Consultation on revision of the EU Emission Trading System (EU ETS) Directive

Transcription

1 Consultation on revision of the EU Emission Trading System (EU ETS) Directive Fields marked with * are mandatory. Introduction On 24 October 2014, the European Council agreed on the 2030 framework for climate and energy[1], including a binding domestic target for reducing greenhouse gas (GHG) emissions of at least 40% in 2030 as compared to To meet this target, the European Council agreed that the emissions in the EU Emission Trading System should be reduced, compared to 2005, by 43%. A reformed EU ETS remains the main instrument to achieve the emission reduction target. The cap will decline based on an annual linear reduction factor of 2.2% (instead of the current 1.74%) from 2021 onwards, to achieve the necessary emission reductions in the EU ETS. The European Council furthermore gave strategic guidance on several issues regarding the implementation of the emission reduction target, namely free allocation to industry, the establishment of a modernisation and an innovation fund, optional free allocation of allowances to modernise electricity generation in some Member States. The strategic guidance given by European leaders on these elements will be translated into a legislative proposal to revise the EU ETS for the period post This constitutes an important part of the work on the achievement of a resilient Energy Union with a forward looking climate change policy, which has been identified as a key policy area in President Juncker's political guidelines for the new Commission. The purpose of the present stakeholder consultation is to gather stakeholders' views on these elements. This consultation focuses on issues not yet addressed in the consultations recently conducted for the 2030 Impact Assessment[2], the Impact Assessment for the carbon leakage list for [3] and the consultation conducted on post-2020 carbon leakage provisions[4]. In order to take stock of the EU ETS (established by Directive 2003/87/EC) as a policy measure, this consultation also contains questions concerning the general evaluation of this policy measure. The questionnaire consists of 7 chapters. You are invited to answer questions on the chapters which are relevant to you.

2 0. Registration 0.1. What is your profile?* Business A small and medium enterprise Trade association representing businesses SME business organisation Government institution/regulatory authority Academic/research institution Non-governmental organisation Citizen Other 0.2. Please enter the name of your business/organisation/association etc.:* Finnish Energy Industries 0.3. Please enter your contact details (address, telephone, ):* Finnish Energy Industries Avenue de Cortenbergh Bruxelles, Belgium Tel ETS issues : joona.poukka@energia.fi 0.4. If relevant, please state if the sector/industry you represent falls under the scope of the EU ETS:* yes no not relevant Please explain: 0.5. If relevant, please state what sector your represent:* Energy-intensive industry Energy sector Other Please specify:

3 0.6. The results of this stakeholder consultation will be published unless stated otherwise. Can we include your replies in the publication?* yes no partially Please state which given information is sensitive and cannot be disclosed: 0.7. Register ID number (if you/your organisation is registered in the Transparency register):

4 1. Free allocation and addressing the risk of carbon leakage The European Council has concluded that free allocation to prevent the risk of carbon leakage should not expire as foreseen in the current legislation, but should continue also after 2020 as long as there are no comparable efforts to reduce emissions in other major economies. Extensive stakeholder consultation was already carried out on the post-2020 carbon leakage provisions, as well as on aspects related to innovation support. The process included three full-day stakeholder meetings (June, July and September 2014) and a written consultation conducted for 12 weeks (8 May 31 July, 2014). The written consultation covered 23 multiple choice questions with space for motivations, and a question allowing respondents to bring up any other issue they felt was important or insufficiently covered. The documents and minutes of the meetings, as well as the submissions and the analysis thereof in the case of the written consultation, are available on the Commission website. Information from the stakeholder meetings: Replies and summary of the written consultation: The results of the above mentioned public consultation are being taken into account in the preparation of the legislative proposal. In order to reduce the administrative burden for stakeholders and the Commission, the present consultation focuses on issues not already covered in this recently finalised public consultation. Respondents are nevertheless invited to add to the replies provided in the earlier consultations if deemed necessary in the light of the conclusions of the European Council in this area. 1.1 The European Council called for a periodic revision of benchmarks in line with technological progress. How could this be best achieved in your view and, in particular, which data could be used to this end? How frequently should benchmarks be updated, keeping in mind administrative feasibility? The energy sector is concerned on the competitiveness of their Industrial customers. As long as the EU's main international trading partners do not make equivalent efforts to price CO 2 in order to reduce greenhouse gas emissions, the need for policies to avoid carbon leakage remains. The allocation of free emission allowances should be based on EU-wide harmonized efficiency benchmarks that provide incentives to reduce greenhouse gas emissions and for application of energy efficient techniques and should not provide incentives to increase emissions. In general, the ambition level for setting benchmarks should reflect the reduction trajectory needed to avoid as far as possible the application of the unilateral cross-sectorial correction factor. The present approach of average of the 10% most efficient installations should remain. Benchmarks should be revised regularly in line with the trading periods, the corresponding revision of the

5 carbon leakage list and in accordance with corresponding sector roadmaps and BREF documents on Best Available Technology In order to reflect the developments in state of the art commercially available technologies. The activity data should reflect recent data from the third trading period. The activity data should be based on a longer-term average taking into account multiple years. Adequate provisions need to be established to take into account significant capacity changes and new built before the beginning of the fourth trading period. The annual variation of temperatures cause variation in the output of district heating as well as combined heat and power, but this variation should not be interpreted as change in capacity and not cause annual variation in allocation. Changes in heat demand should be taken into account only if the change is permanent or forms a trend over years. This is also to avoid transfer of emissions from the ETS sector to the non-trading heating sector, which could compromise the overall efficiency improvements in the heating sector. 1.2 The European Council has defined guiding principles for the development of post-2020 free allocation rules which provide inter alia that "both direct and indirect costs will be taken into account, in line with the EU state aid rules" and that "the most efficient installations in these sectors should not face undue carbon costs leading to carbon leakage" while "incentives for industry to innovate will be fully preserved and administrative complexity will not be increased" and while "ensuring affordable energy prices". Do you have views how these principles should be reflected in the future free allocation rules? The system of free allocation must be maintained, but at the same time be considered as a transitional instrument to address direct carbon leakage. It should be seen as a short to medium-term tool, while international trading partners do not make equivalent efforts. The final objective for the EU should be an international agreement which makes carbon leakage measures unnecessary. The system must therefore reflect progress being made in the international climate change negotiations with respect to the competitive situation of the affected industry sectors in the competing markets. Compensation for indirect costs should be seen equally important with free allocation and needs to be addressed on EU level. However, compensation should remain in line with EU state aid guidelines and be further harmonised across the Member States to ensure a level playing field within the EU. Furthermore the list of industrial sectors deemed to be exposed to indirect carbon leakage should be periodically revised using the same frequency and intervals like the revision procedure for updating the list of sectors exposed to direct carbon leakage. 1.3 Should free allocation be given from 2021 to 2030 to compensate those carbon costs which sectors pass through to customers? How could free allocation be best determined in order to avoid windfall profits? Free allocation of allowances should be given only to companies clearly exposed to the risk of carbon leakage. By definition, sectors able to pass carbon costs on to their customers are not at risk of carbon leakage and should be excluded from free allocation. As outlined above, the coordination for indirect cost compensation should be set at EU level by a harmonized EU framework in order to ensure fair competition and predictability: Financial compensation can be envisaged, under a harmonized EU approach, using revenues from auctioning. Financial compensation should, among other factors, reflect actual allowance price development. Free allocation of CO2 allowances can also be envisaged, but should only cover real, physical emissions in the various industrial sectors, and not be used for financial compensation for indirect emission costs.

6 1.4 Are there any complementary aspects you would like to add to the replies given to the previous written consultation in the light of the European Council conclusions? One of the main objectives of the EU ETS reform should be to find a right balance between free allocation and auctioning volumes in order to meet hedging needs of both the industry and utilities. A minimum of liquidity of the carbon market is crucial and must be ensured. The reform should therefore as priority focus on fixing the existing over allocation of allowances and only secondary look to the introduction of new support mechanisms or the extension of existing ones (Innovation fund NER400, Modernisation fund, etc.). The review of the ETS should pay the utmost attention to the risk of internal carbon leakage. The current scope of the ETS does not cover all competing installations on the heat market. Overall, the heat sector is neglected in EU climate policy, and where it is addressed, a system level approach is missing. A thorough consideration and impact assessment of enlarging the scope of the ETS on the heating sector is needed, in order to gain information on how this would incentivise emission reduction and what would be the impacts on competition in the heating sector and the dynamics of emissions trading. Background: The heat market represents 40% of all energy consumed in the EU and a significant level of CO2 emissions. This market is currently dominated by boilers using fossil fuels. District heating is an efficient alternative to transform the heat market towards high efficiency and renewable energy sources. Today recycled heat (cogeneration, use of surplus heat and heat pumps) and renewables represent over 80% of District Heat supplies. 2. Innovation fund The European Council has concluded that 400 million allowances in 2021 to 2030 should be dedicated for setting up an innovation fund to support demonstration projects of innovative renewable energy technologies, carbon capture and storage (CCS) as well as low carbon innovation in industrial sectors. To make this fund operational, a legal basis has to be created in the EU ETS Directive while further implementation modalities can be set out in secondary legislation. The work can build on the experience with the existing "NER300" programme which made available 300 million allowances for CCS and innovative renewable energy technologies[1]. With regard to establishing a legal basis for the innovation fund as part of the revision of the EU ETS Directive, the Commission seeks feedback on the following questions: 2.1 Do you see reasons to modify the existing modalities applied in the first two calls of the NER300? Are there any modalities governing the NER 300 programme which could be simplified in the design of the innovation fund? If you see the need for changes, please be specific what aspects you would like to see changed and why. The objective of an upcoming ETS funded innovation fund should be to drive cost-efficient and smooth decarbonisation of the ETS sector. Thus the priority should be to fund projects with technologies that are likely to feed the demand-pull with significant, affordable and timely emission reductions. In addition to this principle, the approach should not favour or neglect any technologies. NER300 contains two key lessons on pitfalls in energy innovation demonstration policy: Insufficient coordination and Member State commitment: The NER300 set-up made Member State support a precondition. Yet in the end, Member States did not commit the funds required, a factor that

7 eventually undermined the entire programme. This instability of commitment and lack of coordination of Member State and EU RD&D efforts create a significant impediment across EU innovation policy, although the result is rarely as directly visible as in the case of NER300. Lack of demand-pull and unrealistic expectations for private actors. CCS is dependent on a functioning EU ETS. The unexpected effects of the economic crisis on the carbon price and the subsequent inability of EU policy to restore the EU ETS to a meaningful role in EU climate policy have generated significant uncertainty about the future potential market for CCS. In brief, demand-pull has been all but removed. This also fundamentally undermines the private-sector case for co-investment in demonstration. Especially with the collapse of Member State commitment, the policy environment failed to generate the market rewards that could have provided a case for high-risk investment by private actors. Given these lessons from NER300, our suggestions for the design of the innovation fund are the following: Innovation funds on the national level have to compete with other national needs and political targets in the general allocation of the budget funds. Therefore, the EU should establish a community-wide technology fund considering the experience and lessons learnt of the NER 300. The administrative burden for project application should be reduced and the decision procedures for granting support must be faster and much more efficient to avoid insecurities and delays for the operators. The application of cross-border projects involving several member states and companies should be more facilitated. 2.2 Do you consider that for the extended scope of supporting low-carbon innovation in industrial sectors the modalities should be the same as for CCS and innovative renewable energy technologies or is certain tailoring needed, e.g. pre-defined amounts, specific selection criteria? If possible, please provide specific examples of tailored modalities. As stated above, the objective of an upcoming ETS funded innovation fund should be to drive cost-efficient and smooth decarbonisation of the ETS sector. Thus the priority should be to fund projects that are likely to feed the demand-pull with significant, affordable and timely emission reductions. In addition to this principle, the approach should not favour or neglect any technologies. Pre-defined amounts or other criteria would risk lowering the results on the main objective. The competition for funding should be across technologies and across sectors. Technologies related to CCS, electricity generation, ETS sector heating, energy demand, energy transfer, industrial processes or other potential areas of emission reductions in the ETS sector should be evaluated with similar criteria. 2.3 Are there any complementary aspects regarding innovation funding you would like to add to the replies given to the previous written consultation in the light of the European Council conclusions? The timing of inflow of these NER400 allowances into the market should also be made predictable for market participants. 3. Modernisation fund The European Council has concluded that 2% of the total EU ETS allowances in 2021 to 2030 should be dedicated to address the particularly high investment needs for Member States with GDP per capita below 60% of the EU average. The aim is to improve energy efficiency and to modernise the energy systems of

8 the benefitting Member States. The fund should be managed by the beneficiary Member States, with the involvement of the European Investment Bank (EIB) in the selection of projects. To make this fund operational, a legal basis has to be created (in the EU ETS Directive), while further implementation modalities can be set out in secondary legislation. With regard to establishing a legal basis for the modernisation fund as part of the revision of the EU ETS Directive, the Commission seeks feedback on the following questions: 3.1 Implementation of the modernization fund requires a governance structure: What is the right balance between the responsibilities of eligible Member States, the EIB and other institutions to ensure an effective and transparent management? The inclusion of several welfare redistribution mechanisms to the ETS reform is not directly linked to the task the system was created for. However, as political decision of these mechanisms has been made by the council, it is important that the Commission and the EIB have adequate tools for overseeing the modernization, so the element will provide for the decarbonisation of the concerned sectors and the redistributed funds be utilized efficiently. The commission should set the framework and principles according to which the EIB can develop criteria for funding. 3.2 Regarding the investments, what types of projects should be financed by the modernisation fund to ensure the attainment of its goals? Should certain types of projects be ineligible for support? The Modernisation Fund should be established to assist vulnerable EU Member States to modernise their energy systems and in particular lead to the improvement of their generation fleet (to best available low carbon technologies) and distribution grids. There should be no projects automatically ineligible for support. The project portfolio should be technologically neutral. The fund should not duplicate already existing aid schemes (e.g. the existing social policy support instruments for households) potential project restrictions can therefore result from already existing national support programmes. The range of projects should be individualised for each of the eligible Member States. 3.3 Should there be concrete criteria [e.g. cost-per-unit performance, clean energy produced, energy saved, etc.] guiding the selection of projects? The projects should essentially be evaluated by their ability to initiate market-driven, permanent, timely emission reductions with least cost, bearing in mind an EU system level approach in their net impacts. 3.4 How do you see the interaction of the modernisation fund with other sources of funding available for the same type of projects, in particular under the optional free allocation for modernisation of electricity generation (see section 4 below)? Would accumulation rules be appropriate? The existing rules concerning derogation should be applied according to the existing Article 10c of the EU ETS

9 Directive 2003/87/EC that says that simultaneous support is allowed in case of specific forms of support, but the limit of 100% coverage of investment costs can never be exceeded. As a general principle overpayment should however be avoided, e.g. by limiting public funding to a projectbased share of the investment volume. Market incentives should be at all times the main driver for investments, even if public support is granted. A mix of different instruments can thus be considered for specific projects as long as these projects fulfil the relevant eligibility criteria. 3.5 Do you have views how the assessment of the projects should be reflected in the forthcoming 2030 governance process (e.g. national climate programmes, and plans for renewable energy and energy efficiency)? The assessment of projects should be done in a separate procedure, but the overall results should be included and clearly accounted for in the national reporting programmes and their contribution included in overall European CO 2 mitigation, renewables and energy efficiency target compliance. 3.6 Should the level of funding be contingent on concrete performance criteria? All projects eligible for funding should be able to use the funding if they meet the compliance coefficients that are determined ex-ante. However although it looks adequate that the level of funding should be contingent to performance criteria, it must be taken into account that the performance of some technologies in the RD&D phase can be negatively affected and these technologies never develop if they do not receive the appropriate financial push. 4. Free allocation to promote investments for modernising the energy sector The conclusions of the European Council provide for the continuation after 2020 of the mechanism foreseen in Article 10c of the EU ETS Directive, which allows some Member States to opt to hand out free allowances to power plants in order to promote investments for modernising the energy sector. The current Article 10c modalities, including transparency, should be improved to promote investments modernising the energy sector, while avoiding distortions of the internal energy market. With a view to reviewing and improving the current modalities as part of the revisions to the EU ETS Directive, the Commission seeks feedback on the following questions: 4.1 How can it be ensured that investments have an added value in terms of modernising the energy sector? Should there be common criteria for the selection of projects? The current approach that investment projects under national investment plans should meet certain criteria as laid down in the Guidance document on the optional application of Art. 10c of the Directive 2003/97/EC should be maintained. The effectiveness of derogation is primarily given by the fact that the selection of types of

10 projects falls under the responsibility of individual operators. Member States together with the European Commission only provide the overall framework rules. This system should be maintained after Following selection criteria should be envisaged in order to guarantee both cost efficiency and effectiveness of the made investments: - Investments must not interfere with the internal market - Competition must not be distorted - Diversification of fuel supply and efficiency improvements The current compliance measures under national investment plans under art 10c can be used as a solid basis. The implementation of the national plans in some of the countries has however shown that there was no sufficient public information about the terms and the applied assessment criteria for project eligibility by the national authorities. The country reports to EC for the implementation of the investments have revealed that some investments planned for the first year have not been made which undermines the procedure for assessing project viability. Therefore, strengthening the provisions concerning project selection requirements will contribute for achieving higher added value in the modernization of the energy sector of the countries and for enhancing the transparency of the investment procedure. In addition, the current low allowance prices have not given a proper investment signal to the operators and have made the participation in the national investment plans in some of the countries rather unattractive, especially for some of the operators who did not have own projects and had to make installments calculated on the basis of a specific fixed price for a whole year. Thus a common approach regulating the obligations of participants and the investors in the national plans will increase the thrust and the success of the whole concept of providing free allowance to these countries. 4.2 How do you see the interaction of the free allocation to energy sector with other sources of funding available for the same type of projects, e.g. EU co-financing that should be made available for the projects of common interest under the 2030 climate and energy framework? Would accumulation rules be appropriate? State aid in the field of EU ETS is regulated by the Commission's guidelines and these rules should be maintained after It is important to bear in mind that the derogation according to Article 10c does not constitute a classic form of support. Due to the fact that different support measures (i.e. modernisation fund, free allocation, structural Funds) are designed to prevent from or remedy different market failures or country-specific problems it is advisable to allow Member States to apply all of those instruments with reference to the same (type of) projects, as long as such projects fulfil the relevant eligibility criteria. Exclusion of the possibility to combine financing from different sources could hinder the achievement of the main goals of particular measures, i.e. regional development, improvements in energy efficiency or the generation fleet. A mix of different instruments up to 100% coverage of investment costs can thus be considered for specific projects as long as these projects fulfil the relevant eligibility criteria. As a general principle however overpayment should be avoided, e.g. by limiting public funding to a project-based share of the investment volume. Market incentives should remain the main driver for investments, even if public support is granted. 4.3 Do you have any views how the assessment of the projects should be reflected in the forthcoming 2030 governance process (e.g. as regards improving transparency)? The results of implementing the modernisation fund and the derogation should be summarised in national plans as part of the 2030 governance process. The level of transparency depends on the selected derogation scheme. In most of the countries maximum

11 transparency is already ensured. In the derogation process external financial and energy auditors are involved and subsequently all elements are subject to the control of a competent authority. Last but not least, detailed information is reported to the Commission. 4.4 The maximum amount of allowances handed out for free under this option is limited. Do you think eligible Member States should use the allowances for a period of time specified in advance (e.g. per year), or freely distribute them over the period? (Please explain your motivation.) Due to the complexity and length of the investment cycle in the energy sector, it is essential for operators to have certainty as regards the quantity of allowances available to them. The timing of inflow of allowances into the market should be predictable for market parties. Optimal would be to continue with the current system. 4.5 Should there be priorities guiding the Member States in the selection of areas to be supported? yes no If so, which of the following areas, if any, currently supported through investments for modernisation of electricity generation up to 2020 should be prioritised for support up to 2030 and why? Interconnectors Smart Grids Super-critical coal Gas Renewable energy Energy storage Energy efficiency Other (please elaborate) Please explain in detail: The approach should be technology neutral and aim for EU system level emission reductions, prioritizing projects that will utilize and advance the internal market. Any specific electricity generation technology should not receive priority.

12 4.6 How can improved transparency be ensured with regard to the selection and implementation of investments related to free allocation for modernisation of energy? In particular regarding the implementation of investments, should allowances be added to auctioning volumes after a certain time period has lapsed in case the investment is not carried out within the agreed timeframe? - 5. SMEs / regulatory fees / other In order to allow taking stock of the EU ETS aspects beyond those examined by the European Council, respondents are also invited to provide feedback on certain other questions. The Commission ensures that better regulation principles govern all of the policy work, including that the specificities of small and medium sized enterprise (SMEs) are taken into due consideration. Member States can exclude certain small installations from the EU ETS in the current trading period ( ) if taxation or other equivalent measures are in place that will cut their emissions. If such a possibility was to be reviewed, a legal basis would have to be created in the EU ETS Directive. The accurate accounting of all emission allowances issued is assured by a single Union Registry with strong security measures. The operations were centralised in a single Registry operated by the Commission, following a revision of the ETS Directive in This has replaced Member States' national Registries. Despite the considerable resources from the EU budget required for maintaining the EU Registry, as does supporting work on auctioning, the Commission does not have the possibility to charge any fees. However, Member States administrators may still charge Registry fees to account holders administered by them. There are discrepancies in fees across different Member States. 5.1 Are there any EU ETS administrative requirements which you consider can be simplified? Do you see scope to reduce transaction costs, in particular for SMEs? If yes, please explain in detail. The administrative burden stems mostly from the requirements of the Commission Regulation (EU) No 601/2012 of the 21 June 2012 on the monitoring and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council: Submitting reports on improvements according to Article 69 and the verification report according to Article 69(4): every verifier verifies the rectification of non-conformities. Drafting the reports on improvements and the verification report is very demanding without the desired effect. Requirements according to Article 16: the operator shall keep records of all modifications of the monitoring plan. Based on these requirements he shall create a log of modifications of the monitoring plan. This is redundant because all changes are already put into a monitoring plan which is submitted to the competent authority. Requirements according to Article 58 concerning control systems: The operator shall establish, document, implement and maintain an effective control system to ensure that the annual emission

13 report and, where applicable, the tonne-kilometre report resulting from data flow activities does not contain misstatements and is in conformity with the monitoring plan and this Regulation. At least companies that perform internal audits in order to fulfil requirements of ISO should not be obliged to create a separate document on risk assessment. They examine the entire system within internal audits. 5.2 Member States had the possibility to exclude small emitting installations from the EU ETS until Should this possibility be continued? If so, what should be the modalities for opt-out installations to contribute to emission reductions in a cost-effective and economically efficient manner? Should these be harmonised at EU level? Asymmetric requirements for large and small installations may today lead to undesirable consequences such as the disintegration of large heating systems (who are transferring from cleaner, more efficient heat generation to more emissive sources below the threshold of 20MW). The possibility to exclude small installations from EU ETS can only be maintained on the condition that those installations that have the opportunity to opt-out of the ETS are exposed to alternative carbon price signals instead. In order to avoid excessive administrative burden on the part of small operators, a simplified methodology for emissions verification and reporting should however be put in place. 5.3 How do you rate the importance of a high level of security and user-friendliness of the Union Registry? Do you think the costs for providing these services should be covered via Registry fees? Given the value of allowances a high level of security is indispensable. However, ensuring safety should be the responsibility of the European Commission, as the sole operator of the register. The fees paid by participants today should cover improvements on security and user-friendliness. 5.4 Do you consider discrepancies in Registry fees in different Member States justified? Should Registry fees be aligned at EU level? Market participants around Europe should pay similar fees for the same service they receive. Fair treatment may require development towards alignment of fees.

14 5.5 Under the current EU ETS Directive, at least 50% of the revenues generated from the auctioning of allowances should be used by Member States for climate-related purposes. For the calendar year 2013 Member States have reported to have used or to plan to use 87 % on average to support domestic investments in climate and energy. Do you consider the current provisions regarding the use of the revenues adequate for financing climate action? If not, please explain why? The revenues should be recirculated to the ETS sector with aim to bring down the cost of decarbonisation in the long term. 6. General evaluation 6.1 How well do the objectives of the EU ETS Directive correspond to the EU climate policy objectives? How well is the EU ETS Directive adapted to subsequent technological or scientific changes? The EU ETS objectives are well aligned with the climate policy objectives. The execution is significantly improved by the increased linear reduction factor and the eventual introduction of the MSR. As a technology neutral instrument, the EU ETS is adaptive to changes in technology. 6.2 What are the strengths and weaknesses of the EU ETS Directive? To what extent has the EU ETS Directive been successful in achieving its objectives to promote emission reductions in a cost-effective manner compared to alternatives, e.g. regulatory standards, taxation? The EU ETS is cost-effective, cross-sectorial, technology-neutral and fully compatible with the EU internal energy market. It also let s all measures related to energy production, transfer and consumption, consumer choices etc. compete equally for the most affordable emission reductions. Alternative non-market (emissions performance standards) or national (carbon tax) carbon policies do not fulfil these crucial criteria. Furthermore, with energy and climate policies today trending national through the uncoordinated operation of hundreds of different renewables support schemes, debates on and implementation of national capacity mechanisms, the UK carbon floor price, the Dutch coal tax, the recently announced German emission reduction plans, and several additional discussions on creating national carbon taxes, there is a serious risk that a non-ets approach to decarbonisation will not only further distort, but also fragment the internal energy market. A nonharmonised approach and purely domestic policies to curb emissions could even work against each other, leading to significantly higher overall energy costs. The main defect of the current system is the inability to respond to economic and technological development, which could be rectified by the on-going MSR reform. The Market Stability Reserve proposal, which allows adjusting the supply and demand of ETS allowances through an automated, non-discretionary mechanism, is indeed a sound approach to resolving two of the key problems of today s EU ETS: the current oversupply of allowances and the need to make the EU-ETS more resilient to future demand shocks (just as in any other market where supply should adjust to demand). Another problem of the EU ETS is that it only covers a part of total emissions and its impact will further diminish with the ongoing decarbonisation of the energy sector. Unfortunately only a small part of the heat market is covered by the ETS. This situation leads to (a) a distortion of competition on the heat market, (b) suboptimal choices for customers and (c) undermines the EU decarbonisation policy. The commission is

15 welcome to look for ways to establish a level playing field on the heat market so that all emissions associated with heat production are exposed to a CO 2 price signal. 6.3 To what extent are the costs resulting from the implementation of the EU ETS Directive proportionate to the results/benefits that have been achieved, including secondary impacts on financing/support mechanisms for low carbon technologies, administrative cost, employment impacts etc.? If there are significant differences in costs (or benefits) between Member States, what is causing them? The costs of implementation are acceptable if the ETS is utilized as the driver it was planned to be. So far the EU and the member states have implemented other policies to do the work of the ETS, such as subsidies for renewable or nuclear electricity generation, national carbon taxes or price floors on the ETS sector and energy efficiency obligations. These policies have substantially replaced the ETS and left little for it to achieve. The total cost of emission reduction has increased due to overlapping national policies and measures. 6.4 How well does the EU ETS Directive fit with other relevant EU legislation? The policy coherence was increased with the European Council agreement on the 2030 energy and climate framework, notably the decision to set a binding target of at least 40% domestic reductions in greenhouse gases and to rely firmly on the EU ETS to deliver this objective. The agreed framework is a sound basis for cost effective decarbonisation, and the implementation, including the governance framework should ensure that competitiveness, security of supply and sustainability are achieved simultaneously. But Europe can only achieve a successful decarbonisation of the economy if the energy sector becomes investable again. The binding carbon reduction target of 40% should remain the centerpiece of the framework. With a reformed and strengthened EU ETS, energy efficiency and renewable energy will contribute substantially to reaching the decarbonisation target and at the same time also contribute to other objectives in society. The indicative 27% EU level target on energy efficiency and binding 27% EU level target on renewables should be primarily conceived as instruments to achieve the overarching emissions reduction target. Additional measures to promote these targets can be minimised within the ETS sectors, and specific national (and regional) actions to promote renewable energy and energy efficiency have their place in particular in sectors remaining outside the ETS. Experience from the 2020 framework shows that different targets can interact in ways that reduce the framework s overall effectiveness and this must be avoided: the role of the renewables and energy efficiency targets is to indicate what approximate levels that are needed to reach decarbonisation. The coherence of the three targets must be ensured. 6.5 What is the EU value-added of the EU ETS Directive? To what extent could the changes brought by the EU ETS Directive have been achieved by national measures only? The value added of the ETS directive is its ability to guide the sectors involved jointly to least cost emission reductions, while alternative policies would lead to significantly higher total costs. This cost efficiency is of magnitude easily felt in the development of EU GDP. The questions should be to what extent the changes brought by national policies could have been achieved by the EU ETS only. The answer is that we would be further on our way towards decarbonisation with significant cost savings and system benefits if the ETS had been given a leading role and were the national policies have focussed on the non-ets sector. Looking to the future with plans for an energy union, the ETS is the only climate policy tool compatible with

16 these visions. 6.6 Do you have any other comment on the revision of the EU ETS Directive that you would like to share? Possibilities at hand to set the ETS back on track by revising the directive should be implemented. However, these possibilities are limited, whereas changes in the overall climate and energy policy framework have great influence on the ETS. The energy union should look for utilising not only the energy markets for the benefit of the union and its citizens, but to see the carbon market as equally important.