups,
endorsed the maintenance of the Effort Sharing Regulation and the deployment of other
sector-specific policies when extending the use of emissions trading to emissions from
buildings, road transport or all fossil fuel combustion. CO2 standards for cars and vans,
transport policies, policies addressing energy efficiency of buildings and renewable
energy policies as well as, to a lesser degree, energy taxation.
Interactions with the Effort Sharing Regulation
6.3.5.1
Emissions from road transport, buildings and other fossil fuel combustion are already
covered by the Effort Sharing Regulation (ESR). If the ESR continues to cover these
sectors, European carbon pricing via the ETS could possibly be seen as a double
regulation. However, while EU-wide carbon pricing has shown to provide important
incentives for cost-effective emissions reductions, it has been deemed that a continued
accountability and action by MS for national emission reductions in these sectors
incentivised by national targets under the ESR would not lead to inefficiencies, but rather
lead to important synergies (for a detailed analysis of double coverage, see Section 6.1.6
of the impact assessment for the ESR review). This view has also been voiced by a large
number of stakeholders in the public consultation on the ESR.
169
Under articles 7 and 7a of the Energy Efficiency Directive, amended by Directive 2018/2002, MS must
set up an energy efficiency obligation scheme, which requires energy companies to achieve yearly energy
savings of 1.5% of annual sales to final consumers.
170
Most MS have chosen to obligate energy suppliers. However, in Denmark and Italy distribution
companies are obligated, in Portugal the obligation is held by a non-profit private entity with a public
function.
134
Different sectors covered by the ESR are already affected by a range of regulatory EU
measures covering one or several sectors (see also following subsections). EU-wide
carbon pricing through extended emissions trading can be seen as additional measure in
the policy mix, contributing to achieving the enhanced ESR targets in a subset of the
ESR sectors in a consistent way. The additional economic emission reduction incentives
would cover around 50% (EXT1) or around 60% (EXT2) of ESR emissions, with a cap
consistent with the cost-effective contributions of those sectors. Thus there is no
distortion of the contributions of ESR sectors not covered by EU-wide carbon pricing.
Moreover, national measures that address non-price barriers or make alternative solutions
available can make carbon pricing work better. Together with other measures discussed
in the following subsections, this increases the credibility that a new ETS starting by the
middle of the decade can deliver meaningful reductions in line with -55%.
The interactions between the ETS extension and ESR are assessed in more detail in the
Impact Assessment of the ESR review. On the administrative implications of a possible
parallel coverage of emissions see also Annex 5, Section 16.1.
Interaction between EXT1 and the other regulatory framework
6.3.5.2
There are clear complementarities between option EXT1 and the existing regulatory
framework applying to buildings, notably the Energy Performance of Buildings
Directive, the Energy Efficiency Directive, the Renewable Energy Directive, the
Ecodesign Directive and the Energy Labelling Regulation (for a detailed analysis see
Annex 5, Section 16.2). In line with a net 55% emission reduction target, the 2030 CTP
anticipated that the actions in the Renovation Wave Communication and its goal of
doubling the renovation rate will contribute to reduce buildings' greenhouse gas
emissions by 60% as compared to 2015. Specifically, the EED, EPBD and RED II, which
are all being reviewed and strengthened to contribute to increased GHG reduction
ambition by 2030 will help to overcome market failures that impede emissions abatement
that cannot be overcome by a price signal alone.
A higher price signal for heating or cooling of buildings will in principle support the
objectives of the analysed Directives. Carbon prices at an adequate level can be effective
in incentivising the switch towards low-carbon heating, achieving increased renewables
ambition and in ensuring a level playing field between energy carriers.
An ETS extension and its higher costs for fossil building heating would result in an
additional economic incentive for increased EE ambition and the energy efficiency
measures promoted by the EPBD and the EED, provided that the carbon price signal is
sufficiently high. The measures would likely become more cost-effective and have a
shorter payback period, while the ETS would address potential rebound effects of energy
efficiency improvements. Combined with sector specific EE policies and financing tools,
135
an ETS would support achieving higher renovation rates and deeper renovations, notably
concerning the improvement in heating installations and their replacements and the
market diffusion of minimum energy performance requirements for buildings.
The ETS cap setting outlined in Section 5.2.4.3 reflects these complementarities, with an
ambition level reflecting the combination of current legislation with such a strengthened
policy mix. It would hence provide the additional carbon price incentive necessary to
achieve the GHG objective while fostering the energy related objectives.
The new MFF, the Recovery and Resilience Facility, Cohesion Policy and in eligible
regions also the Just Transition Fund may help to fund structural investments to mitigate
the analysed negative social impacts of the ETS in terms of higher energy prices on
vulnerable groups, by promoting energy efficiency investments that help these groups
who may lack the capital to reduce their energy demand171
. In the Renovation Wave the
need for financial assistance for energy efficiency investments specifically addressing
low-income citizens is recognized as essential to achieve the targeted level of
renovations.
One element in which there are some more complex interactions is between EED Art. 7
and the new ETS. For the period 2021-2030, MS are currently required to achieve
cumulative end-use energy savings equivalent to new annual savings of at least 0,8 % of
final energy consumption, with an increase consistent with -55% GHG reductions
envisaged in the EED review. MS must achieve the required cumulative end-use energy
savings by establishing an energy efficiency obligation scheme, adopting alternative
policy measures, or a combination of both. Details on measures adopted by MS under
this scheme and interactions or overlaps that might occur regarding energy efficiency
obligation schemes (including White Certificates) or other policy measures under Art. 7
is provided in Annex 5, Section 16.2.
There are clear complementarities between option EXT1 and the existing regulatory
framework applying to road transport, mainly the CO2 performance standards, the
Eurovignette Directive, Renewable Energy Directive and the Energy Taxation Directive.
Some of those complementarities have already been highlighted in Section 6.3.1.1. The
individual measures are analysed in Annex 5, Section 16.3.
As the CO2 performance standards have generally been effective at lowering emissions in
the transport sector, and the responsiveness of the sector to price changes is limited, the
171
ICF et al. (2020).
136
ETS inclusion of road transport would not (and could not) replace the existing policies
which have been and will be key to drive the development of zero carbon technologies
for cars and vans. The two policy instruments are complementary. The CO2 performance
standards address the supply on the market of more fuel efficient vehicles and set
requirements on vehicle manufacturers with regards to their fleets of new vehicles. The
proposed future standards will ensure a significant increase in the supply of new zero
emission vehicles over time172
. The Alternative Fuel Infrastructure Directive has and will
be instrumental to drive the deployment of recharging infrastructure.
The ETS coverage concerns the fuel use in the entire vehicle stock (existing and new
vehicles) and captures real-life emissions. It could increase the demand for more fuel-
efficient vehicles, facilitating the achievement of increased ambition under the CO2
standards for cars and vans. It could address possible rebound effects, whereby customers
drive more as their vehicles become more efficient due to lower usage costs173
.
In the OPC, CO2-standards for cars and vans were mentioned most frequently as ‘very
important’ by 64% of respondents (and as ‘important’ by another 23% of respondents) as
regards to other policies that should be deployed when extending emissions trading to
emissions from buildings, road transport or all fossil fuel combustion.
The Eurovignette Directive, predominantly concerned with charging for use of road
infrastructure, implements the user pays principle in addition to the polluter pays
principle. The proposal for a revised Eurovignette Directive (including differentiated
infrastructure charges based on CO2 emissions for heavy-duty vehicles) and the upstream
ETS would not overlap since the objective of the variation of the infrastructure charge is
not to capture the external costs of CO2 emissions. It cannot be linked to a CO2 price or
the cost of emissions. An ETS would be a more targeted tool as it imposes a carbon price
per actual ton emitted and on all roads, whereas a CO2-adjusted road charge would
provide an additional incentive to the deployment of low- and zero-emission heavy-duty
vehicles.
As regards to the review of the Renewable Energy Directive 2018/2001 (RED II), an
increase in supply of renewable energy for transport could lead to a lower carbon price.
The ETS would set economic incentives that can contribute to the development of
renewable and low-carbon fuels, contributing to the achievement of the renewable energy
172
Impact Assessment on the cars & vans CO2 standards.
173
ICCT, op. cit, p. 5; CE Delft, Analysis of the options to include transport and the built environment in
the EU ETS (2014), p. 60.
137
transport targets and of the hydrogen strategy. The reporting and monitoring
methodology for the energy content of transport fuels established under RED II for the
fuel suppliers are potentially complementary to the ETS inclusion.
The Energy Taxation Directive lays down minimal tax rates for motor fuels, heating fuels
and electricity. These minimum tax rates, above which MS can establish their respective
rates, have remained unchanged since 2003. Extending the use of emissions trading is
complementary to the revised ETD with its focus on the energy content and improved
coherence between energy carriers and sectors. Removing many exemptions as envisaged
could help in improving a level playing field between fossil fuels versus electricity in
heating enabling further renewable uptake and electrification. The new ETS would
address the carbon content and give a carbon price signal on top of the ETD levels.
Interaction between EXT2 and the other regulatory framework.
6.3.5.3
Many interactions of EXT2 with the other regulatory framework are similar of those of
EXT1 analysed in the prior section. Several additional particularities can be identified,
with the individual measures being analysed in Annex 5, Section 16.5.
One issue is that, if small industrial installations currently excluded from being subject to
the ETS, would be subject to a carbon price, they would pay a different and possibly
higher carbon price than larger competitors in the same sector which are subject to the
ETS having access to free allowances. There would therefore be the need for a
mechanism to tackle risk of carbon leakage for those small industrial installations.
Regarding the Renewable Energy Directive, in case all fossil fuels were included in an
ETS, all sectors would have an incentive to use more biofuels to avoid the carbon price,
driving up the demand for biofuels in all sectors outside the scope of the existing ETS
plus transport and housing.
In the case of all fossil fuel covered under an ETS, the increase of the fuel price would be
more palpable for the uses specified in Article 8 of the Energy Taxation Directive, which
establishes derogations in the form of significantly reduced tax rates for motor fuels in
certain uses, as they start from a much lower base. Regarding the EU Agricultural Policy,
the partial exemption specified in Article 8 of the Energy Taxation Directive for diesel
and kerosene might need to be revised.
138
7 HOW DO THE OPTIONS COMPARE?
Strengthening of the existing ETS (power and industry installations)
7.1
7.1.1 Summary comparison of effectiveness and efficiency/key impacts of individual
options
Key differences between the individual options to strengthen the existing ETS are
summarised in the following tables. The baseline option sets the comparison reference
for the different options, noting that its ambition is not in line with the cost-effective
2030 ambition.
Strengthening of the ETS target/cap
7.1.1.1
Table 23: Comparing key impacts of the ETS ambition strengthening options174
Key impacts AMB1 AMB2a AMB2c AMB3c
Environmental impacts
Cumulative cap - Trajectory
smoothness over 2021-30
period – balance of
environment impact over time
+
Steeper LRF
change
++
Earlier
trajectory
change
++
Balanced
between LRF
change and
rebase
+
Smaller
rebase with
steeper LRF
Difference between the cap and
projected emissions– indicator
to balance between environment
impact and flexibility for
emission variations175
+
50% below
baseline, risking
to create big
allowances
surplus
++
70% below
baseline,
though still
ensuring some
flexibility
+
90% below
baseline,
allowing for
limited
variations to
projected
emissions
++
similar to
AMB2a
Economic impacts
Market balance – implications
to market liquidity (assessed below in the MSR table)
Competitiveness - Risk of
triggering CSCF with CL0
0
Limited risk of
triggering CSCF
-
CSCF risk in
2029
--
CSCF risk in
2028
-
CSCF risk in
2029
174
The baseline option while not being in line with the cost-effective 2030 ambition sets the comparison
reference
175
Comparison to 2013-19 average emission delta to cap of 163 million allowances per year, where
Baseline delta is significantly above the 2013-19 reference.
139
Market Stability Reserve
7.1.1.2
Table 24: Comparing key impacts of the MSR options
Key impacts compared to
MSR0+
MSR1
Update current
parameter values
MSR2
More dynamic parameters
MSR3
MSR2 with addition
of short term
response mechanism
Environmental impacts
Impact on emissions
0/+
0/+
Emissions under MSR2
are slightly lower than in
MSR0+ and MSR1,
however the differences
are not significant
0/+
Economic impacts
Market
balance
across cap
scenarios176
AMB1 + -- --
AMB2a + - -
AMB2b -- 0 0
AMB2c 0/- 0/+ 0/+
Reduction of the market
surplus over a reasonable
time horizon
+/-
Reduces TNAC the
fastest in the near term
due to larger intakes
between 2024-2026,
maintaining the
downward pressure on
annual allowance
supply
However, TNAC
reduction may be too
steep with the tighter
cap scenarios
-
TNAC is above the upper
threshold throughout the
period for all cap scenario
-
May be able to
reduce the TNAC
slightly more than
MSR2, but this
reduction is
uncertain, because it
only occurs if the
carbon price is
below the set
threshold.
Ensuring market resilience
+
Strong reduction of any
surplus due to demand
shocks
++
Avoids the threshold
effect, because intakes are
smaller as the TNAC
approaches the intake
threshold.
Better adapted to
+
Avoids the threshold
effect like MSR2,
however challenges
in finding an
appropriate threshold
for a carbon price
176
The impact of cap scenarios AMB1 and AMB2b in conjunction with the MSR options is assessed in
Annex 8, Section 23.1, and the impact of cap scenario AMB2c in Annex 8, Section 23.2,
140
decreasing cap over the
medium term
floor risk
destabilising the
market
Opportunities for
speculation if carbon
price were to
approach price floor
Carbon price signal
+
Positive impact in terms
of signalling future
scarcity to the market;
prices are marginally
higher under MSR1 and
MSR2, driven by larger
intakes
+
Also positive impact in
terms of signalling. Prices
are marginally higher
under MSR1 and MSR2,
driven by larger intakes in
the reserve
+
Option provides a
threshold in the
unlikely event the
carbon price would
drop significantly
May act as an
insurance for low-
carbon investments
Price volatility
--
Threshold effect may
still induce price
volatility.
++
Reduces price volatility
that is due to the threshold
effect
0/+
Could reduce
uncertainty in the
event of downside
shocks, but potential
of volatility when
the carbon price is
just above the
threshold
Competitiveness, growth
and jobs
0
+
May improve the
predictability of the
occurrence of intakes as
compared MSR1.
0/+
Slight advantage as
ensuring a stable
carbon price in the
unlikely event the
carbon price drops to
the threshold
Auction revenues
- -
Uncertain impact,
since when in
operation it would
reduce auction
volumes but also
ensure a price level
Predictability, complexity
and transparency
+
Simple formula that has
proven its worth
+
No threshold effect when
the TNAC is close to the
upper threshold, but
formula is more complex
--
Even more complex
mechanism; it cannot
be predicted when
the price threshold
would operate
Framework to address the risk of carbon leakage
7.1.1.3
141
Table 25: Comparison of options to address the risk of carbon leakage
Key impacts Options
Option CL1: Tiered approach Option CL2: Strengthened benchmarks
Environmental impacts
Provide protection
against the risk of
carbon leakage
++
Better targets free allocation to sectors at
highest risk
Long-term protection against risk of carbon
leakage by incentivising emission reductions
++
Better targets free allocation based on actual
GHG emission intensities
Long-term protection against risk of carbon
leakage by incentivising emission reductions
Incentives for low-
carbon
technologies
+
Provides incentives for the deployment of
technologies with a relatively short payback
time
+
Provides incentives for the deployment of
technologies with a relatively short payback
time
Economic impacts
Costs for ETS
installations
0
Reduces carbon costs for sectors at highest risk
of carbon leakage
Increases carbon costs for sectors at medium
risk of carbon leakage
0
Reduces carbon costs for sectors where the
GHG efficiency of the best performing
installations is above the benchmark levels
Increases carbon costs for sectors where the
GHG efficiency of the best performing
installations is below the benchmark levels
Administrative
burden
-
Tiered approach needs a revision of the list of
the sectors deemed to be at risk of carbon
leakage
0
Strengthened benchmarks use the established
mechanism for free allocation
Improving support for low-carbon investment and innovation through
7.1.1.4
the existing Innovation Fund
Table 26: Comparison of options to increase the Innovation Fund
Key impacts
Option IF 1: Increase to 550 million
allowances
Option IF 2: Increase to 700 million
allowances
More innovative clean
tech projects financed
+
A moderate increase of the funding
available (around EUR 5 billion)
allows funding around 50 additional
projects (assuming 100 million average
grant size)
++
A strong increase of the funding
available (around EUR 12.5 billion)
allows funding around 125 additional
projects (assuming 100 million average
grant size)
More effective support
to innovative clean
tech projects
++
The circa EUR 5 billion added to the
initial remaining IF resources:
- can be effectively absorbed in 4 or 5
calls to be run as of 2026
- can finance complementary
mechanism (CCfDs) but only as pilot
+
The circa EUR 12.5 billion added to
the initial remaining IF resources:
- cannot be effectively absorbed in 4 or
5 calls to be run as of 2026 as these
calls need to be very big
- can further finance more
comprehensive CCfDs
142
Administrative burden
++
The additional administrative burden of
running slightly bigger calls as of 2026
can be manageable or easy to address.
-
Risk of administrative challenges due
to significantly bigger calls
Improve the
competitiveness of EU
industry
+
More companies can get funding and
become global clean tech leaders
+
Even more companies can get funding
and become global clean tech leaders
Slightly decreases the amount of free
allowances, thereby increasing the
possible need to apply the CSCF
7.1.2 Comparing packages of options
The different options assessed individually in the previous section interact with each
other. To get a better idea of possible combinations, four policy packages are developed
and compared in this section.
Table 27: Consistent policy packages to strengthen the existing ETS
The packages are internally consistent. Logical pairings were sought, while filtering out
some combinations that cannot realistically be combined. For instance, an increased
auction share combined with the environmentally most stringent cap scenario leads to a
very high carbon leakage risk; conversely, a less stringent cap such as AMB1 should not
be combined with the MSR2 option because the surplus would increase instead of
decrease. On the other hand, the presented packages are not the only ones possible: there
is room to compile different combinations.
Component
Package
1 2 3 4
Strengthening of the
ETS Target/Cap
AMB1 [new
LRF from 2026,
no rebasing]
AMB2a [new
LRF from
2024, no
rebasing]
AMB2c [new
LRF from
2024,
rebasing]
AMB3c [new
LRF from
2026, rebasing]
Market Stability
Reserve
MSR1 MSR1
Combination
of MSR
parameters
Combination
of MSR
parameters
Framework to address
the risk of carbon
leakage
CL1 [tiered
approach]
CL1 [tiered
approach]
CL2
[strengthened
benchmarks]
CL2
[strengthened
benchmarks]
Improving support for
low-carbon investment
and innovation
through the
Innovation Fund
IF 2 [increase to
700 million
EUAs]
IF 2 [increase
to
700 million
EUAs]
IF 1 [increase
to
550 million
EUAs]
IF 1 [increase
to 550 million
EUAs]
143
All four packages reach the cost-effective environmental ambition of -62% in 2030, but
the cap trajectories differ in two ways: is there a rebasing and how early is the current cap
trajectory amended. The answers to these two questions inform the available policy
choices for the other four elements of the package: MSR, auctioning share, carbon
leakage framework and Innovation Fund. As a general rule, the more rebasing and the
earlier the action, the lower the total amount of free allowances available and the higher
the positive environmental impact over the period to 2030. By contrast, action by 2026
only and without rebasing means that more allowances can be used to address carbon
leakage risks and distributional concerns.
In Package 1, the AMB1 scenario is based on an LRF-only approach starting in 2026
only. The resulting underlying cumulative cap over the period 2021 to 2030 is 1185
million ton (8.6%) lower than the current ETS cap, but higher than for the other scenarios
(up to 750 million ton if compared to AMB2c). This means more allowances are, in
principle, available for auctioning and for free allocation compared to other cap
strengthening options. No cross-sectoral correction factor (CSCF) will be triggered, and
combining AMB1 with option CL1 (the tiered approach to free allocation) means that
space is freed up to increase the amount of allowances for auctioning and to transfer extra
free allowances to the Innovation Fund (IF2). In terms of market stability, a less
ambitious cap scenario increases the risk of a surplus building up, making the case for a
stronger 24% intake rate (MSR1).
In Package 2 the AMB2a scenario combines an LRF-only scenario with early action:
there is no rebasing and an LRF of 5.09% applies as of 2024. This leads to a cumulative
cap that is about 400 million allowances lower than under Package 1. In terms of carbon
leakage risks, the combination of AMB2a with CL1 avoids triggering the CSCF. In terms
of the MSR, there is no strong need for fundamental changes to its design. The increase
of the intake rate as per MSR1 is sufficient to address a possible increase of the surplus.
At the same time, in order to allow for gradual changes with the aim of protecting the EU
industry, using the smoother MSR2 option and allowing an initially higher TNAC is not
excluded as a possibility. The size of the cumulative cap and the more focused carbon
leakage protection measure should also provide space to increase the Innovation Fund
contribution of the current ETS.
Package 3 contains the more stringent cap option: AMB2c combines rebasing with early
action, leading to a cumulative cap that is around 750 million allowances smaller than in
Package 1 and 350 million allowances lower than in Package 2. In such a scenario, where
the cap is very close to actual emissions, there is no space to increase the Innovation
Fund contribution of the existing ETS. Even without these options, the triggering of the
CSCF cannot be avoided. Option CL2 would however partly balance the rebasing of
around 119 million allowances and manage to keep the impact of the CSCF modest,
triggering it only as of 2029 and with an average value of 0.88 for the period 2026-2030.
144
There is a likelihood of the surplus dropping very rapidly. Hence, a conservative intake
rate, and additional protection against the threshold effect is needed. Sufficient market
liquidity must be ensured, possibly by keeping the current upper threshold of 833
million, but combined with more frequent MSR reviews assessing this threshold. A
combination of the parameters177
presented in MSR options MSR0+, MSR1 and MSR2
could provide the best mix of controlling the TNAC, avoiding price volatility and
ensuring sufficient market liquidity. Such a combination could behave better than both
MSR1 and MSR2 in terms of TNAC reduction, all the while keeping the benefits of
MSR2 in terms of avoiding threshold effects and price volatility.
Package 4 is based on a cap option that combines rebasing in 2026 with a relatively high
LRF after that (AMB3c). In terms of cumulative cap, this option is comparable to
Package 2 (i.e. 425 million allowances more than in Package 3 or 1,5 billion lower than
the current ETS), but with stronger efforts post 2026 to compensate for the later start.
Option CL2 is sufficient to maintain an adequate level of leakage protection (small CSCF
in 2030, with an average value of 0.96 for the period 2026–2030), in case the IF
contribution of the current ETS is not increased. Again, MSR options can be
combined.197
With a cap that is only adapted in 2026, it is important to adjust the MSR
intake rate to 24%. At the same time, a smoother intake rate like in MSR2 could be
applied when the TNAC is lower, in order to avoid threshold effects. Again, keeping the
current upper threshold of 833 million could provide sufficient market liquidity,
especially in conjunction with more frequent MSR reviews.
7.1.3 Coherence
The ETS is a well-established cornerstone of the EU's policy to combat climate change
and its key tool for reducing greenhouse gas emissions cost-effectively. With its focus on
markets and economic emission reduction incentives, it is coherent with other EU
policies which primarily address non-price barriers. Increasing the environmental
contribution of the ETS does not change its technology-neutral character, allowing it to
continue to run alongside sector-specific policies. The Market Stability Reserve will
continue to enhance policy synergies by mitigating supply/demand imbalances regardless
of their origin, for instance by reducing the impact that complementary and overlapping
policies in the area of renewables or energy efficiency can have on the carbon market.
177
Such a combination, with an upper threshold of 833 million allowances, and a more aggressive variable
intake rate that is a mix of MSR1 and MSR2, was assessed in Annex 8, Section 23.3.
145
As ambition increases and the carbon price signal is reinforced, the ETS’s funding
instruments become more relevant to address the impacts and needs of those impacted.
The strengthened Innovation Fund remains coherent with other EU-wide funding
mechanisms as well as with State aid rules, preventing overcompensation on the one
hand, but providing higher, and more targeted, support to address the innovation
challenge.
In terms of carbon leakage, coherence with the parallel proposal for a CBAM is ensured
through the principle that an effective level of protection against the risk of carbon
leakage is safeguarded. In practice, if a CBAM is proposed for selected sectors and the
proposal determines that the installations in these sectors lose their right to free
allocation, then the relevant ETS legislation would enable such a decision.
7.1.4 Proportionality
All options analysed for the strengthening of the existing ETS are based on the already
existing instrument, the ETS Directive. The initiative is limited to ETS adjustment needs
that are triggered by the increased emissions reduction target of at least 55%.
The instrument of emissions trading ensures that additional costs for industry due to the
increased level of ambition of the EU’s climate policies are expected to be kept to a
minimum, given that the ETS incentivises emissions reduction by operators with the
lowest abatement costs. Moreover, the use of the existing instruments minimises any
additional administrative costs.
To conclude, all options analysed for the strengthening of the existing ETS are
considered proportional as they do not go beyond what is necessary to achieve the
objectives.
Extension of emissions trading or alternatives for maritime emissions
7.2
7.2.1 Effectiveness and efficiency
All maritime policy options would ensure that the maritime transport sector contributes
to the emission reductions needed to achieve the 55% ambition. The main differences
among the different options is summarised in the table below.
146
Table 28: Comparison of maritime policy options
178
Assumptions: NPV estimations based on annualised capital costs; a social discount rate of 4%; GHG
and air quality external costs based on Handbook of external costs 2019; carbon value from the
Handbook of external costs 2019, ETS or tax payments are excluded as they are a transfer between
agents (i.e. from industry to authorities) from the societal perspective, administrative costs are not
included.
Key
impacts
MAR1 MAR2 MAR3 MAR4
Environmental impacts
Absolute
GHG
abatements
vs BSL by
2030
All policy options would result in similar total CO2 emission reduction, in
line with the common level of ambition in the ETS (same linear reduction
factor).
MINTRA: 30-34 MtCO2
MEXTRA50: 45-47 MtCO2
MEXTRA100: 59 MtCO2
Emission
reductions
certainty
High certainty
(emissions
cap)
High certainty
(emissions
cap)
Lower
certainty (no
emissions
cap)
High certainty
(emissions cap)
Origin of
GHG
emission
reductions
Mostly out-of-
sector
reductions
In-sector
abatements
only
In-sector
abatements
only
 Mostly out-of-
sector
reductions
Risk of
carbon
evasion by
2030
MINTRA: low
MEXTRA50: low
MEXTRA100:
medium
MINTRA: high
MEXTRA50:
high
MEXTRA100:
very high
MINTRA: high
MEXTRA50:
high
MEXTRA100:
very high
MINTRA: low
MEXTRA50: low
MEXTRA100:
medium
Economic impacts
Social Net
Present
Value178
compared
to BSL for
the period
2020-2050
MINTRA:
EUR 113 billion
MEXTRA50:
EUR101 billion
MEXTRA100:
EUR78 billion
MINTRA:EUR
94 billion
MINTRA:
EUR 94 billion
MINTRA:
EUR119 billion
147
Environmental effectiveness and impacts
7.2.1.1
When applied to the same geographical scope, the four policy options are expected to
result in comparable environmental impacts as they were designed to ensure CO2
emission reductions in line with what is projected under the revised ETS cap (similar
linear reduction factor). However, the levy on CO2 emissions (MAR3) provides less
certainty as regards the achievement of these reductions as it does not cap emissions
contrary to the other policy options (MAR1, MAR2 and MAR4).
The policy options would lead to emission reductions in different sectors and
activities. An open ETS (MAR1 and MAR4) would lead to the implementation of
mitigation measures in the maritime transport sector, as well as in other ETS sectors
when abatement costs are cheaper through the purchase of ETS allowances. The separate
ETS (MAR2) and the levy option (MAR3) would only drive emission reductions in the
maritime sector itself.
The single most important factor influencing GHG emission reductions is the
geographical scope. The absolute level of CO2 emission reductions compared to the
baseline by 2030 would vary from around 30 MtCO2 to 59 MtCO2 depending on the
voyages covered. This, of course, needs to be read in conjunction with the analysis on the
possible risk of evasion, which show that a broader geographical coverage tend to
amplify that risk. In addition, the risk of evasion is higher in the policy options where
carbon prices are the highest, such as the separate ETS (MAR2) or the levy (MAR3).
Increased
costs vs
BSL by
2030 &
CO2 price
MINTRA: +3%
MEXTRA50:
+7%
MEXTRA100:
+12%
45.5EUR/tCO2
MINTRA: +16%
268EUR/tCO2
MINTRA:+16
%
268EUR/tCO2
MINTRA: +4%
45.5EUR/tCO2
Additional
Auction
revenues in
2030
MINTRA:EUR
1.2 billion
MEXTRA50:
EUR 2.4 billion
MEXTRA100:
EUR 3.6 billion
MINTRA:
EUR 7 billion
MINTRA:
EUR 7 billion
MINTRA50:
EUR 1.2 billion
Proportionality
Admin costs
compared
to BSL
Regulated
entities: low
Public
authorities:
moderate
Regulated
entities: low
Public
authorities:
moderate
Regulated
entities: low
Public
authorities:
low to
moderate
Regulated
entities: low
Public
authorities:
moderately
high
148
Economic effectiveness and efficiency
7.2.1.2
For all policy options, the social Net Present Value calculated as the difference between
the societal costs and the benefits of each option over the period 2020-2050 is positive.
This means that they would bring added value to the society and that their benefits in the
form of e.g. GHG emission reduction, better air quality, energy savings and external
costs savings would outweigh their costs in the long term.
In terms of cost-effectiveness, the separate ETS option (MAR2) and the levy (MAR3)
would result in close to six times more expensive CO2 abatement costs in 2030 than the
two other options based on the ETS extension (MAR1 and MAR4). This is because they
would only target mitigation measures in the maritime sector that are estimated to be
more expensive than in other ETS sectors.
In terms of compliance costs, the policy options would incur additional direct costs for
regulated entities in the form of ETS/carbon levy payments, additional capital costs,
additional fuel and operational costs, partially compensated by fuels saving. These direct
costs are estimated to be significantly higher in MAR2 and MAR3 compared to MAR1
and MAR4. However, from a society perspective, the ETS/carbon levy payments do not
represent a net cost, as they are offset by the corresponding auctioning or tax revenues.
Moreover, these additional costs would only have a very limited impact on the prices of
commodities in the long-term, which are expected to increase by less than 0.2 to 0.7% by
2030. In terms of macroeconomic impacts, policy options produce non-sizeable impacts
on GDP. Sector-wise, only the supply chain of fossil fuels is likely to be somewhat
impacted. These will be partially offset by an increase in production of alternative fuels
by 2050.
All policy options would also raise additional revenues. MAR2 and MAR3 would lead to
the highest additional revenues in 2030 as they induce a much higher carbon price and
don’t allow the purchase of general ETS allowances.
7.2.2 Coherence
All policy options are coherent with the objectives of the European Green Deal, which
aims to ensure effective carbon pricing throughout the economy, including in transport
where price must reflects the impact it has on the environment and on health. They are
also coherent with the assessment underpinning the 2030 Climate Target Plan and the
Sustainable and Smart Mobility Strategy.
The four options would fit well with the basket of measures on maritime transport
announced in the European Green Deal. All policy options can work in full synergy with
the FuelEU maritime initiative as carbon pricing will reduce the price gap between
sustainable low carbon alternative fuels and traditional fossil fuels, and it will trigger
149
energy efficiency improvements that will make the switch to alternative fuels more
affordable by reducing the overall fuel consumption. In addition, revenues could be used
to progress innovation and accelerate the deployment of zero-emission vessels, as shown
by proposals submitted under the existing Innovation Fund. However, while carbon
pricing has the ability to greatly facilitate the uptake of renewable and low-carbon fuels
depending on the carbon price and the use of revenues, there is also a need to address all
the non-pricing problems that hamper the deployment of renewable and low-carbon
fuels. This is the ambition of the FuelEU Maritime initiative, which aims at creating a
predictable demand for these fuels in order to stimulate the process of their selection and
deployment, as well as the gradual technological improvement of yet immature solutions.
In this context, the two measures would complement each other and carbon prices (e.g. in
MAR2 and MAR3) would contribute to further accelerate the uptake of renewable and
low-carbon fuels by making them more economically viable.
The taxation of maritime bunker fuel as considered in the impact assessment of the ETD
revision could also complement a carbon pricing policy applied to maritime transport.
Taken together, these two policies would reinforce the carbon price signal and the
economic attractiveness of mitigation measures such as the implementation of energy
efficiency measures or the switch to renewable and low-carbon fuels. In addition, the fuel
tax could help change the behaviour of market actors not directly targeted by the
proposed policy options such as fuel suppliers, ports or companies operating ships below
5.000 gross tonnage. It is also worth noting that the envisaged tax on maritime bunker
fuel would not apply to bunker fuel sold for extra-EU voyages and that in itself it would
lead to a much smaller carbon price signal in comparison to the four policy options
considered in this impact assessment.
All policy options are also fully consistent with existing EU legislation such as the EU
maritime transport MRV framework. As regards the interaction with the Effort Sharing
Regulation (ESR), it would be beneficial if MS would continue implementing national
measures under the ESR to reduce emissions from domestic navigation as a substantial
part of these emissions would not be covered under the considered policy options. These
national measures have the potential to play a key role in supporting the uptake of zero-
emission vessels and innovative technologies, which are likely to be first implemented
and demonstrated on small vessels involved in domestic navigation.
In terms of coherence with action at global level, notably at the International Maritime
Organization (IMO), it is estimated that all policy options have the ability to positively
contribute to the objectives of the initial IMO GHG reduction strategy to be revised by
2023.
While discussions around a possible global carbon pricing mechanism started in 2006 at
IMO, there is still no consensus on the nature of such a measure and if there would be an
150
agreement to implement such a mechanism, it would likely take place in the period from
2023 to 2030. Since all policy options considered in this assessment have already been
reflected at IMO through different submissions, in theory, any of them could be further
considered and implemented by the IMO in the future. Would a similar measure be
adopted, then it will be necessary to ensure that no regulatory conflict is happening
between the EU and the IMO measure. Divergences may come from the different
regulated entities, policy objectives and levels of stringencies. Would the IMO adopt a
different instrument then the compatibility would need to be assessed. It should also be
noted that there are precedents of IMO following the EU action with global measures.
The adoption of an EU measure may therefore increase the likelihood of a decision at the
IMO. As regards MAR4, there is a possible risk of double regulation with the IMO
framework, depending on what would be agreed at IMO in terms of operational carbon
intensity measure and depending on how the measure is designed at EU level.
As regards the geographical scope, all options are legally feasible and coherent with EU
law. Results from the OPC show that 76% of respondents support a broad scope
including both intra-EEA and extra-EEA voyages as opposed to intra-EEA only
(MINTRA). If extra-EU voyages are included, 65% prefer to cover 100% of all incoming
and outgoing voyages (MEXTRA100). However, according to some stakeholders, the
coverage of emissions from extra-EEA voyages could pose some political challenges at
international level.
7.2.3 Proportionality
Based on the analysis carried out in this impact assessment, all policy options would
result in low administrative costs for regulated entities as they already monitor, report
and verify their CO2 emissions in line with the EU maritime transport MRV regulation,
which has been designed from the start as a first step to carbon pricing. In addition, all
policy options would continue excluding the maritime transport SMEs operating ships
below the size threshold of 5.000 gross tonnage.
Other compliance activities such as the purchase and surrendering of allowances would
only add limited administrative costs.
As regards public authorities, all policy options are considered proportional as the
additional administrative costs on public authorities to implement and enforce the policy
measure would depend to a strong extent on the number of regulated entities, which
would be limited to a maximum of 1.600 entities in total. For public authorities, MAR1
and MAR2 would result in moderate additional administrative burden to e.g. check
aggregated MRV data, manage registries or implement enforcement actions. More costs
would be associated with MAR4 as it would also require public authorities to develop
standards and check compliance. On the contrary, MAR3 would lead to lower costs, in
particular if authorities can rely on existing tax collection systems.
151
Extension of emissions trading to buildings and road transport or all fuels
7.3
7.3.1 Effectiveness and efficiency
Environmental impacts
7.3.1.1
Both options EXT1 (extension to the buildings and transport sectors) and EXT2
(extension to all fossil fuel combustion not yet covered by the ETS) ensure that the
sectors concerned contribute to the emission reductions needed in line with EU targets
and Paris Agreement commitments while ensuring synergies with complementary other
policies targeting these sectors. They both imply that a significantly increased share of
total GHG emissions would be covered by an EU-wide cap and trading system. As a
result, both options provide for an increased certainty in delivering the overall GHG
emission reductions.
Under option EXT2, the share of current total GHG emissions that would be covered by
an EU-wide cap would be slightly higher than in option EXT1 (about 6 percentage
points).
Options EXT1 and EXT2 are expected to deliver a similar reduction in emissions of
GHG in the sectors concerned by 2030 compared to 2005, which would be almost 10
percentage points higher than the projected reduction of -34% in the baseline.
Economic impacts
7.3.1.2
For both options EXT1 and EXT2, extending emissions trading to the new sectors would
assist in incentivising cost-effective emission reductions in the sectors concerned, even
though the incentive may differ according to MS due to the current heterogeneity of the
fuel tax landscape.
Under option EXT1, considering relatively low price elasticities in these sectors, carbon
pricing would work in concert with other policies such as EE and RES policies and CO2
standards for vehicles, with the carbon price and the reallocation of resources stemming
therefrom helping to realise the significant investments needed for a quicker diffusion of
decarbonisation technologies.
This could be complemented under options EXT1 and EXT2 with a contribution of the
new ETS sectors to the Innovation Fund as in option IF1 (using 100 million allowances
from the new ETS cap) to foster the availability of such technologies on the market.
Already under the current Innovation Fund there is significant interest from projects
related to clean transport, from projects providing clean tech solutions in renewable
heating and cooling of buildings and the call for small-scale projects is putting further
152
emphasis on projects providing carbon neutrality solutions for buildings or construction
products substituting carbon intensive ones. IF1 allows to make more resources available
for such projects without a need to explicitly change its current scope, Option IF2 (using
among others 200 million allowances from the new ETS) would allow for a broader
coverage and bigger amounts, which would then not be available for other purposes.
Under option EXT2, for small emitters in the industry, the costs of inclusion in an
emissions trading, as opposed to applying equivalent measures in some cases as under
EXT0 and EXT1, may outweigh the benefits. SMEs with similar activities but of a
different size may be covered by a different regime (the ETS or the new ETS) with
potentially a different carbon price.
Both options EXT1 and EXT2 would affect individual spending on transport and heating
fuels in the short or medium term, until the investments to reduce fossil fuel use have
taken effect. Hence social acceptability for the measure, in particular by households who
have difficulties to afford those investments, will be challenging. However, the revenue
raised should be enough to address the social and distributional concerns alongside other
revenue allocation (see Annex 13).
Table 29: Comparison of key impacts of ETS extension options EXT1 and EXT2
Key impacts EXT1 EXT2
Environmental impacts
Emission reductions ++
-43% by 2030 in MIX compared to
-34% in REF
++
-43% by 2030 in MIX compared to -
34% REF
Contribution to the -55%
ambition by 2030
+/++
Higher certainty in delivering
target: emissions covered by cap
and trade would be two thirds by
2030, twice as much as the existing
ETS alone
++
Higher certainty in delivering 2030
target: higher coverage vs EXT1
(about 6 percentage points)
Economic impacts
Incentivise cost-effective
emission reductions
++
Carbon price reduces payback time
for energy efficiency investments
The building sector responds better
to the carbon price than road
transport.
+
Limited mitigation options in
agriculture/forestry vs EXT1
Equivalent measures work for small
industry opted-out from ETS
Auction revenue ++
Revenue can help mitigate social
impacts and accelerate the
decarbonisation of the sectors
concerned
++
Revenue can help mitigate social
impacts and accelerate the
decarbonisation of the sectors
concerned
Competitiveness/ SME
impact
0
Almost zero risk of carbon leakage
in buildings and transport
0/-
Some firms in small industry and
agriculture might be negatively
impacted
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Other impacts
Social impacts -
Impact of carbon price on poorer
households can be mitigated by
redistribution
-
Impact of carbon price on poorer
households can be mitigated by
redistribution
Complementarity with
other existing measures
+
Clear complementarities between
EXT1 and existing regulatory
framework
+
Complementarities in EXT2
comparable to EXT1
Additional administrative
burden
-
Regulated entities: moderate
Administrative authorities:
moderate
- -
Regulated entities: moderate to high,
depends how free allocation for small
industry is organised
Administrative authorities: high,
because of the complexity involved
with the free allocation for small
industry
With regard to the two linking options analysis of current abatement potentials indicates
that if the existing ETS and the new ETS for road transport and buildings are linked, and
if cost-effective mitigation potentials turn out to be more difficult to realise in new ETS
sectors, allowances would flow from the former to the latter. This could limit prices in
the new ETS, but also increase the price in the existing ETS.
7.3.2 Coherence
The new emissions trading regime would work in parallel with existing policies applying
to the sectors concerned (see analysis in Section 6.2.5 and in Annex 5). This is coherent
due to the above described complementarities, as both under option EXT1 and EXT2,
the additional economic incentives provided by the extension of emissions trading to new
sectors will, on their own, not be sufficient to reduce emissions in these sectors to the
required levels. The more effective the regulatory measures on energy efficiency, vehicle
emission performance and the enabling investments are, and the faster the sector
decarbonises, the lower the carbon price generated by the new ETS will be.
The new regime under option EXT2 would also capture the combustion of fossil fuels in
certain cases where a significantly reduced tax rate currently applies under the Energy
Taxation Directive (for example motor fuels in agriculture). The relative increase of the
fuel price by the carbon price would be felt more in these cases.
An extended use of emissions trading would improve the overall policy mix. It would
allow targeted strengthening of regulatory measures needed to achieve the enhanced
climate ambition but would not replace other policies. Conversely a decision not to apply
emissions trading to buildings and transport would require a further strengthening of
regulatory measures, notably in the field of renewable energy and energy efficiency.
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7.3.3 Proportionality
In all options, the new emissions trading system would be organised as an upstream
system, thus avoiding that regulation falls upon the numerous end-users of fuel. The
number of regulated entities can be expected to be broadly the same in EXT1 and EXT2.
They lead to similar impacts in terms of monitoring, reporting and verification. Both in
EXT1 and EXT2, regulated entities would to a considerable extent be able to build their
monitoring system required for the new emissions trading system on the monitoring
mechanisms that are in place for taxation purposes. In both EXT1 and EXT2, regulated
entities would need to distinguish fuels that go to entities already covered by the ETS
(e.g. gas to industry) to avoid a double coverage by a carbon price which would
otherwise require compensation mechanism.
In the case of EXT1, the regulated entities will need to know the end-use of the fuel (i.e.
is it used in the buildings and road transport sector) which they normally know for
taxation purposes or because they are in contact with the end customer. MS would be
able to identify relatively easily the entities to be regulated since these would be known
for taxation purposes, at least in the case of oil and often gas and to a varying degree for
coal, depending on the MS’s national taxation regime. MS would need to prepare,
implement and run the system, manage the registry, verify compliance by the regulated
entities with their obligations under the new system and enforce compliance where
necessary.
In the case of EXT2, considerable additional burden can be expected stemming from the
fact that free allocation measures would need to be foreseen for small industry for
reasons of level playing field and to avoid carbon leakage. Any such compensation
mechanisms for small industry risk being complex.
8 PREFERRED OPTION
When proposing its updated 2030 greenhouse gas emissions reduction target of at least
55%179
, the European Commission also described the actions across all sectors of the
economy that would complement national efforts to achieve the increased ambition. A
number of impact assessments have been prepared to support the envisaged revisions of
key legislative instruments.
179
Communication on Stepping up Europe’s 2030 climate ambition - Com(2020)562
155
Against this background, this Impact Assessment has analysed the various options
through which a revision of the EU Emissions Trading System could effectively and
efficiently contribute to the delivery of the updated target as part of a wider “Fit for 55”
policy package.
Methodological Approach
Drawing conclusions about preferred options from this analysis requires tackling two
methodological issues.
First, as often the case in impact assessment analysis, ranking options may not be
straightforward as it may not be possible to compare options through a single metric and
no option may clearly dominate the others across relevant criteria. Ranking then requires
an implicit weighting of the different criteria that can only be justifiably established at
the political level. In such cases, an impact assessment should wean out as many inferior
options as possible while transparently provide the information required for political
decision-making.
Secondly, the “Fit for 55” package involves a high number of initiatives underpinned by
individual impact assessments. Therefore, there is a need to ensure coherence between
the preferred options of various impact assessments.
Policy interactions
Given the complex interdependence across policy tools and the interplay with the
previous methodological issue outlined above, no simultaneous determination of a
preferred policy package is thus possible. A sequential approach was therefore necessary.
First, the common economic assessment180,181
underpinning the “Communication on
Stepping up Europe’s 2030 climate ambition” looked at the feasibility of achieving a
higher climate target and provided insights into the efforts that individual sectors would
have to make. It could not, however, discuss precise sectoral ambitions or detailed policy
tools. Rather, it looked at a range of possible pathways/scenarios to explore the delivery
of the increased climate ambition. It noted particular benefits in deploying a broad mix of
policy instruments, including strengthened carbon pricing and increased regulatory
policy ambition.
180
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020SC0176
181
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020SC0331
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An update of the pathway/scenario focusing on a combination of extended use of carbon
pricing and medium intensification of regulatory measures in the economy, while also
reflecting the COVID-19 pandemic and the National Energy and Climate Plans,
confirmed these findings.
Taking this pathway and the Communication on Stepping up Europe’s 2030 climate
ambition as central reference, individual impact assessments for all “Fit for 55”
initiatives were then developed with a view to provide the required evidence base for the
final step of detailing an effective, efficient and coherent “Fit for 55” package.
At the aggregate level, these impact assessments provide considerable reassurances about
the policy indications adopted by the Commission in the Communication on Stepping up
Europe’s 2030 climate ambition. This concerns notably a stronger and more
comprehensive role of carbon pricing, energy efficiency and renewable energy policies,
the land sector, and the instruments supporting sustainable mobility and transport. These
would be complemented by a carbon border adjustment mechanism and phasing out of
free allowances. This would allow to continue to address the risk of carbon leakage in an
efficient manner. It would also preserve the full scope of the Effort Sharing Regulation
for achieving the increased climate target.
Various elements of the analyses also suggest that parts of the revenues of a strengthened
and extended ETS should be used to counter any undesirable distributional impacts such
a package would entail (between and within MS). While the best way to do this is still to
be determined, this would seem a superior alternative to foregoing the relevant measures
altogether or simply disregarding the uneven nature of their distributional impacts. Under
both these alternatives, the eventual success of any package proposed would be at risk.
Preferred policy options
Preliminarily assuming this fact and the analysis above as the framework for the
aggregate “Fit for 55” package, the specific analysis carried out in this impact assessment
comes to the main following conclusions and would suggest the following preferred
policy options for the revision of the EU Emissions Trading System:
1. Increased ambition of the existing ETS and MSR
In line with a coherent approach across policies, the 2030 ambition should reflect the
cost-effective contribution of the sectors as part of a policy mix. Based on the updated
MIX -55% policy scenario for current ETS sectors this contribution is calculated as -62%
in 2030 compared to 2005. Power and industry would continue to provide their cost-
effective higher emission reduction contribution compared to other sectors. Many
stakeholders support the strengthening of the existing ETS to increase its ambition in line
with the new 2030 target and based on cost-efficiency considerations. The separately
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assessed amendments of the ETS Directive concerning the aviation sector would ensure a
proportionate aviation contribution.
Each of the four ambition (sub-)options retained to achieve this -62% reduction
involves either a change of the annual Linear Reduction Factor or a combination with a
possible one-off change in the cap. Any of these options would be effective and efficient
to achieve the 2030 objective, but differ e.g. in terms of impacts on emission reductions
over the period and free allocation volumes. Stakeholders generally recognised the
importance of adjusting the linear reduction factor, while some stakeholders also
highlighted the importance of a combination with a one-off reduction of the cap. The
choice between the different ETS ambition strengthening options and related packages
with other options, e.g. how the Market Stability Reserve is further developed in this
context, remains therefore a political one. The MSR operation has wide support across
stakeholder groups, while there is no consensus about the necessary changes to its
parameters.
2. Auction share and addressing the risk of carbon leakage
A tightened ETS cap reduces the available allowances to be auctioned or allocated for
free. In this context, an increase of the auction share and corresponding further reduction
of the free allowances share seems only conceivable if the Carbon Border Adjustment
Mechanism would effectively protect the industry sectors concerned so that free
allocation for these sectors could be gradually phased out.
In addition, a more targeted approach to free allocation, where it still applies, is needed in
the form of strengthened benchmarks (and conditionality elements) which provides a
fairer and more transparent distribution of free allocation than a higher cut for all sectors
by the cross-sectoral correction factor. This was also supported by a wide range of
stakeholders, even if not by all parts of the private sector.
3. Increased Innovation Fund
An increase of the Innovation Fund has clear advantages in terms of strengthening
competitiveness, innovation and environmental effectiveness to provide the low carbon
solutions needed for further decarbonisation post-2030 and would generally be welcomed
by stakeholders. However, the selected amount and its sourcing is ultimately a political
choice, which is linked with the decisions on existing ETS ambition and/or with the
decision on whether or not to extend emissions trading to new sectors.
4. ETS extension to maritime transport
In line with the Climate Target Plan, the preferred option of extending the ETS to
maritime transport emissions (MAR1) has clear advantages as it would ensure that the
sector contributes cost-effectively to the EU climate efforts. In addition, it would ensure
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that the price of maritime transport reflects the impact it has on climate. It would also
correspond to stakeholders’ preferred policy option out of the proposed options. The ETS
extension to maritime transport could cover emissions from all intra-EEA voyages
(MINTRA) or, depending on political choices, could also extend further, to include half
of the emissions from extra-EEA voyages (MEXTRA50). This includes emissions from
at-berth operations. This extension would build on data coming from the EU maritime
transport MRV system which would be accounted in both the ETS cap reference
emissions and trajectory/LRF design (see Annex 6, Section 18.1). All new emissions
allowances would be auctioned in line with the default method for allocating allowances
in the ETS and would take the form of general ETS allowances. To ensure a smooth
transition, a phase-in period could be introduced where companies would only have to
purchase allowances for a portion of their emissions, gradually rising to 100% over 3
years. As only around 45 or 90 million tons of CO2 would be added to the existing ETS
depending on the selected geographical scope, the impact on the other sectors covered
would remain limited. MAR1 would also result in limited administrative costs.
In terms of coherence, this approach and the FuelEU maritime initiative are
complementary as carbon pricing facilitates the uptake of renewable and low-carbon
fuels as well as other emission reductions. It would also be compatible with the future
operational and technical standards being developed at the International Maritime
Organization (IMO) for existing ships, without a risk of double regulation. The need for
further operational and technical standards at EU level would need to be considered in
the future taking into account the effectiveness of these global measures.
5. New ETS for buildings and transport
Emissions trading could be extended to buildings and road transport, as additional
economic incentives and a more level playing field are needed to ensure achieving the
cost-effective reductions of these sectors to the -55% target. A majority of academic
stakeholders and EU citizens support an ETS extension, while the majority of private
sector actors, trade unions and NGOs are sceptical.
The main benefit of this extension scope compared to an extension to all fossil fuel
combustion is economic efficiency, notably as buildings and road transport are not or at
very low risk of carbon leakage. For including small industry and agriculture fuels,
creating a new carbon leakage risk protection regime would be administratively complex
due to the numerous SME’s concerned. Both extension scopes score high on
environmental effectiveness, with slight additional advantages for an extension to all
fossil fuel combustion as the share of emissions covered by an EU-wide cap would be
higher. At least for a transitional period, the extension should take the form of a separate
ETS to make the required new upstream MRV system work and avoid an uncertain price
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risk for existing ETS sectors, as also preferred by the majority of stakeholders and
notably private sector actors.
The ambition level, emissions cap and trajectory for the new ETS would be set
coherently in line with the cost-effective emission reductions of buildings and road
transport, which amount to approximately 43% emission reductions compared to 2005,
using a combination of carbon pricing and by strengthening the existing regulatory
framework. This is notably consistent with the preferred option for the ambition level of
energy efficiency targets under the Energy Efficiency Directive. An increase in buildings
renovation rate to be driven by the EPBD revision is also taken into account. Full
auctioning of allowances would be justified as there is no or very limited risk of carbon
leakage for these sectors, and would generate significant revenues to help financing
investment needs or to address social and distributional impacts, which might arise due to
an increase in fuel prices having an impact on low-income households. Support measures
to promote energy efficiency, such as the strengthening of Article 7 by obliging MS to
address vulnerable, energy poor, or low-income households, would be necessary to avoid
excessive distributional effects, via inter alia directing part of the revenues from carbon
pricing on buildings to energy efficiency improvements for energy poor households. A
market stabilisation mechanism similar to the one in the existing ETS would be
established.
By providing the additional economic incentives (through carbon pricing) necessary to
achieving the cost-effective emission reductions in buildings and transport, the new ETS
would complement the Effort Sharing Regulation in the current scope, which maintains
incentives for national action. The strengthening of other sectoral legislative initiatives
that contribute to reducing emissions in those sectors, in particular CO2 standards for
cars, the Energy Efficiency Directive, the Energy Performance in Buildings Directive the
Renewable Energy Directive will also take into account the ETS extension. Additional
administrative costs could be limited by using, where possible, existing structures used
for the Directive laying down the general arrangements for excise duty and the Energy
Taxation Directive. In turn, additional energy savings would be enhanced by the new
ETS, with its potential link to energy savings under Article 7 of the EED.
6. Solidarity mechanisms
Existing mechanisms in the ETS help in addressing distributional impacts between and
within MS. These include the 10% solidarity share of auctioning revenues redistributed
to lower income MS and the use of some allowances to feed an investment and solidarity
fund (the Modernisation Fund) for the lowest-income MS. These mechanisms could be
further developed, without prejudice to an ETS contribution to Own Resources.
Mechanisms using revenues from auctioning could also help compensate the social
impacts of the extended application of emissions trading.
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Well-designed energy efficiency programmes funded by some of the ETS revenues could
help addressing these social issues. Thus, MS could be required to systematically spend
revenues (or a specific share of revenues) from EU ETS auctioning for energy efficiency
improvement measures.
Action to address skills, financing mechanisms, consumer empowerment, split incentives
and the alleviation of energy poverty under the Energy Efficiency Directive could
complement the approach to distributional impacts of the EU ETS.
REFIT (simplification and improved efficiency)
8.1
The ETS legislation has consistently favoured approaches to minimise the regulatory
burden for both economic operators and administrations. In particular, installations with
low emissions benefit from the possibility for MS to exclude them from the ETS if they
are subject to national measures leading to an equivalent contribution to emission
reductions.
9 HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?
The Commission will continue to monitor and evaluate the functioning of the ETS in its
annual Carbon Market Report, as foreseen under Article 10(5) of the ETS Directive. This
covers also the impacts of the current revision of the ETS.
Furthermore, evaluation of progress on the application of the ETS Directive is regulated
in the current Article 21, which requires MS to submit to the Commission an annual
report paying particular attention to issues including the allocation of allowances,
operation of the Registry, application of monitoring and reporting, verification and
accreditation and issues relating to compliance.
The measures above (namely the Commission’s annual Carbon Market Report and
Member States annual report) shall also apply to the sectors to which emissions trading is
extended. The MRV data obtained through the regulation of the new sectors will be a key
source for information for the Commission to evaluate progress in the sectors concerned.
With respect to maritime transport, the Commission will notably rely on data collected
through the EU maritime transport MRV system and analysis from the annual report on
CO2 emissions from maritime transport, which provides aggregated and explained
results. With respect to the possible extension to buildings and transport, the Commission
will rely on data collected through the new MRV system for these sectors, while
comparing them also with the corresponding GHG inventory data for these sectors.
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The integrated governance and monitoring process under the Regulation on the
Governance of the Energy Union and Climate action is also expected to make sure that
climate and energy-related actions at European, as well as regional, national and local
level, including the ETS, contribute to the EU climate neutrality and Energy Union's
objectives.
Additionally, the Commission regularly carries out studies on various pertinent aspects of
EU climate policy. Such examples in the past years are the studies on evidence or lack of
evidence for the occurrence of carbon leakage and studies evaluating the application and
effectiveness of free allocation182
. This approach will also continue throughout phase 4.
Several market analysts regularly closely follow various aspects of the carbon market and
its functioning and the Commission will continue to monitor this work. Also, through
regular contacts with stakeholders, the Commission is alert to their views and concerns
about the functioning of the ETS. ETS-related matters are discussed in a dedicated
forum, the Climate Change Expert Group (CCEG) which brings together MS Competent
Authorities, stakeholders (industry associations and NGOs) and the Commission. In its
different formations, the CCEG discusses the implementation of free allocation,
auctioning and issues related to the functioning of the union registry.
In addition, the ETS Compliance forum provides the Competent Authorities of all ETS
countries (the 27 MS, Norway, Iceland and Liechtenstein) with a platform for sharing
information, learning and experience, leading to effective implementation of the ETS.
The forum executes targeted events, such as the Compliance Forum Conference,
organized annually and aimed at sharing experiences and facilitating dialogue amongst
MS Competent Authorities, as well as Task Forces dedicated to specific topics and
training events. National Accreditation Bodies and verifiers are sometimes invited to
participate to the activities of the ETS Compliance forum, where relevant.
Furthermore, the Technical Working Group on ETS Monitoring, Reporting, Verification
and Accreditation (MRVA) brings together representatives of MS Competent Authorities
to share experiences and suggestions concerning effective and efficient implementation
of Commission Implementing Regulation (EU) No 2018/2066183
and Commission
182
https://ec.europa.eu/clima/policies/ets/allowances/leakage_en#tab-0-2
183
Commission Implementing Regulation (EU) 2018/2066 of 19 December 2018 on the monitoring
and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European
Parliament and of the Council and amending Commission Regulation (EU) No 601/2012. OJ L 334,
31.12.2018, p. 1.
162
Implementing Regulation (EU) No. 2018/2067184
and to discuss potential updates and
improvements of the ETS MRVA Regulations.
184
Commission Implementing Regulation (EU) 2018/2067 of 19 December 2018 on the verification
of data and on the accreditation of verifiers pursuant to Directive 2003/87/EC of the European
Parliament and of the Council. OJ L 334, 31.12.2018, p. 94.
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LIST OF FIGURES
Figure 1: Intervention logic of the EU ETS revision ....................................................... 29
Figure 2: ETS cap under the different options ................................................................. 38
Figure 3: TNAC under different MSR options with central cap scenario AMB2a.......... 70
Figure 4: Stylised representation of emissions and carbon prices across different MSR
scenarios for the central cap option AMB2a..................................................... 72
Figure 5: Distribution of intra-EEA and at-berth emissions vs extra-EEA emissions
per ship type ...................................................................................................... 91
Figure 6: Share of voyages tempted to evade for different ETS price (considering that
all intra-EEA and half of extra-EEA voyages are covered by the carbon
price).................................................................................................................. 95
Figure 7: Costs breakdown in 2030 for different maritime policy options and scope
(billion EUR 2015)............................................................................................ 99
Figure 8: Share of Household fossil fuel energy expenditure in total final consumption
expenditure in EU-27 countries grouped by GDP per capita (above EU-27
avg, 60-100% of EU-27 avg, <60% of EU-27 avg), and country group
averages, in Decile 1, 3 and 5, % .................................................................... 118
Figure 9: Energy consumption of the residential sector by fuel (EU-27) ...................... 119
Figure 10: Share of Household transport fuel expenditure in total final consumption
expenditure in EU-27 countries grouped by GDP per capita (above EU-27
avg, 60-100% of EU-27 avg, <60% of EU-27 avg), and country group
averages, in Decile 1, 3 and 5, %)................................................................... 120
Figure 11: Impact of carbon price on consumer prices per Member State – heating oil)125
Figure 12: Impact of carbon price on consumer prices per Member State – natural gas)125
Figure 13: Impact of carbon price on consumer prices per Member State – (diesel and
petrol for road transport) ................................................................................. 128
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LIST OF TABLES
Table 1: Overview of policy options assessed ................................................................. 33
Table 2: Summary of the MSR options............................................................................ 40
Table 3: Tiered approach assessed ................................................................................... 43
Table 4: Needs and instruments to address distributional aspects ................................... 59
Table 5: Overview of existing ETS cap options with cumulative budget and average
delta to emissions .............................................................................................. 65
Table 6: Impacts of the cap trajectory options on free allocation .................................... 77
Table 7: Economic impacts of different cap trajectory options for 10 ETS sectors......... 78
Table 8: Impacts of a tiered approach from 2026 onwards on free allocation for
different cap trajectory options.......................................................................... 80
Table 9: Impacts of strengthened benchmarks from 2026 onwards on free allocation
for different cap trajectory options.................................................................... 80
Table 10: Projected cumulated emissions and free allocation over the period 2021 to
2030 per industry sector for cap trajectory options AMB1 and AMB2b in
combination with a tiered approach (option CL1) or strengthened
benchmarks (option CL2).................................................................................. 81
Table 11: Impacts of a further increase of the Innovation Fund (option IF2) from 2026
onwards on free allocation for different cap trajectory options ........................ 83
Table 12: Impacts of 55% GHG reduction on EU sectoral employment in existing
ETS sectors (deviation from baseline in 2030, in percent) ............................... 86
Table 13. CO2 emission reductions from maritime policy options and scopes in 2030... 89
Table 14: Reduction of air pollutant emissions by 2030 for different maritime policies
(scope MEXTRA50) ......................................................................................... 92
Table 15: Average energy efficiency (energy consumption per tonne-km)
improvements of freight vessels........................................................................ 93
Table 16: Estimated administrative costs for all competent national authorities........... 103
Table 17: Additional revenues generated by policy options (billion Euro 2015) .......... 105
Table 18: Description of possible economic impacts from a maritime carbon pricing
policy............................................................................................................... 106
Table 19: Summary table of impacts on commodity price and demand from open ETS
(MAR1) ........................................................................................................... 107
Table 20: Annual residential sector capital costs as a percentage of household
consumption in 2030, percentage point difference compared to Reference ... 117
Table 21: Impacts of 55% reduction on EU sectoral employment related to buildings,
transport and other fossil fuel use (deviation from baseline across scenarios,
in percent)........................................................................................................ 123
Table 22: Fuel expenditure only as a percentage of household overall consumption
expenditure in 2030 compared to Reference................................................... 126
Table 23: Comparing key impacts of the ETS ambition strengthening options............. 138
Table 24: Comparing key impacts of the MSR options ................................................. 139
Table 25: Comparison of options to address the risk of carbon leakage........................ 141
Table 26: Comparison of options to increase the Innovation Fund................................ 141
Table 27: Consistent policy packages to strengthen the existing ETS........................... 142
Table 28: Comparison of maritime policy options......................................................... 146
Table 29: Comparison of key impacts of ETS extension options EXT1 and EXT2...... 152