Greenhouse Gas Emission Trading System Directive

Introduction

Directive (EU) 2023/959 is a pivotal piece of legislation within the European Union's "Fit for 55" package, amending the existing EU Emissions Trading System (ETS) established by Directive 2003/87/EC. This Directive significantly strengthens the EU ETS to align with the EU's target of reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. It expands the scope of the carbon market to new sectors, tightens limits on emissions for existing sectors, and establishes mechanisms to support the social transition.

Main Goal

The primary objective is to accelerate the reduction of greenhouse gas emissions in the EU. The reform aims to achieve a 62% reduction in emissions from ETS sectors by 2030 (compared to 2005 levels), significantly increasing the ambition from the previous target. It also seeks to incentivize low-carbon innovation and ensure a fair transition through funding mechanisms like the Social Climate Fund.

Who It Applies To

The Directive applies to:

• Stationary Installations: Power plants, oil refineries, steel works, and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals.
• Aviation: Aircraft operators performing flights within the European Economic Area (EEA).
• Maritime Transport: Shipping companies with ships above 5,000 gross tonnage calling at EU ports (covering CO2, and later methane and nitrous oxide).
• Fuel Suppliers (ETS 2): Regulated entities releasing fuel for consumption in the buildings, road transport, and additional industrial sectors not covered by the main ETS.

Key Provisions

• Maritime Sector Inclusion: Extends the ETS to cover maritime transport emissions, phased in from 2024 to 2026.
• ETS 2 Implementation: Establishes a separate emissions trading system (ETS 2) for fuel used in buildings, road transport, and small industry, operating independently from the main ETS.
• Cap Reduction: Increases the Linear Reduction Factor (LRF) to 4.3% (2024-2027) and 4.4% (from 2028), steeper than the previous 2.2%.
• Phase-out of Free Allowances: Gradually phases out free allocation for aviation and sectors covered by the Carbon Border Adjustment Mechanism (CBAM) (e.g., cement, aluminium, fertilizers) between 2026 and 2034.
• Conditionality: Ties free allocation to decarbonization efforts, requiring energy audits and climate-neutrality plans for certain installations.

Obligations & Requirements

• Surrender of Allowances: Operators must surrender allowances equivalent to their verified emissions.
• Monitoring, Reporting, and Verification (MRV): Strict requirements for monitoring emissions and reporting data to competent authorities.
• Permits: Installations and regulated entities must hold valid greenhouse gas emissions permits.
• Climate Neutrality Plans: Operators with high emissions intensities or those seeking to avoid free allocation reductions must implement energy efficiency recommendations or establish climate neutrality plans.

Exemptions

• Small Installations: Certain small emitters (<25,000 tonnes CO2e) or hospitals may be opted out by Member States subject to equivalent measures.
• Maritime Specifics: Temporary exemptions exist for ice-class ships, small islands, and outermost regions until 2030.

Penalties

• Excess Emissions Penalty: Operators failing to surrender sufficient allowances must pay an excess emissions penalty of €100 (indexed to inflation) for each tonne of CO2 equivalent emitted, without prejudice to the obligation to surrender the missing allowances the following year.
• Expulsion Orders: For shipping companies, repeated non-compliance can lead to expulsion orders, barring ships from entering EU ports.