EU: EU emissions trading system (ETS2) – financial compensation 

 

The EU Commission is conducting a public consultation under the EU emissions trading system (ETS2). 

Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishes a scheme for greenhouse gas emission allowance trading within the European Union and amends Council Directive 91/61/EC. This Regulation is adopted pursuant to, and in particular Article 30f(5) of, Directive 2003/87/EC. 

Commission Implementing Regulation (EU) 2018/2066 lays down detailed rules for the ex ante determination of the proportion of released fuel quantities attributable to activities covered under Chapter IVa of Directive 2003/87/EC. These rules aim to prevent the surrender of emission allowances for emissions arising from activities outside the scope of that Chapter. However, accurately identifying the category of final consumers may not always be feasible, particularly in cases where there is no direct supply relationship between the regulated entity and the final consumer. As a result, allowances may inadvertently be surrendered for emissions that are not covered by Chapter IVa, leading to the transfer of carbon costs to final consumers for activities outside the scope of that Chapter. 

To address circumstances where double counting or the surrender of allowances for emissions not covered by Chapter IVa of Directive 2003/87/EC cannot be fully prevented, it is necessary to establish rules for providing financial compensation to affected final consumers of fuels by Member States, in accordance with the requirements of the Directive. In addition, provisions should be introduced requiring the reporting of relevant data to enable adjustments to the Union-wide quantity of allowances issued under Chapter IVa, taking into account allowances that have been surrendered for emissions not falling within the scope of that Chapter. 

The total quantity of allowances for which Member States provide financial compensation above zero is expected to be lower than the overall number of allowances surrendered for emissions not covered by Chapter IVa of Directive 2003/87/EC. This is due to several factors. First, Member States may choose not to provide positive compensation to all final consumers affected by emissions from activities outside the scope of Chapter IVa. Second, to reduce administrative burdens, Member States may introduce thresholds below which compensation is not provided. Third, some eligible final consumers may not submit requests for compensation. Finally, Member States may not always possess complete information regarding instances where regulated entities have surrendered allowances for emissions arising from final uses that are not covered by Chapter IVa of the Directive. 

Where a Member State has expanded the scope of emissions trading to include an activity not listed in Annex III to Directive 2003/87/EC, in accordance with Article 30j of that Directive, the number of allowances surrendered for emissions not covered by Chapter IVa may be substantially reduced. In such circumstances, the quantity of allowances for which that Member State provides financial compensation above zero is likely to represent the most accurate estimate of the allowances surrendered for emissions outside the scope of Chapter IVa. 

Where a Member State has not extended the scope of emissions trading to an activity not included in Annex III to Directive 2003/87/EC, the total number of allowances surrendered for emissions not covered by Chapter IVa—equivalent to the total quantity of allowances compensated by Member States, including cases where compensation is set at zero—may be most reliably estimated by calculating the difference between verified emissions reported under Chapter IVa and the CO₂ emissions attributable to activities covered by that Chapter, as recorded in Member States’ national greenhouse gas inventories in accordance with Regulation (EU) 2018/1999 of the European Parliament and of the Council. 

Pursuant to Article 30c(3) of Directive 2003/87/EC, the Union-wide quantity of allowances issued under Chapter IVa is required to be adjusted annually from 2029 onwards to account for allowances surrendered in respect of emissions that fall outside the scope of that Chapter. 

Accordingly, Member States should provide annual information to the European Commission to enable the determination of the Union-wide quantity of allowances surrendered for emissions not covered by Chapter IVa. 

In accordance with Article 30f of Directive 2003/87/EC, Member States may provide financial compensation to final consumers of fuels where it was not possible to prevent the surrender of allowances for emissions not covered by Chapter IVa. To preserve the environmental integrity of the emissions trading system established under that Chapter, such compensation should be proportionate, non-discriminatory, and directly linked to the carbon costs incurred by eligible final consumers. 

To ensure that only consumers affected by double counting or unintended coverage receive compensation, Member States should apply appropriate verification methods. These may include confirming that regulated entities apply a default scope factor of 1 in their approved monitoring plans, requiring the use of a default scope factor of 1 for relevant fuel streams in accordance with Article 75l(6) of Implementing Regulation (EU) 2018/2066, or requesting supporting evidence from final consumers demonstrating that they have incurred the relevant carbon costs. 

Member States should retain flexibility in determining the methodology used to calculate the amount of CO₂ emissions eligible for compensation, allowing adjustments based on the specific activity concerned and the category of eligible final consumers. However, the methodology applied should provide a reliable estimate of the relevant CO₂ emissions while minimising administrative burdens. 

Member States should establish the eligible period for financial compensation in a manner that reflects the nature of the relevant activity and the characteristics of the final consumers concerned. The eligible period may be determined on a monthly, quarterly, or half-yearly basis, but should not exceed one calendar year. This approach ensures consistency with the annual operational cycle of the EU Emissions Trading System while reducing the administrative burden on final consumers engaged in activities outside the scope of Chapter IVa of Directive 2003/87/EC. 

Pursuant to Article 30f(5) of Directive 2003/87/EC, the calculation of financial compensation for final consumers of fuels must be based on the average auction price of emission allowances during the relevant reporting year. The carbon price applied for determining the compensation should correspond to the average allowance price during the period in which the fuel was purchased by eligible final consumers, as defined by the respective Member State. Accordingly, Member States should apply the average carbon price for the period covered by their compensation scheme, which may be established on a monthly, quarterly, or annual basis. 

To minimise the administrative burden on final consumers involved in activities not covered by Chapter IVa of Directive 2003/87/EC, financial compensation should be granted within the calendar year following the year in which the eligible compensation period occurred. 

To enable the European Commission to monitor the implementation of Article 30f(5) of Directive 2003/87/EC and this Implementing Regulation, Member States should submit annual reports detailing the financial compensation provided to eligible final consumers.