EPP Group priorities for ETS reform

The EPP Group is united and ready to play its role in negotiations on the reform of the Emissions Trading Scheme (ETS). It therefore adopted its priorities for ETS reform today and has put a plan on the table that will serve the climate and the competitiveness of our companies in the world. Soon the Industry and Environment Committees will vote on important texts that will decide the success of this crucial piece of legislation that will shape the future of clean and competitive industry for decades to come.

The EPP Group wants the ETS to remain a vital pillar of our climate policy and a driver of sustainable growth in Europe. Attracting investment in clean technology will be crucial to meeting our climate challenges. Therefore the cleanest companies should be given incentives to do even better and should get adequate protection against the risk of carbon leakage.

We want to stick to the Paris reduction targets, invest in innovation for an industrial renaissance in Europe and reward best-performing industry players with full protection against competitive disadvantages at the global level. No company will be left behind and all companies will play their part for a more clean and competitive Europe.

ETS reform: the EPP Group's priorities

General guidelines

• We are a reliable partner and respect our international obligations and will therefore stick to the agreed CO2 reduction target of 40% for 2030 as part of actions and efforts at the global level.
• Our main concern is the competitiveness of European industry and the jobs it delivers. These need to be safeguarded while respecting our CO2 reduction targets.
• In those sectors at risk of carbon leakage the top 10% of best performers should be granted 100% free allocations. Investment leakage should be monitored and prevented.
• Those sectors that are generally most vulnerable should be most protected.
• With a view to fairness, the data used should be as realistic and recent as possible while avoiding unnecessary red tape.
• Innovation and R&D should be stimulated in line with the needs of industry.
• SMEs as much as possible fall under a more simplified regime.
• The particular situation in Eastern European Member States should be recognised.

Translating these general guidelines into a concrete approach results in the need to create as much room for manoeuvre as possible in the area of free allocation, while avoiding/limiting the likelihood of the cross-sectoral correction factor (CSCF) applying. This within the general context of a 2.2% linear reduction factor.

Further funding opportunities for innovation and the modernisation of our energy and industry sectors are key priorities. 

Many options are interlinked and/or impact on each other. For example, more leniency on the flat rate reduction of the benchmarks without more overall free allocation means the risk of the CSCF applying will increase. We need to take these interlinkages into account if the final result is to be satisfactory for industry.

MAIN BUILDING BLOCKS

1. Linear Reduction Factor

We stick to the agreed CO2 reduction target of 40% for 2030 and the Linear Reduction Factor (LRF) of 2.2%.

We will take on board the stock-taking exercise due to start in 2023 to analyse whether the process is in line with the Paris agreement and the actions of our global competitors.

2. Auctioning vs free allocation

The proposed share of free allocation (43%) should be raised, in order to allow for more room for free allowances and addressing the carbon leakage risk.

The allowances for the innovation fund should be taken from the auction share rather than from the free allocation share.

The proposal allows for the use of third period allowances for production growth in the fourth period (through the new entrants reserve, made up of unspent free allowances from the 3rd period and 250 million European Union Allowances (EUA) from the Market Stability Reserve (MSR)).

3. ETS vs non ETS

Achievements in the non-ETS sector, especially those that stimulate European jobs, in particular in the building sector and sustainable transport, will create more room in the ETS sectors.

We should consider bringing the cap for the aviation sector more in line with the other ETS sectors for intra-EU flights, however wait with any conclusions for intercontinental flights until the ICAO General Assembly in September this year.

4. Free allocation

a. Carbon leakage

Here, several scenarios on the table centre around a tiered approach. Given the complexity and possible unwanted side effects of those scenarios that do not necessarily bring more fairness, we propose to keep the 2 proposed categories and focus instead on the (adaptation of the flat rates of the) benchmarks and a more targeted cross-sectoral correction factor.

Other elements that can, if possible and necessary, be taken on board include:

- phasing out, or lowering the free allowances for sectors not at risk of carbon leakage;

- keeping the option of a qualitative assessment under certain conditions and when justified;

- taking on board geographical considerations, while being aware that in practice this is hard to define;

- and adapting the 0.2 threshold. 

Measures to address the problem of investments leakage should be examined, for example through super credits, similar to those foreseen in the CO2 car regulation (for example, an extra amount of free allowances to the 5% best-performing installations in a sector).

b. Production

We should bring allocation closer to actual production levels, relying on the most up-to-date possible production data.

We need to fine-tune the current thresholds for production increases/decreases in the directive.

c. Benchmarks

Benchmarks should be updated more regularly (at least once shortly before the start of the trading period) on the basis of technological progress, real performance and verified emission data in order to take into account technological improvements.

We need to work with more fine-tuned flat rates. This could be done through, amongst other things, introducing extra categories or changed limit values, taking into account non-avoidable emissions.

d. CSCF

The main aim is to avoid the CSCF from applying and limit it to the extent possible.

A more targeted approach is needed should the CSCF be triggered: when the C- factor comes into effect, the most exposed sectors should be exempt.

5. Indirect costs

The MSR regulation (recital 9) specifies that "In pursuing the goal of a level playing field, the ETS review should consider harmonised arrangements to compensate for indirect costs at Union level".

Therefore we need to develop a common model at EU level for at least partially covering indirect costs. Member States can further top that up with national support (under certain conditions).

Possible action includes:

• x% of auctioning share to be pooled at EU level and allocated to cover a relevant proportion of indirect costs;
• clarifying and codifying the state aid guidelines within the ETS proposal.

6.  Funding for innovation and modernisation

Modernisation fund: we should ensure, inter alia, that district heating modernisation can be supported, that allocation rules are clear and that a simple, transparent and balanced governance structure is set up.

Innovation fund (to be financed by allowances from the auction share): we should ensure that CCS and CCU projects can trigger support under the innovation fund/support, topping up the existing amount of allowances in the innovation fund.

Member States should partially attribute auctioning revenues to finance R&D, abatement opportunities and other measures to reduce GHG emissions and contribute to international climate policy objectives (earmarking) while avoiding possible distortive effects on the internal market.

Small projects as well as projects in non-ETS sectors should be supported, with clear rules on what projects are recommended.

7. Small emitters

Less stringent monitoring and reporting requirements for small emitters should be provided.

The opt-out threshold for small emitters should be increased.

For more information and press enquiries please contact:

Dirk Gotink - +32 488 465 343

Greet Gysen - +32 497 028 054