EU Emission Trading Directive (Directive 2003/87/EC)
Date of adoption: 13 October 2003
Entered into force: 25 October 2003 (O.J.L. 275/32 25.10.2003)
Deadline for transposition in the Member States: 31 December 2003
Revised EU Emission Trading Directive (Directive 2009/29/EC)
Date of adoption: 23 April 2009
Entered into force: 25 June 2009 (O.J.L. 140/63 5.6.2009)
Deadline for transposition in the Member States: 31 December 2012 (with some parts brought into force by 31 December 2009)
What are the aims and requirements of the Directive?
The 2003 EU Emission Trading Directive establishes a scheme for greenhouse gas emission allowance trading within the EU, which is intended to 'promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner' (Article 1). The European Emission Trading Scheme (EU ETS) started operating on 1 January 2005 and is divided into distinct phases. The first phase ran from 2005 to 2007; the second covers 2008 - 2012, in order to coincide with the Kyoto Protocol's first commitment period. A third phase will begin in January 2013.
The Directive requires the government of each Member State to set a cap on the amount of greenhouse gases to be emitted annually by various installations covered by the scheme. The scheme applies to activities undertaken at installations listed in Annex I of the Directive, and to six gases listed in Annex II. Installations are then allocated a total number of allowances, with one allowance representing one tonne of 'carbon dioxide equivalent' for a particular period. Where a company utilises fewer allowances than those granted, for example by making emissions reductions, they can trade their excess allowances on the open market. Those companies that choose to emit more than their allocation allows can purchase extra allowances from the market. The overall aim of the scheme is to allow companies to choose the most economic and cost-effective methods for achieving overall emissions reductions.
National Allocation Plan (NAP)
Under Article 9 of the Directive, each Member State is required to create a National Allocation Plan (NAP), setting out the total number of allowances it intends to allocate for a given allocation period and how it proposes to allocate them. The NAP has to be based upon 'objective and transparent criteria', including those listed in Annex III of the Directive. It must also take due account of comments from the public. The criteria listed in Annex III include, amongst others:
compatibility with the provisions of the Kyoto Protocol and other national commitments;
total quantity of allowances to be consistent with a Member State's projected emissions;
consistency with other EU legislative and policy instruments;
non-discrimination between various companies or sectors;
inclusion of details of the installations in that Member State which are covered by the EU ETS, and of how allowances are to be allocated to the individual installations
The NAP must be published and submitted to the Commission, which is entitled to reject part or all of it in the light of the criteria set out in the Directive. Upon approval, Member States can make a final allocation decision, which will determine the allocation to individual installations. These allocations are then made to the installations via the online Emission Trading Registry in that Member State.
Under Article 9, a NAP has to be submitted to the Commission for each subsequent phase of the scheme at least 18 months prior to the start of the commitment period.
Permits, monitoring and verification
Under Article 4 of the Directive, Member States are required to ensure that all installations undertaking activities listed in Annex I have a permit authorising them to emit greenhouse gases. Articles 5 and 6 specify the process for applying for a permit and the content and conditions to be included, by a competent authority, in any permit that is subsequently granted. Applications must contain full details of the activities undertaken at an installation, the materials used and a methodology for the monitoring and reporting of emissions. The authority may issue a permit if it is satisfied that the application is complete and fulfils all the monitoring and reporting requirements of the Directive. A permit issued under the Directive must contain the following:
the name and address of the operator;
a description of the installation's activities and emissions;
monitoring requirements;
reporting requirements; and
an obligation to surrender allowances equal to the installation's total emissions for the calendar year, the surrender being within four months of the end of that year.
The Directive requires an installation's operators to report the annual emissions of that installation to the competent authority, in accordance with the Commission's Monitoring Guidelines. In 2004, the Commission published a set of legally binding guidelines, which detailed how emissions of greenhouse gases from Annex I installations were to be monitored and reported. In 2005, those guidelines were revised, and in 2006, following a period of consultation, the EU Climate Change Committee approved a new set of monitoring and reporting guidelines. These were adopted by the European Commission in July 2007 and have been in force since 1 January 2008 (see 'useful documents' section below)
Member States are required to verify the annual emissions reports submitted by installations, in accordance with the criteria contained in Annex V of the Directive. The verification of an installation's emissions is to be carried out by an accredited verification body and the report is to be submitted to the regulatory authority by 31 March each year. The operator then has until the 30 April to surrender sufficient allowances to cover its verified emissions.
The Emission Trading Registry, which was set up under the Directive, is responsible for the accounting of 'the issue, holding, transfer and cancellation of allowances' (Article 19). The Registry contains details of all allowances held by individual installations, the annual verified emissions reports for installations, the transfer of allowances and the compliance status of installations.
Each Member State is required to provide the Commission with an annual report on the implementation of the Directive in that particular State. The Commission must then publish a report on the application of the Directive (Article 21).
CCS in Phases I and II
Carbon capture and storage activities are not mentioned in the 2003 Directive. Article 24, however, allows Member States, from 2008 onwards (Phase II), to extend the ambit of the Directive by including activities, gases and installations not previously covered, although Commission approval of any new inclusion is required.
A Revised Emission Trading Scheme
In January 2008, the European Commission launched a climate and energy package, which included, among other things, a proposal for a new EU Directive on Carbon Capture and Storage and a strategy for strengthening and expanding the EU Emission Trading Scheme.
The revised Emission Trading Scheme seeks to achieve greater emissions reductions from traditionally energy intensive industries. It builds upon the European Council's March 2007 commitment to reduce the EU's overall greenhouse gas emissions by at least 20% below 1990 levels by 2020 and to a larger objective of a 30% reduction provided other developed countries make comparable commitments and economically advanced developing countries make adequate contributions. The 2009 Directive anticipates the more ambitious objective of a 30% reduction, should an international agreement involving developing countries be reached under the United Nations Framework Convention on Climate Change. Most of its provisions will take effect from Phase III of the EU ETS, which begins in 2013.
The new Directive requires an annual linear decrease in total EU-wide emissions of 1.74%, based on the average number of allowances issued under the approved NAPs from Phase II. This entails the setting of an EU-wide cap on allowances available under the scheme, which the Commission first published on July 2010 (see Commission Decision 2010/384/EU). The EU-wide cap (about 1.927 billion allowances for 2013) corresponds to a reduction in overall emissions by 2020 of 21% below 2005 levels.
In order that the EU scheme 'operates with the highest possible degree of economic efficiency', a fully-harmonised system of allowance distribution is being imposed. The Directive moves away from the free allocation of allowances, which characterised the first and second phases, and requires that, from Phase III onwards, auctioning should become the principal method of allocation. A transitional scheme will be put in place from 2013 to allow some operators to continue to receive free allowances, but the number of allowances allocated by this method will be reduced each year until there is no free allocation in 2027.
Treatment of CCS activities under the Revised ETS
Under the 2009 ETS Directive, a new paragraph 3a is inserted into Article 12 of the original Directive. This removes the obligation to surrender allowances where emissions have been verified as captured and transported for the purpose of permanent storage, in accordance with the new CCS Directive (2009/31/EC). In addition, no free allocation is to be given to operators in the power sector undertaking the capture and storage of CO2. Guidelines for how these stored emissions are to be monitored and reported are currently under development. On 8 June 2010, the Commission adopted a decision establishing a set of guidelines for monitoring and reporting greenhouse gas emissions from the capture, transport and geological storage of carbon dioxide (see Commission Decision 2010/345/EU).
In June 2008, the European Council requested that a mechanism be established to promote Member State and industry investment in the technology and, in particular, in demonstration projects. Following protracted negotiations, it was decided that allowances from the New Entrant Reserve, a fund set aside for new installations and extensions to existing permitted installations, should be made available for projects demonstrating CCS and innovative renewables.
Demonstration Plants
Under the 2009 Directive, 300 million allowances will be allocated to fund a maximum of 12 full-scale CCS demonstration projects within the EU. (See dedicated page in EU Financing Strategy to Incentivise CCS) These allowances, whose value will depend upon the prevailing market price when they are redeemed (in January 2011, they would have been worth approximately €4.5 billion), will be made available until 31 December 2015. Support for these projects will be dependent upon the 'verified avoidance of CO2 emissions' and they will be selected 'on the basis of objective and transparent criteria that include requirements for knowledge-sharing'. The Directive also requires proposals to demonstrate a wide range of technologies and be situated in 'geographically balanced locations'.
Support for selected projects will be funded via the Member State, although co-financing proposals from installation operators and other external investors will be permitted. No individual project may receive more than 15% of the total number of allowances. The Commission adopted a the final NER300 Decision in November 2010 (see Commission Decision C(2010) 7499 final) and simultaneously launched the first call for proposals for CCS and renewable energy demonstration projects, which will compete to receive NER300 funding.
Directive 2009/29/EC - amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community
Directive 2004/101/EC - amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol's project mechanisms ('Linking Directive')
Commission Decision laying down criteria and measures for the financing of commercial demonstration projects that aim at the environmentally safe capture and geological storage of CO2 as well as demonstation projects of innovative renewable energy technologies (SEC(2010)1319, SEC(2010)1320)