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China National ETS
General Information
China’s national ETS began operating in 2021, with the objective of contributing to the effective control and gradual reduction of carbon emissions. China’s national ETS is the world’s largest in terms of covered emissions, estimated to cover around 5 billion tCO2 and accounting for over 40% of the country’s CO2 emissions.
The China national ETS regulates more than 2,000 companies from the power sector with annual emissions of more than 26,000 tCO2, including combined heat and power, as well as captive power plants in other sectors. Covered entities must surrender allowances for all their covered emissions, and allocation is based on intensity, with allowances freely allocated using benchmarks and based on actual production levels. Compliance obligations are currently limited and vary between different types of power generation. The system’s coverage will expand to other sectors over time.
The national ETS builds on the successful experience of pilot carbon markets implemented in eight regions. These pilots continue to operate in parallel with the national ETS, covering sectors and entities not included in the national system. As the national system expands, entities covered by regional systems are expected to be integrated into it.
In March, the Chinese Ministry of Ecology and Environment (MEE) released the retroactive “Allocation and Compliance Work Plan” for the second compliance period (2021 to 2022) of the national ETS. This announcement followed a public consultation process held in December 2022 on the draft version of the allocation plan. The allocation plan includes several significant changes compared to the allocation plan for 2019 to 2020, including allowing borrowing future allowance and significantly tightening benchmarks.
In February, the MEE published the “Work Plan on the Management of Power Enterprise GHG Emissions Reporting and Verification in 2023-2025” and, in October, the “Work Plan on the Management of Industrial Enterprise GHG Emissions Reporting and Verification in 2023-2025”. These two documents laid out earlier MRV submission deadlines for enterprises in various sectors, including power generation, cement, electrolytic aluminum, and steel. The verification of emissions reports of enterprises in other key industries should be completed by the end of the year. For the cement, electrolytic aluminum and steel sectors, the MEE also updated the MRV guidelines to require installation data and detailed measuring of different parameters, which would help the MEE to set the benchmarks for these sectors.
In July, the MEE published a notice regarding compliance in the national ETS in 2021 and 2022. This document confirmed the unlimited banking allowed from the first compliance period and published detailed requirements for borrowing.
In January 2024, China launched its domestic offsetting scheme, the Chinese Certified Emissions Reduction scheme (CCER), after six years of suspension during which time it was undergoing reform (see ‘Offset Credits’ section). In October 2023, the MEE published the new regulations for the CCER, followed by four new methodologies including forestation, mangrove cultivation, solar thermal power, and grid-connected offshore wind power projects. In November, the National Center for Climate Change Strategy Research and International Cooperation published guidelines for the CCER registry. The Beijing Green Exchange has also published guidelines for CCER trading and clearing. In December, the SAMR (State Administration for Market Regulation) published the guidelines of the validation of CCER Projects and Verification of Emission Reduction, including the basic processes and general requirements of validation and verification. The Certification and Accreditation Administration (CNCA) started to accredited verifiers in January 2024, after which project owners can commence their applications.
In February 2024, the State Council of People’s Republic of China published a regulation for the national ETS, which significantly increased the punishment for non-compliance, data fraud and market manipulation behaviors.
Emissions & Targets
13,035 MtCO2e (2018)
By 2025: Reduction in carbon emissions per unit of GDP of 18% compared to 2020 levels (14th Five-Year Plan)
By 2030: Peak CO2 emissions; reduction of CO2 emissions per unit of GDP by over 65% from 2005 levels (‘1+N’ policy framework; updated NDC)
By 2060: Carbon neutrality (‘1+N’ policy framework; updated NDC)
Size & Phases
There are currently no specific phases for the Chinese national ETS. The current rules only apply to the first and second compliance periods, which cover 2019 to 2020 and 2021 to 2022.
The cap under the China national ETS is the sum of the bottom-up total allowance allocation to all individual covered entities. The cap changes according to the actual production levels.
The national ETS is estimated to have had a cap of ~4,500 MtCO2 in 2019 and 2020; and ~5,000 MtCO2 in 2021 and 2022.
Power sector (including combined heat and power, as well as captive power plants of other sectors). Compliance obligations are currently limited (see 'Enforcement’ section).
The scope is expected to be gradually expanded to cover seven other sectors: petrochemicals, chemicals, building materials, steel, nonferrous metals, paper, and domestic aviation. Entities in these sectors have MRV obligation since 2015. There is no specific timeline for this expansion.
INCLUSION THRESHOLDS:
For 2019 to 2020: Entities with annual emissions of 26,000 tCO2 or greater in any year from 2013 to 2019.
For 2021 to 2022: Entities with annual emissions of 26,000 tCO2 or more in any year from 2020 to 2021.
Point source (industry); downstream (indirect emissions from electricity and heat consumption).
2,257 (2021 and 2022)
Allowance Allocation & Revenue
Allowances are distributed for free, using benchmarking. A pre-allocation method is adopted for the annual allowance allocation. Allocation is then adjusted ex-post to reflect the actual production in the respective compliance year.
FREE ALLOCATION: Output-based benchmarking is used as the main allocation method, with four distinct benchmarks: conventional coal plants below 300 MW; conventional coal plants above 300 MW; unconventional coal; and natural gas.
In March 2023, the MEE proposed benchmark values for allocation for the 2021 to 2022 compliance period. These propose a significant tightening, especially for coal-fired power plants.
Entities received allowances at 70% of their 2021 verified emissions. Allocation was subsequently adjusted to reflect actual generation in 2021 and 2022. A unit load (output) adjustment factor distributed more allowances for entities operating at load rates lower than 85%. This may have provided more allowances to less efficient power units.
AUCTIONING: Allocation currently takes place through free allocation, but the Interim Regulations clarify that auctioning is to be introduced and gradually expanded. There is currently no timeline for this.
There is currently no arrangement for the use of revenues generated by the scheme.
Flexibility & Linking
Borrowing was not allowed in 2019 to 2020. In the 2021 to 2022 allocation plan, borrowing is allowed. Companies with a shortfall of 10% or more can apply to borrow from a pre-approved allocation for 2023, up to 50% of the shortfall. Banking from 2019 to 2020 was allowed in 2021 to 2022. Future rules on banking are not yet defined.
The use of offset credits is allowed.
QUANTITATIVE LIMITS: Covered entities can use CCERs generated from projects not covered by the national ETS for up to 5% of their verified emissions.
QUALITATIVE LIMITS: There were no additional project or vintage restrictions.
Development of the CCER scheme began in 2009 alongside the development of the regional ETS pilots. In 2012, the NDRC issued the “Interim Measures for the Management of Voluntary GHG Emissions Reduction Transactions”, which provided guidelines for the issuance of CCERs. The registration of CCER projects started in 2015 but the program was suspended in 2017 while regulations were reviewed. MEE launched the new CCER system with new methodologies, registry, verifiers and exchange in January 2024.
The National Center for Climate Change Strategy and International Cooperation (NCSC) operates the CCER registry. The Beijing Green Exchange is dedicated to CCER trading platforms.
The China national ETS is not linked with any other system.
Compliance
Two calendar years. Covered entities were requested to surrender allowances in 2021 for emissions from 2019 and 2020. Covered entities had to surrender allowances in 2023 for emissions from 2021 and 2022.
MONITORING: Covered entities are required to set up monitor plans and monitor their emission based on these plans.
REPORTING FREQUENCY: Covered entities must submit the previous year’s emissions reports by the end of April each year.
VERIFICATION: Provincial-level ecological and environmental authorities are responsible for organizing the verification of GHG reports. They may commission technical service agencies to provide verification services. Verification of emissions from the power sector must be complete by the end of June. Verification of the cement, electrolytic aluminum and steel industries should be completed before the end of September each year. Verification of other key industries should be completed by before the end of the year.
FRAMEWORK: MRV guidelines, supplementary data sheets, verification guidelines, and other guidance are available for the eight sectors expected to be covered by the ETS. This MRV framework has evolved continuously since 2013 (see ‘Sectors and Thresholds’ section).
OTHER: The MEE amends the existing MRV guidelines and technical specifications for the national ETS every year.
According to the 2021 to 2022 allocation plan, compliance obligations are limited. Gas-fired plants only need to surrender allowances up to their level of free allocation as per the benchmarks. For coal-fired plants with free allowance less than 80% of their verified emissions will have their allocation adjusted upwards to 80% of their verified emissions. This means that 20% remains the maximum shortfall, similar to the first compliance period.
Covered entities that “undertake major tasks to safeguard people’s livelihoods” that are unable to meet obligations can apply to borrow allowances from future compliance periods.
According to the Interim Regulation, fines for failing to submit a report would increase from CNY 10,000-30,000 (USD 1,411-4,234) to CNY 50,000-200,000 (USD 7,058-28,232), while fines for failing to comply would increase from CNY 20,000-30,000 (USD 2,822-4,234) to five to ten times the market value of and the missing allowances, based on the average price in the month before the compliance deadline. In serious cases, the gap would be deducted from the following year’s allocation and the government may require the entity to stop business.
The regulation introduced the requirement to technical services organizations and market participants. If consultancies, third-party verifiers and testing labs participate in MRV data fraud, they will face penalties up to ten times of their illegal income, as well as disqualification in their business. Similar punishments also apply to market manipulation behaviors. Individuals involved in these cases would face penalties and disbarment.
Market Regulation
MARKET PARTICIPATION: Compliance entities. The Interim Regulations indicate that other types of institutions or individuals may in the future also be allowed to participate in the market; however, there is no specific timeline for this.
MARKET TYPES:
Primary: Allowances are currently only distributed by free allocation. The Interim Regulations state the intention to introduce auctioning, though without a specific timeline.
Secondary: China Emission Allowances (CEA) can be traded on a dedicated trading platform managed by the Shanghai Environment and Energy Exchange. CEAs for the 2019 to 2020 period, CEAs for 2021, and CEAs for 2022 are categorized as three different products on the exchange, and have similar prices.
Due to financial market regulations, other products (i.e., derivatives) are currently not allowed.
LEGAL STATUS OF ALLOWANCES: Allowances are not considered financial instruments. For financial accounting purposes, the Ministry of Finance published an interim policy that categorizes only purchased allowances, and not those received for free, as assets in financial statements.
In May 2021, the MEE announced the option of establishing a market-regulating and protection mechanism. This would enable the MEE to respond to abnormal fluctuations in trading prices, for instance through buy-back, auctioning, or adjusting the rules related to CCER use. The necessary triggers and specifics of this mechanism are yet to be defined.
Other Information
The China national ETS has a multi-level governance structure involving three levels of government:
Ministry of Ecology and Environment (MEE):
Acts as the national competent authority setting the rules and overseeing the system, jointly with other national regulators.
Provincial-level MEE subsidiaries: Oversee the implementation of the ETS, including identifying covered entities, organizing MRV, hiring verifiers, calculating allowance, managing provincial registry account, oversee compliance.
Municipal-level authorities: Responsible for managing covered entities directly.
China Carbon Emissions Registration and Clearing Co., Ltd.: Responsible for operating the CEA registry and clearing platform.
Shanghai Environment and Energy Exchange: Operates the CEA trading platform.
National Center for Climate Change Strategy and International Cooperation (NCSC): Operates the CCER registry.
The Beijing Green Exchange: Responsible for operating the CCER trading and clearing platform.
An evaluation framework is currently under development.
The National Measures for the Administration of Carbon Emission Trading (trial) (2021)
Allocation Plan for the Power Sector(2019-2020) and list of covered entities (2021) (English translation)
Guidelines for Enterprise Greenhouse Gas Verification (trial) (2021)
Notice on Strengthening the Management of Enterprise Greenhouse Gas Emissions Reporting (2021)
Allocation Plan for the Power Sector(2021-2022)
Guidelines for GHG Monitoring and Reporting for various sectors (2013, 2014, and 2015)
Updated Guidelines for GHG Monitoring and Reporting for the power sector (2023)
Updated Guidelines for GHG Monitoring and Reporting for industrial sectors (2023)
Interim Regulations on the Administration of Carbon Emission Trading (2024)
EU Emissions Trading System (EU ETS)
General Information
Operational since 2005, the European Union Emissions Trading System (EU ETS) is the oldest cap-and-trade system in force. It is a cornerstone instrument of the EU’s policy framework to combat climate change under the “European Green Deal” and reduce GHG emissions cost-effectively. Until 2023, the system covered emissions from over 10,000 installations and airlines operating in the EU. Collectively, they represent around 38% of the EU’s total emissions. From 2024, emissions from large ships are included in the EU ETS.
The EU ETS is currently in its fourth trading phase (2021 to 2030). Every year, covered entities must surrender allowances for their emissions under the EU ETS. Auctioning is the main method of distributing allowances, with free allocation, based on benchmarks, issued to address the risk of carbon leakage.
The EU ETS was revised in 2023 in the context of the European Green Deal to align the system with the 2030 climate target of at least 55% net emissions reductions compared to 1990 levels.
In the first half of 2023, the EU adopted important reforms of the EU ETS framework as part of:
- the “Fit for 55” package, to align the system with the EU’s 2030 climate target of at least 55% net emissions reductions compared to 1990 levels and the European Green Deal objectives,
- the EU’s response to the energy crisis caused by Russia’s invasion of Ukraine (“REPowerEU” plan).
These reforms:
- increased the ambition and expanded the scope of the EU ETS to maritime transport, and introduced a new, separate emissions trading system for buildings, road transport and additional sectors* (ETS 2)**;
- strengthened the Market Stability Reserve (MSR);
- updated the EU ETS regarding aviation;
- updated the rules of the monitoring and reporting of emissions from maritime transport;
- created the Social Climate Fund to complement the new ETS 2; and
- established a Carbon Border Adjustment Mechanism to address the risk of carbon leakage from specific sectors under the EU ETS (as an alternative to free allocation).
They are in force and their implementation has followed in the second half of 2023.
In May, the European Commission published the seventh communication on the MSR indicator. In addition to managing the supply of allowances to auctions, from 2023 onward the MSR cancels allowances in its holdings above a certain threshold. At the start of January 2023, 2.5 billion allowances from the MSR were cancelled.
To address the impact of the energy crisis following Russia’s invasion of Ukraine, the Commission put forward targeted reforms and investments to phase out the EU’s dependence on fossil fuel imports, ensure the security of the energy supply, promote energy efficiency, and accelerate the clean energy transition. The REPowerEU Regulation mobilizes the ETS Innovation Fund as one of the funding sources. At the same time, it directs 27 million unallocated allowances from the MSR, which would otherwise become cancelled, to replenish the Innovation Fund.
* Mainly industry sectors not covered under the existing EU ETS.
** See ETS 2 factsheet.
Emissions & Targets
3,468.3 MtCO2e (2021)
By 2030: Reduce net emissions to at least 55% below 1990 GHG levels (European Climate Law)
By 2050: Climate neutrality (European Climate Law)
EUR 83.24 (USD 90.00) (average 2023 auction price; updated prices available here)
EUR 83.47 (USD 90.25) (average secondary market price 2022)
Size & Phases
PHASE ONE: Three years (2005 to 2007)
PHASE TWO: Five years (2008 to 2012)
PHASE THREE: Eight years (2013 to 2020)
PHASE FOUR: Ten years (2021 to 2030)
A cap limits the total emissions allowed in the system It is set to bring emissions down by 2030 by 62% compared to 2005.
PHASE ONE and PHASE TWO: The cap was calculated bottom-up, based on the aggregation of the national allocation plans of each Member State. Phase 1 started with a cap of 2,096 MtCO2e in 2005; Phase 2 started with a cap of 2,049 MtCO2e in 2008.
PHASE THREE:
Installations: A single EU-wide cap was calculated based on emissions’ monitoring and set at 2,084 MtCO2e in 2013. It was reduced annually by a linear factor of 1.74% (applied to the midpoint of 2008-2012 baseline emissions). This translated into a year-on-year reduction of the cap by some 38 million allowances and resulted in a cap of 1,816 MtCO2e in 2020.
Aviation: Included in the EU ETS in 2012, with a cap calculated separately. Legally, the system covers all outgoing and incoming flights to the EEA. The 2012 cap for aviation amounted to 221 million MtCO2e (95% of 2004 to 2006 emissions). In 2013, however, the EU temporarily limited ETS obligations to flights within the EEA to support the development of a global market-based measure to reduce aviation emissions by the International Civil Aviation Organization (ICAO). The number of aviation allowances put into circulation in 2013 to 2016 was reduced to 38 million allowances annually. This ‘stop-the-clock’ limited scope of the EU ETS for aviation was extended until 2023.
PHASE FOUR:
From Phase 4, the linear reduction factor applies annually to the overall cap. The factor is set at 2.2% per year (of 2008 to 2012 baseline emissions) for the period 2021 to 2023, 4.3% for the period 2024 to 2027 and 4.4% from 2028. The cap is also reduced in two steps, by 90 million allowances in 2024 and 27 million allowances in 2026.
Installations: A single EU-wide cap subject annually to the linear reduction factor. Following the 2023 ETS revision, the cap in 2024 amounts to 1,386 MtCO2e. From 2021, the UK is no longer part of the EU ETS except for electricity generators in Northern Ireland.
Maritime: The 2024 cap has been increased by 78.4 million allowances based on the sector’s average emissions reported for 2018 and 2019.
Aviation: The aviation cap in 2024 amounts to 28.9 MtCO2e.
From Phase 4, a Member State may cancel allowances from their auction share if they take additional policy measures that result in a closure of electricity generation capacity. The quantity of allowances cancelled shall not exceed the average verified emissions of the installation from five years preceding the closure.
The EU ETS scope in terms of activities and greenhouse gases is specified in Annex I and Annex II of the “ETS Directive”.
PHASE ONE: Power stations and other combustion installations with >20 MW thermal rated input (except hazardous or municipal waste installations), industry (various thresholds) including oil refineries, coke ovens, and iron and steel plants, as well as production of cement, glass, lime, bricks, ceramics, pulp, paper, and cardboard.
PHASE TWO: Several countries included NOx emissions from the production of nitric acid. The EU ETS also expanded to include Iceland, Liechtenstein, and Norway.
Aviation: Emissions from international aviation were included in the EU ETS in 2012 (>10,000 tCO2/year for commercial aviation; >1,000 tCO2/year for non-commercial aviation since 2013). However, the EU temporarily limited the scope of the EU ETS for aviation to flights within the EEA. Exemptions for operators with low emissions were introduced.
PHASE THREE: Carbon capture and storage installations, production of petrochemicals, ammonia, nonferrous and ferrous metals, gypsum, aluminum, as well as nitric, adipic, and glyoxylic acid (various thresholds) were added to the scope.
Aviation: In 2017, the limited scope of the EU ETS for aviation was extended until 2023 to support the development of a global measure for aviation emissions under ICAO. Under the Linking Agreement between the EU and Switzerland, from 2020, the EU ETS covers emissions from outgoing flights to Switzerland.
PHASE FOUR: Amendments introduced in view of the UK’s departure from the EU and in the 2023 revision of the EU ETS.
Power and industry: The scope of ETS and benchmarks used for free allocation is broadened from 2024 to remove barriers for the deployment of new technologies such as green hydrogen or hydrogen-based steel.
Aviation: Under the “Trade and Cooperation Agreement” between the EU and the UK, the EU ETS applies to emissions from flights departing from the EEA to the UK from 2021 (the UK ETS applies to flights departing to EEA airports).
Emissions from most flights to and from the EU’s nine outermost regions as well as from departing flights from these regions to Switzerland and the UK are added to the scope from 2024.
Maritime: From 2024, emissions from all large ships (of 5,000 gross tonnage and above) entering EU ports are covered by the EU ETS, regardless of the flag they fly, covering:
- 50% of emissions from voyages starting or ending outside the EU;
- 100% of emissions that occur between two EU ports and when ships are in EU ports.
Initially, the scope extension to maritime transport concerns CO2 emissions and then CH4 and N2O emissions from 2026.
The obligation for maritime companies to surrender allowances for their emissions is being gradually phased in.
- 2025: for 40% of emissions reported in 2024;
- 2026: for 70% of emissions reported in 2025;
- 2027 onward: for 100% of emissions reported in 2026 and later years.
To ensure environmental integrity during the phase-in, Member States will cancel the number of allowances equivalent to the difference between the surrendered allowances and the verified emissions in 2024 and in 2025.
Point source
2022: 8,640 installations, 390 aircraft operators
The number of regulated shipping companies will become known throughout 2024.
Allowance Allocation & Revenue
PHASE ONE: Allocation was based on Member States’ national allocation plans. Allowances were allocated through grandparenting. Some Member States used auctioning and some used benchmark-based allocation.
PHASE TWO:
Auctioning: Eight Member States (Germany, United Kingdom, the Netherlands, Austria, Ireland, Hungary, Czechia, and Lithuania) held auctions corresponding to ~3% of the total allowance allocation.
Free allocation: ~90% of allowances were allocated for free.
PHASE THREE:
Auctioning: The main method of distributing allowances, accounting for up to 57% of the cap. Of the share of allowances to be auctioned, 88% were distributed to Member States based on verified 2005 or average 2005 to 2007 emissions; 10% were allocated between 16 lower-income Member States under the solidarity provision; and the remaining 2% were allocated between the Member States that had reduced their emissions by at least 20% compared to the applicable base year under the Kyoto Protocol.
Free allocation: A significant volume of allowances was allocated for free to address the risk of carbon leakage, based on sectors-specific performance benchmarks. As the demand for free allowances exceeded the volume of allowances available, the free allocation of each installation was subject to a uniform cross-sectoral correction factor — which was revised in 2017.
Power: Auctioning, with an optional transitional free allocation for the modernisation and diversification of electricity generation in ten lower-income Member States. At the end of Phase 3, eligible Member States could decide to continue using this option in Phase 4 (2021 to 2030), monetize remaining allowances, or transfer them to the Modernisation Fund, created under the EU ETS in 2018.
Industry: Free allocation based on sector-specific performance benchmarks, which reflect an average emissions intensity per unit of product of the most efficient 10% of installations in each sector. The European Commission established 54 benchmarks in 2011, using 2007 and 2008 activity data and literature sources (when data was missing). Sectors deemed at risk of carbon leakage received free allocation at 100% of the relevant benchmark. Sub-sectors deemed not at risk of carbon leakage had free allocation reduced gradually from 80% of the respective benchmark in 2013 to 30% by 2020.
The carbon leakage risk was assessed against emissions intensity and trade exposure:
- direct and indirect cost increase >30%; or
- non-EU trade intensity >30%; or
- direct and indirect cost increase >5% and trade intensity >10%.
Cost intensity was determined by the formula:
[Carbon price × (direct emissions × auctioning factor + electricity consumption × electricity emission factor)]/ gross value added
Trade intensity was determined by the formula:
(imports + exports)/(imports + production)
New Entrants’ Reserve (NER): 5% of the cap for Phase 3 was set aside to assist new installations or to cover installations whose capacity significantly increased since their free allocation had been determined. 300 million allowances from the reserve were allocated to the NER300, a large-scale funding program for innovative low-carbon energy demonstration projects.
Aviation: 15% of allowances were auctioned and 82% were allocated to aircraft operators for free. The remaining 3% constituted a special reserve for new entrants and fast-growing airlines. The number of allowances put into circulation for the aviation sectors was reduced to reflect the temporary limitation of the scope of the EU ETS to flights within the EEA.
PHASE FOUR:
Auctioning: the main method of distributing allowances, accounting for up to 57% of the cap. Of the share of allowances to be auctioned, 90% are distributed to Member States based on their share of verified emissions, with 10% distributed among the lower-income Member States under the solidarity provision.
Free allocation: A significant volume of allowances is allocated for free to address the risk of carbon leakage, based on sectors-specific performance benchmarks. Benchmark values are updated twice in Phase 4 to reflect technological progress in different sectors. In 2021, the European Commission updated benchmark values for the first time.* They apply in 2021 to 2025. The values are adjusted for technological progress on a yearly basis. An annual reduction rate is determined for each benchmark. For the steel sector, which faces high abatement costs and leakage risks, a fixed reduction rate applies.
The uniform cross-sectoral correction factor for the adjustment of free allocation is 1 for 2021 to 2025.
The Phase 4 cap includes a buffer of more than 450 million allowances, initially earmarked for auctioning, which can be made available if the initial free allocation volume is fully absorbed (thereby avoiding the need to apply the cross-sectoral correction factor).
Free allocation for 2026 to 2030 will become conditional on the implementation of energy efficiency measures (based on audits or energy management systems) and of carbon neutrality plans for the worst performing installations, in order to incentivize decarbonization.
Free allocation to specific sectors will be gradually phased out from 2026 to 2034, in parallel to the phase-in of EU Carbon Border Adjustment Mechanism (CBAM) for third-country imports. Those sectors are - iron and steel, cement, aluminum, fertilizers and hydrogen. The CBAM will also apply to electricity imports. The transitional, data collection phase of CBAM started on 1 October 2023, with only reporting but no charges due.
Power Sector: Auctioning, with an optional transitional free allocation for the modernization and diversification of electricity generation in ten lower-income Member States. Three of the eligible Member States decided to continue using this option in Phase 4. It can be used until the end of 2024. After this time, any leftover allowances will be either added to a Member State’s share of allowances to be auctioned or its share of the Modernisation Fund.
Industry: Updated benchmark values that apply for 2021 to 2025 were calculated based on activity data for installations over 2016 to 2017, supplied by Member States.
The updated values were compared to the original benchmarks to determine the reductions to be applied over the 15-year period between 2007/08 and 2022/23. Benchmarks could be reduced between 3% and 24% over this period. In total, 31 out of 54 benchmarks have been reduced by the maximum rate of 24%.
There are revised rules covering adjustments to free allocation when an installation makes a significant change to its production. These rules apply from Phase 4. The threshold for adjustments is a 15% increase or decrease in production. Adjustments to free allocation are issued based on yearly production data reports that operators submit to national competent authorities. Adjustments to the level of free allocation are made from the New Entrants’ Reserve.
Carbon leakage rules: The third carbon leakage list, adopted in February 2019, applies for 2021 to 2030. The list includes a reduced number of sectors classified at risk of carbon leakage. Free allocation for other sectors will be discontinued by 2030 (except for district heating).
Carbon leakage is assessed against a composite indicator of trade intensity and emissions intensity, according to the following criteria:
Trade intensity x emissions intensity > 0.2
Trade intensity x emissions intensity > 0.15 but < 0.2; qualitative assessment will follow based on abatement potential, market characteristics, and profit margins.
Emissions intensity is determined by:
[direct emissions + (electricity consumption x electricity emission factor)]/ gross value added
Trade exposure is determined by:
(imports + exports)/(imports + production)
New Entrants’ Reserve (NER): The initial volume of the NER at the start of Phase 4 amounted to 331.3 million allowances. This included unallocated allowances from Phase 3 and 200 million allowances from the MSR.
Aviation: Phase 3 breakdown applied until 2023. Free allocation to aviation will be phased out gradually – reduced to 75% in 2024, 50% in 2025 and eventually to 0% from 2026 onward.
* Revised benchmark values for free allocation of emission allowances for 2021-2025.
EUR 184 billion* (USD 206 billion) since 2013
EUR 43.6 billion** (USD 47.1 billion) in 2023
* Includes revenues from Iceland, Liechtenstein, Norway, and the UK, as well as of the Innovation and Modernisation Funds funded by the EU ETS.
** Includes revenues from Iceland, Liechtenstein, Norway, and Northern Ireland, as well as of the Innovation and Modernisation Funds funded by the EU ETS.
Revenue from the auctioning of allowances under the EU ETS accrues primarily to Member States’ budgets. Of the revenues generated until mid-2023, Member States were instructed to use at least 50% for climate- and energy-related purposes. Member States are required to use all revenues generated from that point onward to support climate and energy objectives.
Member States can use their EU ETS revenues to finance State aid to certain electricity-intensive industries to compensate for the additional electricity costs they face as a result of the EU ETS.They do so under State aid schemes that are approved by the European Commission. Every year, they must publish the total compensation amounts paid out, including a breakdown per recipient sector and subsector. The overall spending under a scheme should not exceed 25% of a Member State’s ETS revenue.
Member States report annually to the European Commission on how they spent their auction revenues. To date, Member States have reported having spent ~76% of EU ETS revenues on climate- and energy-related purposes, both domestic and international.
A share of EU ETS allowances is auctioned to supply the Innovation and Modernisation Funds – two funds established for Phase 4 to support decarbonization in the covered sectors.
Innovation Fund: Supports the commercial demonstration of innovative low-carbon technologies and industrial solutions to decarbonize Europe’s energy-intensive industries, as well as the development of renewable energy, energy storage and carbon capture use and storage.
Modernisation Fund: Supports investments in lower-income Member States aimed at modernizing energy systems, improving energy efficiency, and supporting a socially just transition to climate neutrality. It is one of the solidarity mechanisms of the EU ETS, which addresses Member States’ different starting points in the decarbonization challenge.
Flexibility & Linking
Banking is allowed (since 2008).
Borrowing is not allowed.
PHASE ONE: The use of the Clean Development Mechanism (CDM) and Joint Implementation (JI) credits was allowed without limitation. In practice, no offset credits were used in Phase 1
PHASE TWO:
The use of offset credits was allowed. 1,058 MtCO2e of international credits were used.
Qualitative limits: Most categories of CDM/JI credits were allowed, except for LULUCF and nuclear power. Strict requirements applied for large hydro projects exceeding 20 MW.
Quantitative limits: In Phase 2, operators were allowed to use JI and CDM credits up to a certain percentage limit determined in the respective country’s National Allocation Plan. Unused entitlements were transferred to Phase 3.
PHASE THREE:
The use of offset credits was allowed with strict limitations.
Qualitative limits: Newly generated international credits (post-2012) had to originate from projects in least developed countries. Credits from CDM and JI projects from other countries were eligible only if registered and implemented before the end of 2012. Projects from industrial gas credits (projects involving the destruction of HFC-23 and N2O) were excluded regardless of the host country. Credits issued for emission reductions that occurred in the first commitment period of the Kyoto Protocol were no longer accepted after March 2015.
Quantitative limits: The total use of credits for Phase 2 and Phase 3 was capped at 50% of the overall reduction under the EU ETS in that period (~1.6 Gt CO2e).
PHASE FOUR:
The use of offset credits is not allowed.
The EU ETS and the Swiss ETS have been linked since 2020. This means that allowances issued in one system can be surrendered for emissions generated in either of the two systems. The “Linking Agreement” between the EU and Switzerland sets out the conditions and requirements under which the two systems are linked. A direct link was created between the registries of both systems. It allows regulated entities to transfer allowances from an account in one system to an account in the other system.
Compliance
One calendar year.
A harmonized framework of monitoring, reporting, verification and accreditation requirements underpins the EU ETS functioning. Every year, Member States report on implementation of this framework:
- “Monitoring and Reporting Regulation (2018/2066)”
- “Accreditation and Verification Regulation (2018/2067)”
- “Monitoring and Reporting Regulation for maritime transport (2015/757)”
MONITORING: Each installation, aircraft operator and maritime transport operator is required to have an emission monitoring plan, approved by a national competent authority. The deadline for submitting an emissions report is the end of March (for the preceding calendar year).
REPORTING: Emission reports submitted annually using templates.
VERIFICATION: Emission reports are verified by independent accredited verifiers before the end of March of the following year. Once verified, operators must surrender the equivalent number of allowances by the end of September.
In addition to the detail set out here, a dedicated monitoring, reporting and verification framework for non-CO2 aviation effects is due to start from January 2025.
Regulated entities must pay an excess emissions penalty of EUR 100 (USD 108.13), adjusted for inflation, for each tCO2 emitted for which no allowance has been surrendered, in addition to buying and surrendering the equivalent number of allowances. The name of the non-compliant operator is also made public. Member States may enforce different penalties for other forms of non-compliance.
Market Regulation
MARKET PARTICIPATION: Compliance entities and non-compliance entities.
MARKET TYPES:
Primary: Uniform price auctions with single rounds and sealed bids, conducted daily by EEX. Germany has opted out of the common auctioning platform, instead running national auctions through the EEX. Poland has also opted out but continues to participate on the common auction platform at the EEX until further notice.
Secondary: Spot, futures, options, and forward contracts are traded on the secondary markets, both on exchange and over the counter. Besides the EEX, futures are traded on ICE, ENDEX and Nasdaq.
LEGAL STATUS OF ALLOWANCES:
Classified as financial instruments. The associated derivatives can hence be traded on secondary markets.
BACKLOADING: As a short-term measure implemented in Phase 3 to address a growing surplus of allowances in the EU ETS. Auctioning of 900 million allowances was postponed from the period spanning 2014 to 2016 until 2019 and 2020. The allowances were eventually placed in the Market Stability Reserve.
MARKET STABILITY RESERVE (MSR): The MSR was created in 2015 as a long-term measure to address a growing surplus of allowances in the EU ETS. It adjusts auction volumes according to pre-defined thresholds of the total number of allowances in circulation (TNAC), fostering balance in the EU carbon market and resilience to demand shocks. The MSRstarted operating in 2019.
Triggers: The Commission publishes the TNAC communication every year.
- If the TNAC is above 1,096 million, 24% of its volume is withdrawn from future auctions and placed into the MSR over a period of 12 months.
- If the TNAC is between 833 and 1,096 million, to mitigate threshold effects a smaller share of allowances is deducted from auction volumes and placed in the MSR.
- If the TNAC is less than 400 million allowances, 100 million allowances are released from the MSR and auctioned.
CANCELLATIONS: From 2023, allowances in the MSR above a certain threshold are cancelled annually. In 2023, the applicable threshold was the 2022 auction volume. From 2024, the applicable threshold is fixed at 400 million.
At the end of December 2022, the MSR contained over 3 billion allowances. The 2022 auction volume amounted to 486 million allowances. This led to a cancellation of 2,515 million allowances in January 2023.
Swiss ETS allowance supply is not considered in the TNAC, and Swiss auction quotas are not affected by the MSR.
Other Information
European Commission: Responsible for establishing the regulatory framework of the EU ETS and centralized administration of the system, e.g., the EU registry.
Competent authorities of all EU Member States as well as Iceland, Liechtenstein, and Norway: implementation, e.g., verifying compliance with MRV and surrender obligations.
The European Commission publishes annual reports on the functioning of the European carbon market (2023 report on the EU ETS functioning in 2022).
The ETS Directive stipulates that the system is kept under review in light of the implementation of the Paris Agreement and the development of carbon markets in other major economies. Three major EU ETS reviews — before Phase 3, before Phase 4, and in the context of increasing the EU 2030 climate target — have been conducted to date.
By the end July 2026, the European Commission will assess:
- how negative emissions could be accounted for and covered under the EU ETS,
- the feasibility of lowering the 20 MW total rated thermal input thresholds for the activities under the EU ETS,
- effective accounting and avoidance of double counting of CCU products under the EU ETS,
- the feasibility of including municipal waste incineration under the EU ETS,
- the functioning of the EU ETS for aviation, including the functioning of CORSIA.
By the end of December 2027, the Commission will assess the possibility of the scope of the EU ETS to include non-CO2 aviation emissions.
Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for GHG emission allowance trading within the Community and amending Council Directive 96/61/EC.
Decision concerning the establishment and operation of a market stability reserve for the Union GHG emission trading scheme and amending Directive 2003/87/EC (6 October 2015).
Consolidated Auctioning Regulation: Commission Delegated Regulation 2023/2830 supplementing Directive 2003/87/EC
All other legislation and documentation can be found here.