The European Union is establishing a greenhouse gas emission trading scheme for the cost-effective reduction of such emissions in the Community. This scheme should enable the Community and the Member States to meet the commitments to reduce greenhouse gas emissions made in the context of the Kyoto Protocol. Installations operating in the energy sector, iron and steel production and processing, the mineral industry and the paper and board industry will automatically be subject to the emission trading scheme.
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ACT
Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.
SUMMARY
This Directive establishes a Community greenhouse gas emission trading scheme from 1 January 2005. In this context, ‘allowance’ means the entitlement to emit a tonne of carbon dioxide or an amount of any other greenhouse gas with an equivalent global warming potential during a specified period.
Greenhouse gas emission permits
With effect from 1 January 2005, all installations carrying out any of the activities listed in Annex I to this Directive (activities in the energy sector, iron and steel production and processing, the mineral industry and the wood pulp, paper and board industry) and emitting the specific greenhouse gases associated with that activity must be in possession of an appropriate permit issued by the competent authorities.
Applications for greenhouse gas emission permits must describe:
- the installation, its activities and the technology used;
- the materials used which could emit the greenhouse gases listed in Annex II;
- the sources of gas emissions;
- the measures planned to monitor and report emissions.
The authorities will issue a permit provided that they are satisfied that the operator of the installation is capable of monitoring and reporting the emissions. A permit may cover one or more installations on the same site operated by the same operator. The permit will contain details of:
- the name and address of the operator;
- the installation’s activities and emissions;
- the monitoring methodology and frequency;
- the reporting requirements in respect of emissions;
- the obligation to surrender, during the first four months of each year, a quantity of allowances commensurate with the total emissions over the previous year.
Management of allowances
Each Member State must draw up a national plan complying with the criteria set out in Annex III to this Directive, indicating the allowances it intends to allocate for the relevant period and how it proposes to allocate them to each installation. The plans covering the initial three-year period specified in the Directive (1 January 2005 to 1 January 2008) had to be published by 31 March 2004 at the latest, and those relating to the subsequent five-year periods are to be published at least eighteen months before the beginning of the relevant period. When drawing up the plans, Member States should take due account of comments from the public. If a plan does not comply with the criteria in Article 10 of or Annex III to this Directive, the Commission may reject it within three months of notification.
Under the Directive, at least 95% of the allowances for the initial three-year period were to be allocated to the installations free of charge. For the five-year period beginning 1 January 2008, Member States must allocate 90% of the allowances free of charge.
Member States will ensure the free circulation of allowances within the European Community. Each year, no later than 30 April, they will also make sure that the operators of the installations surrender the correct quantity of allowances commensurate with the total emissions over the previous year. The surrendered allowances are subsequently cancelled.
Monitoring and reporting of emissions
At the end of the year, the operator must submit a report to the competent authority detailing the greenhouse gas emissions produced by the installation during that year. These reports must comply with the ‘guidelines for the monitoring and reporting of emissions’, adopted by the Commission on the basis of the criteria laid down in Annex IV to this Directive.
When verifying the reports submitted by operators, due account must be taken of the principles set out in Annex V to this Directive. If a report is not verified as satisfactory in accordance with the criteria in the Annex, the operator must cease trading allowances until the report is deemed satisfactory.
Penalties
Any operator failing to surrender, by 30 April at the latest, the quantity of allowances commensurate with the emissions from his installation during the previous year will be required to pay an excess emissions penalty. The penalty is EUR 100 for each tonne of carbon dioxide equivalent (EUR 40 during the three-year period starting on 1 January 2005) and will not release the operator from the obligation to surrender an amount of allowances equal to the excess emissions. Each Member State was to determine its own sanctions regime covering infringements of this Directive and notify the Commission accordingly by 31 December 2003 at the latest.
Kyoto Protocol project mechanisms
Directive 2004/101/EC reinforces the link between the EU’s emission allowance trading scheme and the Kyoto Protocol by making the latter’s ‘project-based’ mechanisms (Joint Implementation and the Clean Development Mechanism) compatible with the scheme. This will enable operators to use these two mechanisms in the allowance trading scheme to fulfil their obligations. The result will be lower compliance costs for installations in the scheme. It is estimated that annual compliance costs in the period 2008-12 for all installations covered in the enlarged EU will be reduced by more than 20%.
This Directive thus recognises joint implementation (JI) and clean development mechanism (CDM) credits as equivalent to EU emission allowances, except for those from land use, land use change and forestry activities. Credits from JI projects are called ’emission reduction units’ (ERU), while credits from CDM projects are called ‘certified emission reductions’ (CER). The Directive also takes steps to prevent ERUs and CERs being counted twice where they result from activities which also lead to a reduction in, or limitation of, emissions from installations covered by Directive 2003/87/EC.
Registries, reports and agreements
The Commission has adopted a regulation on the establishment of a system of registries in the form of an electronic database for monitoring the issue, holding, transfer and cancellation of allowances. These registries will also guarantee public access to information, confidentiality and conformity with the provisions of the Kyoto Protocol.
The Commission will nominate a Central Administrator to maintain an independent transaction log recording the issue, transfer and cancellation of allowances at Community level. The Central Administrator will conduct an automated check on each transaction relating to allowances. If irregularities are identified, the transactions in question will be suspended until the irregularities have been corrected.
Each year, the Member States will submit to the Commission a report on the application of this Directive and the Directive amending it. The Commission will publish an annual report based on these reports.
With a view to ensuring mutual recognition of allowances and the promotion of JI and the CDM, the Community may conclude agreements with third countries (which have ratified the Kyoto Protocol and are listed in its Annex B) using other greenhouse gas emission trading schemes.
Characteristics of the application of the emission allowance trading scheme
If the Commission agrees, from 2008 Member States may apply the emission allowance trading scheme to activities, installations and greenhouse gases other than those listed in the Annexes to this Directive, after studying the consequences of this on the internal market, competition and the emission allowance trading scheme. From 2005, Member States could also apply the scheme to Annex I installations which did not reach the emissions thresholds specified in the Annex.
Member States could apply to the Commission for certain installations to be temporarily excluded from the scheme until 31 December 2007 at the latest.
Member States may allow operators of installations listed in Annex I to form a pool of installations carrying out the same activity (for the three-year period which started on 1 January 2005 and the five-year period starting on 1 January 2008). Operators wishing to form a pool must nominate a trustee to manage the installations’ allowances and be responsible for surrendering allowances equal to the total emissions from the installations in the pool.
During the three-year period which started on 1 January 2005, Member States could apply to the Commission for certain installations to be issued with additional allowances in cases of force majeure. The Commission determined which situations constitute force majeure in a communication in 2004.
Background: Green Paper and Kyoto Protocol
The Commission Green Paper on greenhouse gas emission trading within the EU launched a debate on the suitability of such a scheme and the ways in which it might operate. This Directive is based on the results of the debate.
The adoption of the Kyoto Protocol by the Community and its Member States in 2002 commits them to reducing their greenhouse gas emissions by 8% in relation to 1990 levels between 2008 and 2012. This Directive, by establishing a market in greenhouse gas emission allowances, will help the Community and its Member States to effectively meet the commitments made in the framework of the Kyoto Protocol while safeguarding economic development and employment.
REFERENCES
Directive 2003/87/EC – 25.10.2003-31.12.2003 – OJ L 275 of 25.10.2003
Amending act:
Directive 2004/101/EC – 13.11.2004-13.11.2005 – OJ L 338 of 13.11.2004
RELATED ACTS
Proposal for a Directive of the European Parliament and of the Council of 23 January 2008 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community [COM(2008) 16 final – Not published in the Official Journal]
As part of the package of climate measures adopted in January 2008, the Commission proposes a modernisation of the emission allowance trading system, in particular the monitoring, reporting and verification measures. The proposal also provides for an extension of the scheme to include greenhouse gases other than CO2 and all large industrial emitters, while installations emitting less than 10 000 tonnes of CO2 per year would not take part in the scheme provided that substitution measures exist. The proposition would also replace the national allocation plans with a common auctioning system or allocation for free. Using credits generated by application of the clean development mechanism under the Kyoto Protocol will be limited to the current period covered by the scheme in order to provide wider access to the mechanism when an international agreement is signed.
Communication from the Commission of 23 January 2008: “20 20 by 2020 – Europe’s climate change opportunity” [COM(2008) 30 final – Not published in the Official Journal]
In January 2008 the Commission adopted a package of coherent and comprehensive measures to achieve the 2020 climate change and renewable energy source targets set by the EU in spring 2007.
Commission Decision 2007/589/EC of 18 July 2007 establishing guidelines for the monitoring and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council [Official Journal L 229 of 31.8.2007]
The 12 Annexes to this Decision contain guidelines for monitoring and reporting greenhouse gas emissions. Annex I sets out general guidelines. Additional guidelines for specific activities are set out in Annexes II to XI. Annex XII gives guidelines on continuous greenhouse gas emission measurement systems. These guidelines are designed to ensure regular and precise monitoring and reporting of greenhouse gas emissions in the Community. Their application is facilitated in the case of installations with average verified reported emissions of less than 25 000 tonnes of fossil CO2 per year during the previous trading period.
Communication from the Commission of 10 January 2007: “Limiting Global Climate Change to 2 degrees Celsius – The way ahead for 2020 and beyond” [COM(2007) 2 final – Not published in the Official Journal] After reviewing the costs and benefits of tackling climate change, the Commission recommends a number of measures aimed at limiting global warming to 2° Celsius. Some of these measures apply to the European Union (compulsory target for a reduction of greenhouse gas emissions and a revision of the emission rights trading mechanism, among other things) while others are at international level (in particular the negotiation of an international agreement).
Proposal for a Directive of the European Parliament and of the Council of 20 December 2006 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community [COM(2006) 818 final – Not published in the Official Journal]
This proposal is aimed at incorporating aviation activities in the greenhouse gas emission allowance trading scheme. The scheme will cover all flights arriving at or departing from airports in the Community from 1 January 2012 (2011 for flights between EU airports). Aircraft operators will be responsible for complying with the scheme requirements. It is also proposed that the allowance allocation method be harmonised across the EU and that each aircraft operator, including operators from third countries, be administered by one Member State only.
Report from the Commission of 15 December 2006 on assigned amounts (required under Article 7(1) of Decision 280/2004/EC of the European Parliament and of the Council concerning a mechanism for monitoring Community greenhouse gas emissions and for implementing the Kyoto Protocol) [COM(2006) 799 final – Not published in the Official Journal] This report is a summary of the technical report prepared by the European Environment Agency (EEA) to be submitted on behalf of the EU to the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) to facilitate the calculation of the assigned amount under the Kyoto Protocol and demonstrate the EU’s capacity to account for its emissions and assigned amount for the first commitment period.
Commission Decision 2006/780/EC of 16 November 2006 on avoiding double counting of greenhouse gas emission reductions under the Community emissions trading scheme for project activities under the Kyoto Protocol pursuant to Directive 2003/87/EC of the European Parliament and of the Council [Official Journal L 316 of 16 November 2006].
Communication from the Commission of 13 November 2006: “Building a global carbon market – Report pursuant to Article 30 of Directive 2003/87/EC” [COM(2006) 676 final – Not published in the Official Journal] At 30 April 2006 emission reports had been filed for almost 9 000 installations. The data showed that greenhouse gas emissions were lower than had been expected, a sign that companies had reduced emissions from year one of operation of the scheme or that the level of baseline emissions had been overestimated by the Member States. In 2005, more than 320 million allowances worth more than 6.5 billion were traded at exchanges or bilaterally. There was a sharp fall in market prices in May 2006, when the Member States’ 2005 verified emissions data were released; the fall was due in particular to the fact that the actual level of reported emissions was lower than forecast.
As a result of the experience gained in the first 18 months of operation of the allowance trading scheme, the Commission sees a need to make the scheme simpler and more predictable. It thinks the scope of the scheme should be clarified (interpretation of “combustion installation”) and expanded to include other gases (N2O and CH4 in particular) and other sectors. The Commission would also like to see further harmonisation of the cap-setting and allocation process and increased predictability of the scheme, in particular as regards the length of each allocation period. It also sees a need for more robust compliance and enforcement of Community rules, possibly by laying down guidelines or stricter provisions on the verification of reports by third parties. Reviewing the scheme would provide the opportunity to consider the possibility of linking the Community emissions trading scheme with third-country schemes and look into how developing countries and countries in economic transition could be involved. Lastly, the Commission intends to study the various possibilities for improving the institutional and procedural aspects of the Community scheme and a global carbon market, and examine the interplay with other market instruments, in particular energy taxation. The scheme review procedure will involve wide-ranging consultation with stakeholders.
Communication from the Commission of 22 December 2005: “Further guidance on allocation plans for the 2008 to 2012 trading period of the EU Emission Trading Scheme” [COM(2005) 703 final – Not published in the Official Journal]
In order to incorporate coherently the lessons of the first allocation period, the Commission invites the Member States to simplify their allocation plans for the second exchange period (2008-12) and specifies certain points relevant to these plans. These concern in particular the fixing of national ceilings, the installations covered by the Directive and the limitation of operators’ use of the instruments provided by the Kyoto Protocol (joint implementation and clean development mechanism) to achieve compliance.
Commission Regulation (EC) No 2216/2004 of 21 December 2004 for a standardised and secured system of registries pursuant to Directive 2003/87/EC of the European Parliament and of the Council and Decision No 280/2004/EC of the European Parliament and of the Council [Official Journal L 386 of 29.12.2004]
Amended by: Regulation (EC) No 916/2007 [Official Journal L 200 of 1.8.2007].
Each of the Member States must establish a register in the form of a standardised electronic database containing information on the issue, holding, transfer and cancellation of allowances. This information will ensure that transfers comply with obligations under the Kyoto Protocol.
Communication from the Commission dated 7 January 2004 on guidance to assist Member States in the implementation of the criteria listed in Annex III to Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, and on the circumstances under which force majeure is demonstrated [COM(2003) 830 final – Not published in the Official Journal]
The purpose of this communication is:
- to assist Member States in drawing up their national allocation plans by indicating the scope of interpretation of the Annex III criteria that the Commission deems acceptable. These criteria are: Kyoto commitments, assessments of emissions development, potential to reduce emissions, consistency with other Community legislation, non-discrimination between companies or sectors, participation of new entrants, early action, clean technology, involvement of the public, list of installations covered, and competition from outside the Union;
- to support the Commission assessment of national allocation plans drawn up by the Member States;
- to describe the circumstances under which force majeure is demonstrated. These are defined as circumstances beyond the control of the installation operator and the Member State in question (such as wars, natural disasters, terrorist acts or sabotage).
Quota allocation
Commission Decision 2006/944/EC of 14 December 2006 determining the respective emission levels allocated to the Community and each of its Member States under the Kyoto Protocol pursuant to Council Decision 2002/358/EC [Official Journal L 358 of 16.12.2006]
Corrigendum [Official Journal L 367 of 22.12.2006]
Commission Decisions of 15 September 2005 pursuant to Article 9 of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC [Official Journal C 226 of 15.9.2005]
Communication of 20 October 2004 from the Commission to the Council and to the European Parliament on Commission Decisions of 20 October 2004 concerning national allocation plans for the allocation of greenhouse gas emission allowances of Belgium, Estonia, Finland, France, Latvia, Luxembourg, Portugal, and the Slovak Republic in accordance with Directive 2003/87/EC [COM(2004) 681 – Not published in the Official Journal]
In this communication and the Decisions it refers to, the Commission assesses the national allowance allocation plans notified by Belgium, Estonia, Finland, France, Latvia, Luxembourg, Portugal and the Slovak Republic. None of these plans has been rejected outright, but certain aspects of the plans of Finland, France, Portugal and the Slovak Republic have been rejected. Regarding the latter, the communication sets out the changes the Commission has specified to make the proposed plans acceptable without a further procedural stage. These eight plans represent around 15% of the overall estimated volume of allowances for the first trading period (2005-07).
Communication from the Commission to the Council and to the European Parliament on Commission Decisions of 7 July 2004 concerning national allocation plans for the allocation of greenhouse gas emission allowances of Austria, Denmark, Germany, Ireland, the Netherlands, Slovenia, Sweden and the United Kingdom in accordance with Directive 2003/87/EC [COM(2004) 500 – Not published in the Official Journal]
In this communication and the Decisions it refers to, the Commission assesses the national allowance allocation plans notified by Denmark, Germany, Ireland, the Netherlands, Austria, Slovenia, Sweden and the United Kingdom. None of these plans has been rejected outright, but certain aspects of the plans of Germany, Ireland, Austria and the United Kingdom have been rejected. Regarding the latter, the communication sets out the changes the Commission has specified to make the proposed plans acceptable without a further procedural stage. These eight plans represent almost half the overall estimated volume of allowances for the first trading period (2005-07), i.e. a total of more than 2.88 billion tonnes, breaking down as follows: Denmark: 100.5 million tonnes; Germany: 1 499 million tonnes; Ireland: 66.96 million tonnes; Netherlands: 285.9 million tonnes; Austria: around 98.24 million tonnes; Slovenia: around 26.33 million tonnes; Sweden: 68.7 million tonnes; United Kingdom: 736 million tonnes.
