The European Parliament’s post-2020 reform package explained

On 15 February, the European Parliament adopted its position on the Phase 4 reform of the EU ETS. The report was adopted with 379 votes in favour, 263 votes against and 57 abstentions.

The main points adopted by the European Parliament are listed below.

Market stability reserve:
- The intake rate of the market stability reserve will be doubled from 12% to 24% in the first four years of its operation.1 January 2021, 800 million allowances will be cancelled from the reserve.

Linear reduction factor:
- The linear reduction factor should increase to 2.2% from the 1.74% in Phase 3. It should be kept under review with a view to increase it to 2.4% by 2024 at the earliest.

Free allocation / auction:
- Auctioning should remain the main source of allowances. 57% of the cap should be auctioned and 43% should be allocated for free to installations. The 57% can be optionally decreased by 5 percentage points to ensure free allowances for installations, if application of the cross sectoral correction factor is triggered.
- When no adjustment occurs, or when less than 5 percentage points are required for adjustment, the remaining quantity of allowances (but no more that 200 million) shall be cancelled at the end of Phase 4.
- Benchmarks for the period 2021-2025 should be determined by using 2016-2017 data and for the 2026-2030 period using 2021-2022 data.
- For industries that cannot achieve an emission reduction of 0.5% annually, a new benchmark reduction rate of 0.3% has been introduced.
- 100% of the revenues generated from the auctioning of allowances shall be used for the purposes listed in the Directive.

Changes in activity level:
- For any increase or decrease in production level of at least 10%, an installation should be eligible for additional allocation from the new entrants reserve.

Small emitters:
- The threshold for small-emitters shall be raised from the current 20,000 to 50,000 tonnes of CO2 equivalent per year.

Overlapping policies:
- The European Commission shall prepare and send to the European Council and the European Parliament a report about the functioning of the EU ETS. The report shall address the interaction of the EU ETS with other policies (like the energy efficiency, renewables). If appropriate, the European Commission shall table legislative proposals to reflect the effects of other policies on the EU ETS.

Fund for indirect cost compensation:
- 2% of the auction pot and 1% of the free allocation should be used to establish a fund that compensates sectors having a significant indirect cost from the EU ETS.Member states are allowed to establish their own measures in addition to the EU fund in order to support their companies.

Innovation Fund:
- Increase of the Innovation Fund to 600 million allowances (from 400 million as proposed by the European Commission). A maximum of 75% of the cost of the projects can be supported.

Modernisation Fund:
- The beneficiary member states should be responsible for the governance of the Fund.
- An advisory board, composed of the beneficiary member states, three representatives from non-beneficiary member states, a representative from the European Commission, a representative of the European Investment Bank and a representative from the European Bank for Reconstruction and Development, shall be established.

Just Transition Fund:
- A Just Transition Fund shall be created as of 1 January 2021 and shall be funded through the pooling of 2% of the auctioning revenues.
- The revenues of those auctions would remain at Union level, with the goal of using them to cushion the social impact of climate policies in regions which combine a high share of workers in carbon-dependent sectors and a GDP per capital well below the EU average.

Optional cancellation of allowances by member states:
- Every two years member states shall report to the European Commission the closure of electricity generation in their territory capacity due to national measures. The Commission shall calculate the equivalent number of allowances that those closures represent and inform the member states. Member states may cancel a corresponding volume of allowances.

Derogation (Art. 10c):
- Where projects relate to electricity production, total greenhouse gas emissions per kilowatt hour of electricity produced in the installation shall not exceed 450g of CO2 equivalent after completion of the project.
- Member states eligible to grant to their power producers 10c free allocation, may choose to transfer the corresponding number of allowances or part of their share to the Modernisation Fund.

Paris Agreement:
- Within six months of the facilitative dialogue under the UNFCCC in 2018 the Commission shall publish a communication assessing the consistency of the Union’s climate change legislation with the Paris Agreement goals. In particular, the communication shall examine the role and adequacy of the EU ETS in meeting the – Paris Agreement goals.
- Within six months of the global stocktake in 2023 and subsequent global stocktakes thereafter, the Commission shall submit a report assessing the need to adjust the Union’s climate action accordingly.

Aviation sector:
- The total quantity of allowances to be allocated to aircraft operators in 2021 shall be 10% lower than the average allocation for the period from 1 January 2014 to 31 December 2016, and then decrease annually at the same rate as that of the total cap for the EU ETS.
- From 1 January 2021, 50% of allowances for the aviation sector shall be auctioned.

Shipping sector:
- As from 2021, in the absence of a comparable system operating under the International Maritime Organization, CO2 emissions emitted in Union ports and during voyages to and from Union ports shall be accounted for through the system, to be operational from 2023.
- A fund aimed at compensating for maritime emissions, improving energy efficiency and facilitating investments in innovative technologies to reduce CO2 emissions of the maritime sector shall be established at Union level.

The rapporteur Ian Duncan received a mandate to enter the trialogue negotiations with the European Council. If the Council agrees its position 28 February, negotiations may begin early March.

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