[Revised on 17/11/20 to align the total cap with the Commission Decision on the Union-wide quantity of allowances to be issued under the EU Emissions Trading System for 2021]

Based on our analysis of the provisionally agreed Phase IV ETS text, the Phase IV cap breaks down as follows:

Assumptions and notes:

• Percentages relate to the total fixed installation cap, which is 13,781 million as of 17/11/20
• This cap will be tightened to deliver a more ambitious 2030 climate target, with a proposal expected in 2021
• Dotted arrow flows are not reflected in the percentages
• The number of allowances available for compliance also includes the market surplus, which is not considered here
• Auction volumes (and NER allowances) can enter the Market Stability Reserve (MSR), which is not represented here
• Article 10c transitional free allocation is made from Member States’ auctionable allowances
• Unused Article 10c allowances from Phase III may be added to 2021 auction volumes or the Modernisation Fund, which is not represented here

Auction Share Key Points

• The auction share will comprise 57% of the total cap, but this can fall to as low as 54% if allowances need to be transferred to the free share to avoid a CSCF
• 2% of the total cap will be taken out of the auction share for the Modernisation Fund; this increases to 2.5%, if allowances are not required for avoidance of the CSCF
• 75 million allowances from the auction share will go into the Innovation Fund; this will increase to 125 million if allowances are not required for the avoidance of the CSCF
• 10% of the allowances available for Member State auctioning will be used for solidarity purposes
• Member States may voluntarily cancel auctionable allowances in the event of the closure of electricity generation in their territory
• Member States may transfer solidarity and Article 10c allowances to the Modernisation Fund
• The amount auctioned in practice will determine the level of cancellation from the MSR and is affected by the following factors:
  • The percentage of the auction share transferred to the free share to avoid a CSCF
  • The amount of allowances that the MSR withdraws (which is administered through adjusting down auction volumes)
  • The amount of Article 10c free allocation, which reduces the number of allowances auctioned
  • The amount of voluntary cancellation of auction volumes by Member States
  • The auctioning of non-auction share allowances (e.g. free allowances and Phase III unallocated allowances for the Innovation Fund), which increases the number of allowances auctioned
• The timing of these factors will also have a bearing on the timing of cancellations from the MSR

​
Free Share Key Points

• The free share will comprise 43% of the total cap, but this can rise to 46% if required to mitigate the CSCF
• 325 million allowances from the free share will go into the Innovation Fund
• The free share can be supplemented with allowances from the Phase IV NER to allow for allocation to new entrants and growing installations; the Phase IV NER is stocked with unallocated allowances from Phase III 
• The actual amount given out for free in Phase IV will be affected by bottom-up eligibility calculations, the application of the CSCF (and in some cases the LRF) as a haircut, as well as the extent to which certain Member States use the Article 10c derogation

Funds Key Points

• The Innovation Fund is stocked as follows:
  • 325 million allowances from the free share
  • 75-125 million allowances from the auction share (depending on whether CSCF flexbility is required)
  • 50 million unallocated Phase III allowances not allocated due to cessations, partial cessations, and the Phase III NER being underused, which enter the MSR under Article 1(3) of the MSR Decision in 2020
  • It is also supplemented with revenues from its predecessor NER300
• The New Entrants' Reserve (NER) is stocked as follows:
  • Phase III allowances not allocated to installations not on the carbon leakage list (referred to as 'CLEF' allowances in the diagram above), which the EC's 2015 Impact Assessment estimated will number 145 million (Greece, however, has first claim on up to 25 million of these)
  • 200 million Phase III allowances not allocated due to cessations, partial cessations, and the Phase III NER being underused, which enter the MSR under Article 1(3) of the MSR Decision in 2020
  • Allowances will leave and enter the NER depending on growth/contraction in the industries receiving free allocation
  • Up to 200 million allowances will be transferred from the NER to the MSR at the end of Phase IV if NER allowances remain unused
• The Modernisation Fund is stocked as follows:
  • 2-2.5% of the total cap, taken from the auction share
  • Member States may top this up with solidarity and Article 10c allowances

​For further information please contact damien.green@perspectiveclimate.com

It's evident from the provisionally agreed Phase IV ETS text that incorporating CCU into the ETS is going to be left to Phase V. Recital 10 recognises CCU, but there is no exemption from the obligation to surrender allowances in Article 12 for installations capturing emissions for CCU purposes, nor is there a zero rating for CCU-fuels burned by ETS installations. Indeed, the Commission’s statement on the negotiated text says the following on CCU:

The Commission takes note of the European Parliament’s proposal to exempt emissions verified as captured and used ensuring a permanent bound from surrender obligations under the EU ETS. Such technologies are currently insufficiently mature for a decision on their future regulatory treatment. In view of the technological potential of CO2 Carbon Capture and Use (CCU) technologies, the Commission undertakes to consider their regulatory treatment in the course of the next trading period, with a view to considering whether any changes to the regulatory treatment are appropriate by the time of any future review of the Directive. In this regard, the Commission will give due consideration to the potential of such technologies to contribute to substantial emissions reductions while not compromising the environmental integrity of the EU ETS.

CCU is indeed relatively immature, and the EU must take an evidence-based approach to integrating CCU technologies into the policy framework. Nevertheless, we can consider some general principles for accommodating CCU in ETS Phase V:
 

1. Article 12 3(a) of the ETS Directive excuses installations from the obligation to surrender allowances for emissions that are captured and geologically stored, but there is no equivalent derogation for installations capturing emissions for utilisation. This exemption should be explicitly extended to installations where emissions are captured for use in applications that offer permanent storage, e.g. mineralisation. Indeed, the ECJ has already ruled that i) such an exemption follows from Article 3 (b) of the Directive, ii) the omission to mention it in Article 12 does not preclude such an exemption, and iii) passages of the Monitoring and Reporting Regulation which explicitly rule out such an exemption are invalid.
2. For CCU applications that do not offer permanent storage, the situation is more complicated, because the emissions captured from the ETS installation will be re-emitted at the end of the CCU product’s life (e.g. when a CCU-fuel is burned, or a CCU-polymer is incinerated). If these end-of-life emissions take place outside the ETS (as they would do with combusted transport fuel, or incinerated plastic waste) it is inappropriate to exempt the ETS installation from the obligation to surrender allowances, because this would provide an incentive to move emissions outside the jurisdiction of the carbon price.
3. If the end-of-life emissions associated with these CCU applications would take place within the ETS, however, steps should be taken to avoid double counting: for instance, if emissions were captured from one ETS installation, processed into CCU-fuel by a second, and burned by a third, (or if incinerators were incorporated into the ETS in the future and were burning CCU-products). The simplest approach here would seem to be exempting the end-of-life emitter from the obligation to surrender allowances for the relevant emissions, following the model taken with biomass (cf. Annex IV of the ETS Directive), i.e. zero rate the CCU-fuel.
4. This is not to say that CCU applications that don’t offer permanent storage cannot deliver emissions savings. It’s just that the emissions savings would be in the value chain, and not equivalent to the amount captured at the ETS site (unlike with permanent storage). That is, the emissions saving would be defined by comparing how using CO2 as a material compares to the counterfactual of using virgin fossil feedstock, cradle to gate, in the specific application. Indeed, CCU is in most cases about energy and resource efficiency or facilitating electrification, not capture and storage: it offers savings through substitution and leaving fossil resources in the ground, rather than capturing them and putting them back.
5. The obligation to surrender allowances at point of capture within the ETS could theoretically be modified to reflect this value chain saving, but this would be complicated to administer (varying according to application, country, and over time). Incentivising CCU from the demand-side may be easier, therefore, where there is no permanent storage and the end-of-life emitter is outside the ETS. This could be done through RED quotas, or eco-design standards for CCU-polymers in products, for instance, insofar as the evidence supports providing market support.