Emissions Trading Scheme Directive

Introduction

Directive 2003/87/EC establishes the European Union Emissions Trading System (EU ETS), the cornerstone of the EU's policy to combat climate change. It is a 'cap-and-trade' system that sets a limit on the total amount of greenhouse gases that can be emitted by installations covered by the system. The cap decreases over time so that total emissions fall.

Evolution and Relations

Since its launch in 2005, the EU ETS has undergone several revisions (Phases). The most significant recent amendments align the directive with the 'Fit for 55' package to achieve a 55% net emissions reduction by 2030. Key evolutions include the reduction of free allowances, the inclusion of the aviation sector, the recent inclusion of maritime transport (from 2024), and the establishment of a separate emissions trading system (ETS 2) for buildings, road transport, and additional sectors (starting 2027/2028). It is directly linked to the Carbon Border Adjustment Mechanism (CBAM) Regulation, which gradually replaces free allocations for certain sectors.

Main Goal

The primary objective is to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner to contribute to the EU's climate-neutrality objective by 2050.

Who It Applies To

The directive applies to:

• Stationary Installations: Energy-intensive industries (power stations, oil refineries, steel works, production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals).
• Aviation: Aircraft operators performing flights within the EEA (and departing to Switzerland/UK).
• Maritime Transport: Shipping companies with ships above 5000 gross tonnage calling at EU ports.
• Fuel Suppliers (ETS 2): Entities releasing fuel for consumption in buildings, road transport, and small industries (starting 2025).

Key Dates

• Entry into Force: 25 October 2003.
• Maritime Inclusion: Monitoring began in 2018 (MRV), surrender obligations start for 2024 emissions.
• ETS 2 (Buildings/Transport): Monitoring starts 2025; surrendering starts 2027 or 2028.
• 2030 Target: Sectors covered by the EU ETS must reduce emissions by 62% compared to 2005 levels.

Exemptions

• Small Emitters: Installations emitting less than 25,000 tonnes of CO2e/year may be opted out by Member States if subject to equivalent measures.
• Hospitals: May be opted out.
• Specific Flights: Military, search and rescue, training flights, and small aircraft are generally excluded.
• Maritime: Warships, fishing vessels, and simple wooden ships are excluded.

Key Provisions

• Cap and Trade: A Union-wide quantity of allowances is issued each year, decreasing by a linear reduction factor (4.3% from 2024-2027, 4.4% from 2028).
• Allowances: Operators must surrender one allowance for every tonne of CO2e emitted.
• Auctioning: The default method for allocating allowances, though some free allocation remains for sectors at risk of carbon leakage (phasing out).
• Market Stability Reserve (MSR): Mechanisms to address surplus allowances and improve system resilience.

Obligations and Requirements

1. Greenhouse Gas Permit: Operators must hold a valid permit issued by the competent authority.
2. Monitoring Plan: Operators must have an approved monitoring plan.
3. Reporting: Annual monitoring and reporting of verified emissions (deadline usually 31 March).
4. Verification: Reports must be verified by an accredited independent verifier.
5. Surrender: Operators must surrender allowances equal to their verified emissions by 30 September of the following year.

Penalties

• Excess Emissions Penalty: €100 for each tonne of CO2e emitted for which no allowance has been surrendered. Payment of the penalty does not release the operator from the obligation to surrender the missing allowances the following year.
• Name and Shame: Publication of the names of non-compliant operators.
• Operating Bans: Possibility of operating bans for non-compliant aircraft operators or expulsion orders for shipping companies.