EU 4 EU Emission Trading Scheme (2003/87/EC)

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1 Title of the measure: EU 4 EU Emission Trading Scheme (2003/87/EC) General description The Directive establishes a greenhouse gas (GHG) emission allowance trading within the Community to mitigate GHG emissions in a cost-optimal and economically efficient way. The European Union Emissions Trading Scheme (EU ETS) is the world s largest emissions trading system and the first international trading system for CO2. In total, the EU ETS covers about 50 % of Europe s CO2 emissions and 40 % of its total greenhouse gas emissions. As the European Union s key climate policy instrument for the energy sector and the industrial sector, the EU ETS is expected to help the EU and the EU Member States reach their short- and long-term greenhouse gas emissions targets in a cost-efficient way (CEC, 2000). Greenhouse gas emissions permits Member states are mandated to ensure that from January 1 st, 2005, no installation commence any activity mentioned in Annex I resulting in emissions specified in regards to that operation unless its operator holds a permit issued by a responsible authority. The responsible authority should only issue a GHG emissions permit granting allowance to emit greenhouse gases from the installation if it is satisfied that the operator is competent of monitory and reporting emissions. A greenhouse gas emissions permit can cover one or more installations on the same activity site operated by the same operator. Operator of the facility is obliged to inform the competent authority of any changes in the functioning or an extension of the installation which may require updating of the greenhouse gas permit. National Allocation Plan and Allocation of Allowances Member states are to develop a national plan about the total quantity of allowances that it decides for the trading period and how it suggests to allocate them. The plan shall be based on transparency and objectivity including on the criterion listed in Annex III of the directive. For the three-year period beginning in January 1 st, 2005, member states should allocate at least 95% of the allowances free of charge. For the five-year period beginning January 1 st, 2008, member states are obliged to allocate 90% of the allowances free of charge. For the three-year period beginning January 1 st, 2005, each member state should make a decision about the total quantity of the allowances it will allocate for that period and the allocation of those allowances to the operator of each installation. For the five year period starting January 1 st and for each subsequent five year period, each member state should decide about the total quantity of the allowances it will allocate for that particular period and commence the process for the allocation of those allowances to the operator of each installation. Monitory and Reporting of Emissions Commission is obliged to adopt guidelines for monitory and reporting of emissions resulting from the activities mentioned in Annex I of greenhouse gases specified in regards to those activities. Member states have the obligation to ensure that emissions are monitored in accordance with the guidelines. They also should ensure that the each operator of an installation reports the emissions of that installation during each calendar year after the end of that year in accordance with the guidelines. Penalties Member states are mandated to lay down rules penalize the infringements of national provisions adopted in relation to this directive and should all mandatory measures to ensure that such rules are implemented. Penalties provided for must be effective and proportionate. Member states are to ensure that any operator who does not surrender sufficient allowances by April 30 th of each year to cover its emissions during the preceding year should be held liable for the recompense of an excess emissions penalty. EUR 100 should

2 be the excess emissions penalty for each tonne of CO2 equivalent emitted by that installation for which the operator has not surrender the allowances. During the three-year period starting January 1 st, 2005 member states should apply lower excess emissions penalty of EUR 40 for each tonne of CO2 equivalent emitted. Payment of the excess emissions penalty would not release the operator from the requirement to surrender an amount of allowances equal to those excess emissions when surrendering allowances in relation to the following calendar year. ANNEX I CATEGORIES OF ACTIVITIES REFERRED TO IN ARTICLES 2(1), 3, 4, 14(1), 28 AND Installations or parts of installations used for research, development and testing of new products and processes are not covered by this Directive. 2. The threshold values given below generally refer to production capacities or outputs. Where one operator carries out several activities falling under the same subheading in the same installation or on the same site, the capacities of such activities are added together. ANNEX II GREENHOUSE GASES REFERRED TO IN ARTICLES 3 AND 30 Carbon dioxide (CO2) Methane (CH4) Nitrous Oxide (N2O) Hydrofluorocarbons (HFCs) Perfluorocarbons (PFCs)

3 Sulphur Hexafluoride (SF6) ANNEX III CRITERIA FOR NATIONAL ALLOCATION PLANS REFERRED TO IN ARTICLES 9, 22 AND The total quantity of allowances to be allocated for the relevant period shall be consistent with the Member State's obligation to limit its emissions pursuant to Decision 2002/358/EC and the Kyoto Protocol, taking into account, on the one hand, the proportion of overall emissions that these allowances represent in comparison with emissions from sources not covered by this Directive and, on the other hand, national energy policies, and should be consistent with the national climate change programme. The total quantity of allowances to be allocated shall not be more than is likely to be needed for the strict application of the criteria of this Annex. Prior to 2008, the quantity shall be consistent with a path towards achieving or over-achieving each Member State's target under Decision 2002/358/EC and the Kyoto Protocol. 2. The total quantity of allowances to be allocated shall be consistent with assessments of actual and projected progress towards fulfilling the Member States' contributions to the Community's commitments made pursuant to Decision 93/389/EEC. 3. Quantities of allowances to be allocated shall be consistent with the potential, including the technological potential, of activities covered by this scheme to reduce emissions. Member States may base their distribution of allowances on average emissions of greenhouse gases by product in each activity and achievable progress in each activity. 4. The plan shall be consistent with other Community legislative and policy instruments. Account should be taken of unavoidable increases in emissions resulting from new legislative requirements. 5. The plan shall not discriminate between companies or sectors in such a way as to unduly favour certain undertakings or activities in accordance with the requirements of the Treaty, in particular Articles 87 and 88 thereof. 6. The plan shall contain information on the manner in which new entrants will be able to begin participating in the Community scheme in the Member State concerned. 7. The plan may accommodate early action and shall contain information on the manner in which early action is taken into account. Benchmarks derived from reference documents concerning the best available technologies may be employed by Member States in developing their National Allocation Plans, and these benchmarks can incorporate an element of accommodating early action. 8. The plan shall contain information on the manner in which clean technology, including energy efficient technologies, are taken into account. 9. The plan shall include provisions for comments to be expressed by the public, and contain information on the arrangements by which due account will be taken of these comments before a decision on the allocation of allowances is taken. 10. The plan shall contain a list of the installations covered by this Directive with the quantities of allowances intended to be allocated to each. 11. The plan may contain information on the manner in which the existence of competition from countries or entities outside the Union will be taken into account. Impact Assessment Impact assessment about including the aviation emissions in the EU ETS has been carried out in 2013 by the EC based on following policy options; Full-scope EU ETS A continuation of the full-scope EU ETS means that aircraft operators remain responsible for all emissions from flights departing from or arriving at EEA airports. Hybrid option Based on the proposal for a MBM Framework that was supported by major aviation countries in the run-up to the 2013 ICAO Assembly but eventually not agreed at the Assembly, a regional MBM should be based on the following geographical scope:

4 Full coverage of emissions from all flights that arrive and depart within a group of States, plus A proportion of the emissions from flights that arrive from or depart to 3rd countries outside the group of States, in relation to the total distance travelled across areas associated with the group of States (e.g. for a flight between Paris and Beijing, the EU ETS would cover the distance over EEA states to and from the border with a 3rd country, in this case Russia). Alternative options Besides the hybrid option, the following alternative options have been considered: Departing-flights option: All intra-eea flights are covered but only the departing flights to non-eea countries. This approach was the EU's initial proposition for the geographic scope of the MBM Framework but rejected by a large number of ICAO Member states. 50/50 option: As shown by the public consultations, the majority of environmental NGOs are in favour of limiting the EU ETS coverage to 50 % of the departing and arriving flights for extra-eea flights. However, this option has never been discussed at ICAO. A general exemption of extra-eea flights (similar to the "stop-the-clock" decision) would only leave intra-eea flights covered. Upstream option: A switch to an upstream system would make fuel suppliers the compliance entity instead of aircraft operators. This option would have similar emission coverage to the departing-flights option because fuel suppliers would surrender allowances corresponding to fuel sold to EEA airports. To avoid windfall profits for fuel suppliers, no free allowances would be given out but all allowances will be auctioned. Environmental impact The hybrid and alternative options reduce the emission coverage to a range of 25 % to 62 % compared to the emission coverage under the full-scope EU ETS (see Table 1). Economic impact Competitiveness The hybrid and alternative options with the exception of the upstream option improve the overall competitiveness of the aviation sector compared to the full-scope EU ETS because the reduced coverage leads to lower prices for extra-eea flights. Due to the cancellation of free allowances, the upstream option would lead to higher prices for intra-eea flights. Level-playing field for competition All policy options maintain a level-playing field on the relevant city-pair markets because all operators are treated the same, regardless of nationality or any other characteristics. In case that non-stop services are also in competition with services that stop over at a non-eea hub (e.g. on a route from London to Singapore with a possible stop-over in Dubai), the hybrid option avoids potential distortion risks because one-stop and non-stop services will be equally covered. However, at current carbon prices, the likelihood of distortions is negligible with all options.

5 Impact on administrative effort and feasibility The hybrid option can be implemented based on the current MRV system. The lower coverage of extra-eea flights will be reflected by taking a proportionally reduced percentage of the total fuel consumption (as currently reported for the whole flight). The departing flights, 50/50, and "stop-the-clock" options do not require any changes to the current MRV system. A move to the upstream option would involve significant changes because fuel suppliers would become responsible entities. Significant delays in its implementation would have to be expected. Impact on consistency with international aviation law and ICAO policy The ECJ dismissed the claim that the EU ETS would violate the sovereignty of other states and confirmed the competence of the EU to apply the ETS to the total emissions of flights that arrive and depart at aerodromes situated in in the territory of a Member State. As all options continue to apply to arriving and departing flights only and do not include over-flights, they are in conformity with the respective principles of customary international law, the Chicago Convention and Air Service Agreements. Compared to the other options, the hybrid option will have the advantage of greater international political acceptability because it will effectively limit the coverage to emissions within the EEA. With regards to the upstream option, a legal risk exists that it would be judged to constitute a fuel tax or charge under the Chicago Convention and the Air Service Agreements. Comparison of Options In choosing between the different options, the EU will have to balance the environmental effectiveness, possible changes in the MRV system, and the consistency of the options with international law and the (non-binding) ICAO Assembly resolutions. The economic impacts do not differ so substantially between the options as to change the cost-benefit balance. The hybrid option leads to a significantly lower coverage of 39 to 47 % compared to the full-scope EU ETS (depending on the defined coverage of 12 or 200 nm) and would entail some costs for changes in the MRV system. On the benefit side, the more limited emission coverage provides additional arguments to defend the EU ETS against claims about sovereignty violations. It also reduces any potential distortions regarding one-stop flights operating alongside direct flights. The departing-flights and 50/50 options offer coverage of 62 % of emissions compared to the full-scope EU ETS and do not change the MRV system. However, as these options are not to be supported by the 2013 ICAO Assembly resolution, they will neither increase political acceptability nor bring new legal arguments to defend the EU ETS. As the "stop-the-clock" option only covers 25 % of emissions, it will not be a viable long-term solution in view of the EU's environmental objectives for the aviation sector. The upstream option achieves the same emission coverage as the departing-flights option but has a negative impact on competitiveness. Furthermore it would involve a complete change of MRV and risk new legal challenges

6 Table 1: Comparison of options in terms of impacts Post-Directive Developments According to the Climate and Energy Package adopted by the EU in 2008 (CEC 2008, 2009), after 2013 the ET-budgets and allocation rules will no longer be set by individual Member States, and the third trading period for the ETS will last from 2013 to The EU intends to reduce total greenhouse gas emissions by 20% compared to 1990 levels. In case other developed countries also decided to take on similar reduction targets within a Post-Kyoto framework, the EU would commit to a reduction of 30%. To achieve these targets the proposed size of the ET-budget corresponds to a reduction of 21% compared to 2005 emissions for the 20% target, and 38% compared to 2005 emissions for the 30% reduction target.

7 References 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 of the European Union L275, 25/10/2003 P ; COMMISSION STAFF WORKING DOCUMENT - EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document PROPOSAL FOR A DIRECTIVE OFTHE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community in view of the implementation by 2020 of an international agreement applying a single global market-based measure to internationalaviation emissions COMMISSION STAFF WORKING DOCUMENT Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowances trading within the Community, in view of the implementation by 2020 of aninternational agreement applying a single global market-based measure to international aviation emissions