COMMUNICATION FROM THE COMMISSION

Publication of the total number of allowances in circulation in 2018 for the purposes of the Market Stability Reserve under the EU Emissions Trading System established by Directive 2003/87/EC

(2019/C 167/04)

1. Introduction

In 2015, the Council and the European Parliament took the decision to establish a Market Stability Reserve (‘MSR’) (1) under the EU Emissions Trading System (ETS) established by Directive 2003/87/EC (2). The MSR began operating in January 2019. The purpose of the MSR is to avoid that the EU carbon market operates with a large structural surplus of allowances, with the associated risk that this prevents the EU ETS from delivering the necessary investment signal to deliver on the EU's emission reduction target in a cost-efficient manner.

The Decision states that, by 15 May each year and starting in 2017, the Commission shall publish the total number of allowances in circulation. This figure determines whether allowances intended to be auctioned in the subsequent year should be placed into the reserve.

On 15 May 2018, the Commission published the total number of allowances in circulation in 2017, amounting to around 1,65 billion allowances (3). In line with MSR rules, following this publication, 264 731 936 allowances will be placed in the reserve over the first 8 months of 2019 starting as of 1 January (4).

This Communication is the third publication for the purposes of the MSR, and concerns the year 2018. It contains the actual total number of allowances in circulation, and sets out in detail how this figure has been calculated. This publication will determine the number of allowances that will be placed in the reserve from September 2019 to August 2020.

2. Functioning of the market stability reserve

The MSR functions in an automatic manner where the total number of allowances in circulation is outside of a predefined range. Allowances are added to the reserve, if the total number of allowances in circulation exceeds the threshold of 833 million allowances. Allowances are released from the reserve, if the total number of allowances in circulation is lower than 400 million allowances. In practical terms, allowances are added to the reserve by auctioning less, and released from the reserve by auctioning 100 million more allowances in the future.

The publication of the total number of allowances in circulation, on the basis of which allowances will be added to or released from the reserve, is therefore a key element for the operation of the reserve.

In the context of the revision of the EU ETS (5), important changes were made to the functioning of the MSR. During the period from 2019 to 2023, the percentage of the total number of allowances in circulation determining the number of allowances put in the reserve if the threshold of 833 million allowances is exceeded is temporarily doubled from 12 % to 24 %. In addition, as from 2023, allowances held in the MSR above the previous year's auction volume will no longer be valid.

On the basis of this Communication, 24 % (6) of the total number of allowances in circulation will therefore be placed in the reserve over a period of 12-months starting as of 1 September 2019. A corresponding amount will be deducted from Member States' auction volumes, following their respective auction shares. In this context, it is important to recall that until 31 December 2025, allowances redistributed for the purposes of solidarity and growth within the Union are not taken into account to determine the relevant shares.

3. The total number of allowances in circulation

According to Article 1(4) of Decision (EU) 2015/1814, the total number of allowances in circulation ‘shall be the cumulative number of allowances issued in the period since 1 January 2008, including the number issued pursuant to Article 13(2) of Directive 2003/87/EC in that period and entitlements to use international credits exercised by installations under the EU ETS in respect of emissions up to 31 December of that given year, minus the cumulative tonnes of verified emissions from installations under the EU ETS between 1 January 2008 and 31 December of that same given year, any allowances cancelled in accordance with Article 12(4) of Directive 2003/87/EC and the number of allowances in the reserve.’

In short, the total number of allowances in circulation relevant for MSR feeds and releases is calculated by the following formula:

TNAC = Supply — (Demand + allowances in the MSR)

There are three different elements that determine the total number of allowances in circulation: first, the supply of allowances since 1 January 2008; second, the number of allowances surrendered and cancelled (‘demand’); and third, the holdings of the reserve.

As foreseen in Decision (EU) 2015/1814, aviation allowances and verified aviation emissions are not considered in this context.

3.1. Supply

The supply of allowances to the market is determined by five different elements:

— allowances banked from 2008-12 (‘phase 2’),

— allowances allocated for free since 1 January 2013 until 31 December 2018, including allowances allocated from the new entrants' reserve (‘NER’),

— allowances auctioned between 1 January 2013 (7) and 31 December 2018,

— allowances monetised by the European Investment Bank (EIB) for the purposes of the ‘NER300’ programme, and

— international credit entitlements exercised by installations in respect of emissions up to 31 December 2018.

The number of allowances banked from phase 2 of the EU ETS is 1 749 540 826 allowances (8). This ‘banking total’ represents the total number of allowances issued during phase 2 of the EU ETS, which were not surrendered to cover verified emissions or cancelled. For the purpose of the determination of the total number of allowances in circulation it therefore represents the number of ETS allowances in circulation at the start of the period 2013-20 (‘phase 3’) on 1 January 2013 and is taken into account as such in the calculation.

According to the reports from the auctions on the common auction platform and on the relevant opt-out platforms (9), the number of allowances auctioned between 1 January 2013 and 31 December 2018, including the so-called early auctions, is 4 641 208 000.

The number of allowances allocated for free, including allowances allocated from the NER, since 1 January 2013 until 31 December 2018 is 5 162 023 498 (10).

300 000 000 allowances have been monetised by the EIB for the purposes of the NER300 programme (11).

The international credit entitlements exercised by installations in respect of emissions up to 31 December 2018 correspond to 434 049 616 (12).

3.2. Demand

The demand consists of the total verified emissions from installations between 1 January 2013 (13) and 31 December 2018, which is 10 631 597 033 (14), and allowances cancelled in that same period, which corresponds to 315 083 allowances.

3.3. Holdings of the MSR

For the period of this publication, there were no allowances in the reserve (15).

3.4. Total number of allowances in circulation

In the light of the foregoing, the total number of allowances in circulation amounts to 1 654 909 824 allowances.

4. Conclusion

In line with the MSR rules, over a 12-month period — from 1 September 2019 to 31 August 2020 —, a total of 397 178 358 allowances will be placed in the MSR.

The next publication will be made in May 2020 to determine reserve feeds from September 2020 until August 2021.

Table

Overview

Supply (a) Banking from phase 2 1 749 540 826 (b) total number of allowances allocated for free between 1 January 2013 and 31 December 2018, including from NER 5 162 023 498 (c) total number of allowances auctioned between 1 January 2013 and 31 December 2018, including early auctions 4 641 208 000 (d) the number of allowances monetised by the European Investment Bank for the purposes of the NER300 programme 300 000 000 (e) international credit entitlements exercised by installations in respect of emissions up to 31 December 2018 434 049 616 Sum (supply) 12 286 821 940





Demand (a) Tonnes of verified emissions from installations under the EU ETS between 1 January 2013 and 31 December 2018 10 631 597 033 (b) Allowances cancelled in accordance with Article 12(4) of Directive 2003/87/EC by 31 December 2018 315 083 Sum (demand) 10 631 912 116





MSR holdings Number of allowances in the reserve 0 Total number of allowances in circulation 1 654 909 824

(1) Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC (OJ L 264, 9.10.2015, p. 1).

(2) 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 (OJ L 275, 25.10.2003, p. 32).

(3) See Communication from the Commission, C(2018) 2801 final, available at:

https://ec.europa.eu/clima/sites/clima/files/ets/reform/docs/c_2018_2801_en.pdf

(4) The contributions of each Member State to the Market Stability Reserve from 1 January to 31 August 2019 were published in the Report from the Commission to the European Parliament and the Council — Report on the Functioning of the European Carbon market, COM(2018) 842 final, published on 17 December 2018, available at: https://ec.europa.eu/clima/sites/clima/files/ets/docs/com_2018_842_final_en.pdf

(5) Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814 (OJ L 76, 19.3.2018, p. 3); available at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.076.01.0003.01.ENG&toc=OJ:L:2018:076:TOC

(6) Representing 2 % per month.

(7) This figure includes the so-called ‘early auctions’, i.e. allowances valid for the period 2013-20, which have been auctioned before 1 January 2013.

(8) See Carbon Market Report 2015; COM(2015) 576.

(9) Available at: http://www.eex.com/en/products/environmental-markets/emissions-auctions/archive and https://www.theice.com/marketdata/reports/148

(10) Based on an extract of the EU Transaction Log (EUTL) on 1 April 2019

(11) A first tranche of 200 million allowances — sold in 2011 and 2012 — and a second tranche of 100 million allowances – sold in 2013 and 2014; see for further details

https://ec.europa.eu/clima/sites/clima/files/lowcarbon/ner300/docs/summary_report_ner300_monetisation_en.pdf

(12) Based on an extract of the EUTL on 1 April 2019.

(13) With respect to verified emissions in the period 2008-2012, please see explanations on the banking total (section 3.1.).

(14) The total verified emissions are based on an extract from the EUTL on 1 April 2019 to take into account verified emissions reported by 31 March 2019. Emissions reported after that date are therefore not reflected in this total.

(15) This Communication shows the total number of allowances in circulation by the end of 2018. The MSR is operating since 1 January 2019. Around 265 million allowances will be placed in the reserve from 1 January until 31 August 2019, based on the TNAC for 2017.