Revision for phase 4 (2021-2030)

On 14 July 2021, the European Commission adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport and land use legislation, setting out in real terms the ways in which the Commission intends to reach EU climate targets under the European Green Deal.

To achieve the EU's overall greenhouse gas emissions reduction target for 2030, the sectors covered by the EU Emissions Trading System (EU ETS) must reduce their emissions by 43% compared to 2005 levels.

The revised EU ETS Directive, which will apply for the period 2021-2030, will enable this through a mix of interlinked measures.

To increase the pace of emissions cuts, the overall number of emission allowances will decline at an annual rate of 2.2% from 2021 onwards, compared to 1.74% currently.

The Market Stability Reserve (MSR) - the mechanism established by the EU to reduce the surplus of emission allowances in the carbon market and to improve the EU ETS's resilience to future shocks – will be substantially reinforced.

Between 2019 and 2023, the amount of allowances put in the reserve will double to 24% of the allowances in circulation. The regular feeding rate of 12% will be restored as of 2024.

As a long-term measure to improve the functioning of the EU ETS, and unless otherwise decided in the first review of the MSR in 2021, from 2023 onwards the number of allowances held in the reserve will be limited to the auction volume of the previous year. Holdings above that amount will lose their validity.

The revised EU ETS Directive provides predictable, robust and fair rules to address the risk of carbon leakage.

The system of free allocation will be prolonged for another decade and has been revised to focus on sectors at the highest risk of relocating their production outside of the EU. These sectors will receive 100% of their allocation for free. For less exposed sectors, free allocation is foreseen to be phased out after 2026 from a maximum of 30% to 0 at the end of phase 4 (2030).

A considerable number of free allowances will be set aside for new and growing installations. This number consists of allowances that were not allocated from the total amount available for free allocation by the end of phase 3 (2020) and 200 million allowances from the MSR.

More flexible rules have been set to better align the level of free allocation with actual production levels:

• Allocations to individual installations may be adjusted annually to reflect relevant increases and decreases in production. The threshold for adjustments was set at 15% and will be assessed on the basis of a rolling average of two years. To prevent manipulation and abuse of the allocation adjustment system, the Commission may adopt implementing acts to define further arrangements for the adjustments.
• The list of installations covered by the Directive and eligible for free allocation will be updated every 5 years.
• The 54 benchmark values determining the level of free allocation to each installation will be updated twice in phase 4 to avoid windfall profits and reflect technological progress since 2008.

Overall, more than 6 billion allowances are expected to be allocated to industry for free over the period 2021-2030.

Several low-carbon funding mechanisms will be set up to help energy-intensive industrial sectors and the power sector meet the innovation and investment challenges of the transition to a low-carbon economy.

These include two new funds:

• The Innovation Fund will support the demonstration of innovative technologies and breakthrough innovation in industry. It will extend existing support under the NER300 programme. The amount of funding available will correspond to the market value of at least 450 million emission allowances.
• The Modernisation Fund will support investments in modernising the power sector and wider energy systems, boosting energy efficiency, and facilitating a just transition in carbon-dependent regions in 10 lower-income Member States.

In addition, the optional transitional free allocation under Article 10c of the EU ETS Directive will continue to be available to modernise the energy sector in lower-income Member States.

In July 2015, the European Commission presented a legislative proposal to revise the EU Emissions Trading System (EU ETS) for the period after 2020.

After extensive negotiations, the European Parliament and the Council formally supported the revision in February 2018.

The revised EU ETS Directive (Directive (EU) 2018/410) entered into force on 8 April 2018.

In the context of each global stocktake under the Paris Agreement, the provisions of the revised EU ETS Directive will be kept under review. The first global stocktake will take place in 2023.

Stakeholders were involved at various stages in the development of the EU ETS revision for phase 4.

Extensive consultations were carried out in 2014, including

• stakeholder events
• written consultation on post-2020 carbon leakage provisions
• written consultation on the revision of the ETS (more than 500 contributions received).

Following these consultations and the analysis of EU climate policy targets for 2030, the Commission carried out an impact assessment.

The legislative proposal was submitted to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions for further consideration under the ordinary legislative procedure.

The public also had the possibility to provide feedback on the legislative proposal. Feedback was received from 85 stakeholders and a summary was presented to the European Parliament and the Council.

The Commission will continue to seek stakeholder input on the implementation of the revised EU ETS legislation. The Climate Change Committee, where all Member States are represented, is consulted for the preparation of implementing acts. An expert group on climate change policy has been created to assist the Commission in the preparation of delegated acts, especially regarding legislation adopted for the implementation of the Paris Agreement.

Moreover, stakeholders can give feedback on the delegated and implementing acts to be drawn up in the process of implementing the revised EU ETS Directive through the Commission's feedback mechanism for technical rules or updates. Draft delegated and implementing acts are open for a feedback period of 4 weeks.

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