Green light for the preliminary draft of the Law that revises the CO ₂ emission rights trade regime for the 2021-2030 period, aligning it with the objectives of the Paris Agreement and promoting low-carbon technologies

Council of Ministers 09/06/2020

• The legislative proposal modifies the current standard to adapt it to the new emission reduction targets that the European Union has set as a contribution to the Paris Agreement, and that are specified in at least 40 percent in 2030 with respect to the values of 1990

• The emissions trading system is the EU’s main tool for regulating greenhouse gas emissions from industry, the electricity generation sector and air transport

• In 2019, emissions from sectors affected by emissions trading fell by 35% in the EU as a whole, and by 45% in Spain, in both cases compared to 2005, the first year of operation of this scheme

• In Spain it affects almost 970 installations and about 30 air operators, whose emissions represent around 40% of total national emissions of all greenhouse gases

• The draft law is sent to the Courts to continue with its processing

The Council of Ministers, at the proposal of the Ministry for the Ecological Transition and the Demographic Challenge, has given the green light today for its referral to the Courts to the draft law that regulates the greenhouse gas (GHG) emission rights trading system. This legislative proposal modifies the current standard, to introduce the novelties for the period 2021-2030 adopted in the EU Directive 2018/410 and adapt it to the new emission reduction objectives that the European Union has set as a contribution to the Paris Agreement, and that are specified in at least 40 percent in 2030 with respect to the values of 1990.

Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to intensify cost-effective emission reductions and facilitate investments in low-carbon technologies was published in the Official Journal of the European Union on 19 March 2018, as well as Decision (EU) 2015/1814. Directive (EU) 2018/410 constitutes the European Union’s regulatory framework for the trading period 2021-2030 (phase IV) of the EU Emissions Trading System (EU ETS).

FACILITATING INVESTMENTS IN LOW-CARBON TECHNOLOGIES

The text approved by the Council of Ministers includes the regulation in Spain of the fourth phase (2021-2030) of the EU ETS, carrying out the transposition of Directive (EU) 2018/410; defines common rules for all participants in this system and sets out mechanisms to step up emission reductions in a cost-effective manner and facilitate investments in low-carbon technologies.

The EU ETS is a market instrument that pursues an environmental aim. In it, the figure of the emission right is created, which is an authorization to emit a ton of CO2 equivalent that can be the object of purchase and sale. The total number of allowances issued annually defines the environmental ambition and supply on the market: the lower that total, the lower the emissions that can be produced and the higher the duty price on the market, and vice versa. This stimulates investment in cleaner technologies that allow industries operating in the system to be more efficient.

This system is the EU’s main tool for regulating greenhouse gas emissions from industry, the power generation sector and air transport in all states of the European Economic Area (the EU Member States together with Norway, Iceland and Liechtenstein). The regulated gases are carbon dioxide (CO2), nitrous oxide (N2O), and some perfluorocarbons (CF4 and C2F6).

1,000 AIR FACILITIES AND OPERATORS AFFECTED

In total, in the EU it covers more than 10,500 fixed installations and about 500 air operators, whose greenhouse gas emissions are around 1,740 million tons of CO2 equivalent, around 40% of the total emitted in the participating countries. In Spain, this regime affects almost 970 installations and about 30 air operators. It also accounts for around 40% of total national emissions of all greenhouse gases.

To achieve the EU’s target of reducing emissions of at least 40 per cent by 2030 compared to 1990, sectors included in the trading system must achieve a combined emission reduction of 43% by 2030 compared to 2005 levels. To achieve these levels, Directive (EU) 2018/410 regulating the EU ETS reinforced some aspects, which it now proposes to transpose in this draft law.

Thus, the annual reduction in emissions goes from 1.74% during phase 3 (2013-2020) to 2.2% in phase 4 (2021-2030). Although the main method of allocating allowances to companies is auctioning, free allocation continues. The proposal improves carbon leakage provisions, more focused on sectors at risk of carbon leakage by updating reference levels to reflect technological progress, improving the classification of sectors based on their risk of carbon leakage and further aligning allocation levels to actual production levels. Allocation levels may be revised to adjust to the activity level of the facility when variations of +/- 15% occur.

In addition, Member States may exclude from the system installations of less than 2,500 tonnes of carbon dioxide equivalent. The exclusion regime for facilities that emit less than 25,000 tonnes of carbon dioxide equivalent and hospitals, already in force in the current period, will continue to exist.

MODERNIZATION AND INNOVATION FUNDS

Two new funds are also created: the Modernisation Fund and the Innovation Fund, to finance the transition to a low-carbon economy. The Innovation Fund will promote the development of new technologies by granting aid for the construction of large demonstration projects of pre-commercial scale in four main areas of action: innovative renewable energies, energy storage, the decarbonization of industry and the capture and storage or use of CO2. It is expected that throughout its life this fund will distribute more than 10,000 million euros to the chosen projects. For its part, the Modernisation Fund is a tool only accessible to countries with GDP per capita below 60% of the EU average, and should be used to modernise the energy systems of these countries.

THE MARKET STABILITY RESERVE

Another essential element in the new design of the EU ETS, in this case in operation since 1 January 2019, is the market stability reserve. It was created to address the circulating surplus of emission allowances that placed the price of emission allowances at levels much lower than those necessary to generate real incentives in the reduction of emissions. It was also designed to increase the system’s resilience to future unforeseen market events.

The stability reserve is a mechanism that automatically regulates the supply of allowances that is put on the market, so that there is a reasonable surplus of allowances in circulation, which allows liquidity but without sinking the price. It is thus a question of ensuring the effectiveness of the system itself and of maintaining environmental ambition. The Stability Reserve already contributes to improving the functioning of the Emissions Trading System. Since it came into operation, the balance between supply and demand has been remarkably restored and, very recently, it has been seen that the effect of the COVID-19 crisis on the emission right has been much lower than in other markets.

HOW EMISSIONS TRADING WORKS

The EU ETS is ultimately a mechanism for implementing the polluter pays principle. Each year, regulated entities have to monitor their emissions, and account for them by delivering a number of allowances equal to the emissions produced. In this way, the reduction of emissions is being economically encouraged. Since the emission right has an economic value, by reducing emissions, regulated entities are reducing their costs.

Emissions trading does not set individualised reduction obligations. Each entity decides which compliance strategy is best for it. It can be the investment in improvements that reduce the emissions of the installation, or it can be going to the market to buy the required emission rights. Thus, reductions will occur where it is most economically efficient.

Source: Ministry for the Ecological Transition and the Demographic Challenge