EUROPEAN COMMISSION Brussels, 14.7.2021 COM(2021) 551 final 2021/0211(COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757 (Text with EEA relevance) {SEC(2021) 551 final} - {SWD(2021) 557 final} - {SWD(2021) 601 final} - {SWD(2021) 602 final}



EXPLANATORY MEMORANDUM 1.CONTEXT OF THE PROPOSAL •Reasons for and objectives of the proposal The European Green Deal Communication launched a new growth strategy for the EU that aims to transform the EU into a fair and prosperous society with a modern, resource-efficient and competitive economy. It reaffirms the Commission’s ambition to increase its climate targets and make Europe the first climate-neutral continent by 2050. Furthermore, it aims to protect the health and well-being of citizens from environment-related risks and impacts. The necessity and value of the European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on the health, living and working conditions and well-being of the Union’s citizens. Tackling climate change is an urgent challenge. In line with the scientific findings of the Intergovernmental Panel on Climate Change (IPCC) Special Report, global net-zero CO2 emissions need to be achieved around 2050, and neutrality for all other greenhouse gases as soon as possible later in the century. This urgent challenge requires the EU to step up its action and demonstrate global leadership by becoming climate neutral by 2050. This objective is set out in the Communication ‘A Clean Planet for all’ - A European strategic long-term vision for a prosperous, modern, competitive and climate-neutral economy’. Based on the European Green Deal strategy and a comprehensive impact assessment, the Commission’s Communication of September 2020 on Stepping up Europe’s 2030 climate ambition (‘2030 Climate Target Plan’) proposed to raise the EU's ambition and put forward a comprehensive plan to increase the European Union’s binding target for 2030 towards at least 55 % net emission reduction, in a responsible way. Raising the 2030 ambition now helps give certainty to policymakers and investors, so that decisions made in the coming years do not lock in emission levels inconsistent with the EU’s objective to be climate neutral by 2050. The 2030 target is in line with the Paris Agreement objective to keep the global temperature increase to well below 2°C and pursue efforts to keep it to 1.5°C. The European Council endorsed the new EU binding target for 2030 at its meeting of December 2020. It also called on the Commission “to assess how all economic sectors can best contribute to the 2030 target and to make the necessary proposals, accompanied by an in-depth examination of the environmental, economic and social impact at Member State level, taking into account national energy and climate plans and reviewing existing flexibilities”. To this end, the European Climate Law, as agreed with the co-legislators, makes the EU’s climate neutrality target legally binding, and raises the 2030 ambition by setting a target of at least 55 % net emission reductions by 2030 compared to 1990. In order to follow the pathway proposed in the European Climate Law, and deliver this increased level of ambition for 2030, the Commission has reviewed the climate and energy legislation currently in place that are expected to only reduce greenhouse gas emissions by 40 % by 2030 and by 60 % by 2050. This ‘Fit for 55’ legislative package, as announced in the 2030 Climate Target Plan, is the most comprehensive building block in the efforts to implement the ambitious new 2030 climate target, and all economic sectors and policies will need to make their contribution. The European Council also invited the Commission in December 2020 to consider exploring ways to strengthen the EU Emissions Trading System (EU ETS), while preserving its integrity and taking into account the need to address distributional concerns and energy poverty. The European Council also invited the Commission to consider proposing measures that enable energy-intensive industries to develop and deploy innovative climate-neutral technologies while maintaining their industrial competitiveness. The current ETS legislation was revised in 2018 to deliver a 43 % reduction in EU ETS emissions by 2030 compared to 2005, coherent with an EU economy-wide emissions reduction target of at least 40 % by 2030 compared to 1990. More recent analysis by the Commission services, however, indicates that, if the legislation remains unchanged, the sectors currently covered by the EU ETS would instead achieve emission reductions of -51 % in 2030 compared to 2005. Even though this would mean outperforming the contribution of -43 % referred to above, it would still be an insufficient contribution to an overall target of at least -55 % compared to 1990. Therefore, the general objective of this initiative is to revise the ETS Directive in a manner commensurate with the 2030 climate ambition to reach at least 55 % net greenhouse gas emission reductions by 2030 below 1990 levels and with a gradual and balanced trajectory towards climate neutrality by 2050, in a cost-effective and coherent way while taking into account the need for a just transition and the need for all sectors to contribute to the EU’s climate efforts. As explained in the impact assessment, contribution of the sectors covered by the EU ETS of -61 % compared to 2005 is considered as best reflecting the 2030 Climate Target Plan results and is taken as the EU ETS ambition contributing to an overall target of at least -55 % compared to 1990. Increasing the EU ETS’s environmental contribution entails adjusting primarily the total number of allowances issued under the EU ETS (the ‘cap’). However, a reduced amount of allowances available to the market affects other pillars of the EU ETS and the carbon price. It impacts core principles such as the need for market stability, the protection against the risk of carbon leakage, the carefully balanced distributional effects between Member States, and the availability of funds for the increased investment needs in low-carbon technologies. At the same time as the EU ETS is brought in line with the overall target of at least -55 % compared to 1990, this increased climate ambition also needs to be reflected in the contribution to the EU’s climate efforts of sectors currently outside of the EU ETS. The impact assessment accompanying the 2030 Climate Target Plan found that in the absence of additional measures, emissions in certain sectors would not decrease as much as required to be on a path to achieve an economy-wide 55 % reduction in emissions. In fact, in maritime transport, emissions today are higher than in 1990, and maritime transport emissions are expected to grow further in a business-as-usual scenario. All pathways assessed as part of the 2030 Climate Target Plan and the Sustainable and Smart Mobility Strategy envisage 80-82 % emissions reductions from international shipping by 2050 relative to 1990 (equivalent to 88-89 % emissions reductions relative to 2008), in order to be consistent with the increased level of climate ambition. Therefore, the European Commission undertook the commitment to extend the EU ETS to maritime transport as part of a basket of EU measures to address emissions from maritime transport, along with action agreed within the IMO. In this context, the Commission welcomes the progress that the European Parliament and the Council have made since 2019 on the proposal to amend Regulation (EU) 2015/757 in order to take appropriate account of the global data collection system for ship fuel oil consumption data (COM(2019) 38 final) and the Commission takes note of the European Parliament’s Plenary support for the extension of the EU’s Emissions Trading System (EU ETS) to cover maritime transport emissions from 2023. Emissions from maritime transport should be included in the existing emissions trading system. To ensure a smooth transition, a phase-in period should be introduced where shipping companies would only have to surrender allowances for a portion of their verified emissions, gradually rising to 100 % over 4 years. As only around 90 million tons of CO2 would be added through the extension to maritime transport to the existing ETS, the impact on the availability of allowances for other sectors covered would remain limited. To take into account the inclusion of the maritime sector in the EU ETS, Regulation (EU) 2015/757 should be amended, in particular as regards the reporting of aggregated emissions data at company level and considering the role of administering authorities in respect of shipping companies. These amendments complement those proposed in COM(2019) 38 final. As specified in the 2030 Climate Target Plan, the building sector is currently responsible directly and indirectly for 36 % of energy-related greenhouse gas emissions in the EU and has a large cost-effective potential to reduce emissions. More than half of those emissions are already covered by the existing ETS, notably the provision of electricity for use in buildings and most emissions of district heating. However, many homes are still heated with outdated systems that use polluting fossil fuels such as coal and oil. The sector of road transport also has a significant cost-effective reduction potential. Today, road transport accounts for a fifth of the EU’s greenhouse gas emissions and increased its emissions by over a quarter since 1990. As already considered in the European Green Deal Communication, the Commission is proposing to include the building sector and road transport into emissions trading. The coverage of these sectors by emissions trading, when put in the context of other appropriate regulatory and investment measures for the sectors in question, would provide for increased and more harmonised economic incentives to reduce emissions across these sectors in the EU and increased certainty of delivery of the emission reductions for those sectors. Emissions trading for the buildings and road transport sectors should be introduced through separate but adjacent emissions trading. This will avoid any disturbance of the well-functioning emissions trading system for stationary installations and aviation, given the different reduction potentials in those sectors and different factors that influence the demand. Any possible merger of the two systems should be assessed only after a few years of functioning of the new emissions trading, based on experience. The extension to buildings and road transport requires an upstream approach to regulated entities.

Market stability is crucial for the EU ETS to function correctly to achieve its targets. To ensure market stability, Decision (EU) 2015/1814 established the market stability reserve (MSR). It began operating in January 2019. The objectives of the MSR are to tackle historical supply-demand imbalances and to make the EU ETS more resilient to major imbalances. The mechanism must preserve regulatory stability and ensure long-term predictability. Article 3 of the Decision requires the Commission to review the functioning of the reserve within three years of the start of the operation. This review needs to be considered together with the effects for market stability of increasing the ambition of the EU ETS, so the necessary amendments to the reserve are proposed together with the amendments to the EU ETS with this proposal. In this context, this proposal, as part of the Fit for 55 package, has the following specific objectives: –strengthening the EU ETS in its current scope in order to provide the appropriate contribution to an overall target of at least -55 % GHG emissions compared to 1990; –ensuring continued effective protection for the sectors exposed to a significant risk of carbon leakage while incentivising the uptake of low-carbon technologies; –addressing the distributional and social effects of this transition, by reviewing the use of auctioning revenues and the size and functioning of the low-carbon funding mechanisms; –ensuring that the other sectors than those currently included in the EU ETS contribute cost-effectively to the emission reductions needed in line with EU targets and Paris Agreement commitments notably by including emissions from maritime transport and emissions from buildings and road transport under the rules of the EU ETS while ensuring synergies with other policies targeting those sectors; –reviewing the monitoring, reporting and verification system of CO2 emissions from maritime transport to take into account the inclusion of the maritime transport sector in the EU ETS; –reviewing the market stability reserve in line with the corresponding legal obligation and examining possible amendments to its design, to fulfil the legal objectives in the MSR decision and to address any issues that may be raised in the context of the increased ambition. •Consistency with existing policy provisions in the policy area All sectors of the economy should contribute to the reduction of greenhouse gas emissions. The ‘Fit for 55’ climate and energy package is a comprehensive step in overhauling Union legislation to align it with the EU’s increased climate ambition. All initiatives in the package are closely interlinked, and each one depends on the design of the others. This legislative proposal is complementary to the proposals made in the package and maintains consistency with them. Sectors outside the EU ETS are covered by the Effort Sharing Regulation (ESR), which establishes an overall EU-wide greenhouse gas emission reductions target, as well as binding annual targets for individual Member States to be achieved by 2030. The ESR covers among others the road transport and buildings sectors, as well as emissions from domestic navigation, amounting together to around 50 % of ESR emissions. Contrary to the EU ETS, the sectors covered by the ESR are not subject to an EU-wide carbon price signal. By providing the additional economic incentives (through carbon pricing) necessary to achieving the cost-efficient emission reductions in buildings and road transport, the new ETS would complement the ESR in the current scope, which maintains incentives and accountability for national action. The importance of the latter has also been voiced by a large number of stakeholders. As the 2030 ambition of the emission trading for buildings and road transport is set in a consistent way with the cost-efficient contributions of the sectors covered, there is no distortion of the contributions of the ESR sectors not covered by EU-wide carbon pricing. National measures that address non-price barriers or make alternative solutions available can make carbon pricing work better. Directive (EU) 2018/410 states in recital 4 that action from the International Maritime Organization (IMO) or the Union should start from 2023, including preparatory work on adoption and implementation of a measure ensuring that the sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement and due consideration being given by all stakeholders. Also, reducing maritime transport emissions is part of the EU economy-wide reduction commitment under the Paris Agreement. To date, no adequate measures are in place, either at the global level or in the EU, to achieve the emission reductions necessary from the maritime transport sector to be in line with the EU’s increased level of climate ambition. At the EU level, CO2 emissions from ships above 5000 gross tonnage travelling to or from ports located within the EEA are being monitored, reported and verified (through the EU Maritime MRV Regulation) since 2018. At the global level, a regulatory framework on the energy efficiency of new ships is in place and energy efficiency measures for existing ships have recently been approved. The IMO has also adopted an Initial Strategy on Reduction of Greenhouse Gas Emissions from Ships, which sets a greenhouse gas emission reduction objective of at least 50 % by 2050 compared to 2008 levels. While the recent progress achieved in IMO is welcome, these measures are insufficient to decarbonise international shipping in line with international climate objectives. Given this situation, the European Commission committed to propose a basket of EU measures to increase the contribution of maritime transport to the EU climate efforts, along with the measures agreed at global level within the IMO. Beside the extension of the EU ETS to maritime transport, the basket of measures contains notably the FuelEU Maritime initiative, which aims to increase the demand and deployment of renewable alternative transport fuels, as well as a proposal to review the Energy Taxation Directive (ETD) with regard to the current exemption of fuel used by ships from taxation. Currently, the EU ETS directly or indirectly covers around 30 % of buildings emissions from heating. This is related to the system’s coverage of district heating and electricity used for heating purposes. Covering all emissions of fossil fuel combustion in this sector and integrating them in the EU emissions trading would present important benefits in terms of effectiveness of emissions reduction. In road transport, emissions trading would have the advantage of capturing fleet emissions under the cap and simultaneously incentivising behavioural change with lasting effects on mobility solutions through the price signal. Nevertheless, the CO2 emissions performance standards for cars remain the main driver to ensure the supply of modern and innovative clean vehicles, including electric cars. In parallel to applying emissions trading to road transport, the Commission is proposing to strengthen the CO2 standards for cars and vans for 2030 to ensure a clear pathway towards zero emissions mobility. In addition to the already specified possible auction revenue uses which include e.g. promoting skill formation and reallocation of labour, a part of the revenues generated by emissions trading in the new sectors could be used to address the social impacts arising from the new emissions trading in these sectors and invested in measures intended to accelerate the building renovation wave as well as the uptake of zero-emission vehicles and to develop the necessary infrastructure, such as strategically located, smart and intelligent refilling and charging stations for zero-emission vehicles. Support measures to promote energy efficiency in vulnerable or low-income households could also contribute to avoiding excessive distributional effects. To that end, within the ‘Fit for 55’ legislative package the Commission makes a proposal for establishing a Social Climate Fund to finance the relevant Member Sates’ plans to address social aspects of the emission trading for buildings and road transport with a specific emphasis on vulnerable households, micro-enterprises and transport users. Part of the auction revenues of the new system are to be used to finance the plans of the Member States. The ambition level, emissions cap and trajectory for the new ETS is proposed to be set coherently in line with the cost-effective emission reductions of buildings and road transport stemming from a combination of carbon pricing and strengthening the existing regulatory framework for these sectors. •Consistency with other Union policies The European Green Deal, its climate neutrality objective, and the twin green and digital transition are a core priority of the European Union. The ‘Fit for 55’ package, the Next Generation EU and the Multiannual Financial Framework for 2021-2027 will help achieving the twin green and digital transitions that Europe is aiming for. The combination of these policies will address the economic crisis and accelerate the shift to a clean and sustainable economy, linking climate action and economic growth. Reducing net GHG emission by 2030 compared to 1990 at an economy wide scale by at least 55 % calls not only for changes to the current climate, but also energy policy framework. The ‘Fit for 55’ package provides a comprehensive review of the climate and energy legislation to achieve this objective. The ETS amendment proposal is part of this large set of coherently designed policy proposals. The ETS is a core instrument to help the EU achieve the increased 2030 target and a successful and just transition towards the 2050 climate neutrality. As such, this initiative is linked to many other policy areas, including the Union’s external policies. For example, as a market-based EU-wide instrument, the ETS is consistent with and further strengthens the EU’s internal market. The increased Innovation Fund under the ETS Directive, as one of the EU’s prime instruments to bring innovative low-carbon technologies closer to the market, complements other instruments such as Horizon 2020 and Horizon Europe which mainly focus on earlier research phases. The increased Modernisation Fund under the ETS Directive supports investments in modernising the power sector and wider energy systems, boosting energy efficiency, and facilitating a just transition in coal-dependent regions in lower-income MS. This complements other instruments such as cohesion policy and the Just Transition Fund.

Consistency with other Union policies is also ensured through the coherence of the impact assessments for the EU ETS with those for the remainder of the 2030 climate, energy and transport framework, such as the complementarity of extending emission trading with the Energy Efficiency Directive, and with other measures presented as part of the basket of measures to address greenhouse gas emissions from maritime transport. A common baseline and common core policy scenarios with other initiatives of the ‘Fit for 55’ package are used. These scenarios take into account all relevant EU actions and policies. Additional administrative costs of the extension to road transport and buildings are envisaged to be limited by using, where possible, existing structures used for the Energy Taxation Directive and for Energy Savings Obligations under the Energy Efficiency Directive. In turn, additional energy savings would be enhanced by the new ETS, with its potential link to energy savings under Article 7 of the Energy Efficiency Directive. 2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY •Legal basis The legal basis for this proposal is Article 192 TFEU. In accordance with Article 191 and 192(1) TFEU, the European Union shall contribute to the pursuit, inter alia, of the following objectives: preserving, protecting and improving the quality of the environment; promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change. •Subsidiarity (for non-exclusive competence) The EU ETS Directive is an existing EU legislative instrument adopted in 2003. In accordance with the principle of subsidiarity set out in Article 5 of the TFEU, the objectives of this proposal to amend the EU ETS Directive can only be achieved through a legislative instrument at EU level. Similarly, Decision (EU) 2015/1814 of the European Parliament and of the Council concerning the establishment and operation of a market stability reserve for the EU ETS is an existing Union measure. Amending it, as is part of this proposal, cannot be achieved at national or local level, but requires Union action. Climate change is a trans-boundary problem and EU action can effectively complement and reinforce global, regional, national and local action. Increasing the 2030 target for EU greenhouse gas reductions will impact many sectors across the EU economy and coordinated action at the EU level is therefore indispensable and has a much bigger chance of leading to the necessary transformation, acting as a strong driver for cost-efficient change and upward convergence. Furthermore, many of the elements of this proposal have an important internal market dimension, in particular the options related to the carbon leakage protection and the low-carbon funding mechanisms. As a carbon market, the EU ETS incentivises emission reductions to be made by the most cost-efficient solutions first across the activities it covers, achieving greater efficiency by virtue of its scale. Implementing a similar measure nationally would result in smaller, fragmented carbon markets, risking distortions of competition and likely lead to higher overall abatement costs. The same logic holds for the extension of carbon pricing to new sectors. The cross-border dimension of the maritime transport sector calls for coordinated action at European level. EU action can also inspire and pave the way for broader action, e.g. as regards maritime transport within the International Maritime Organization (IMO) and by third countries. •Proportionality As set out in sections 3 and 7 of the impact assessment accompanying this proposal, the proposal complies with the proportionality principle because it does not go beyond what is necessary in order to achieve the objectives of implementing the EU’s greenhouse gas emission reduction target for 2030 in a cost-effective manner while at the same time ensuring the proper functioning of the internal market. The European Council has endorsed an overall economy-wide and domestic reduction in greenhouse gas emissions of at least 55 % below 1990 levels by 2030. This proposal covers a large part of these greenhouse gas emissions, and revises the EU ETS Directive in order to achieve this objective. •Choice of the instrument The objectives of this proposal can be best pursued through a Directive. This is the most appropriate legal instrument to make amendments to the existing ETS Directive (Directive 2003/87/EC). A Directive requires Member States to achieve the objectives and implement the measures into their national substantive and procedural law systems. This approach gives the Member States more freedom when implementing an EU measure than does a Regulation, in that Member States are left the choice of the most appropriate means of implementing the measures in the Directive. This allows Member States to ensure that the amended rules are consistent with their existing substantive and procedural legal framework implementing the EU ETS, in particular regulating permits for installations as well as enforcement measures and penalties. A Directive is also the appropriate instrument to amend Decision (EU) 2015/1814 on the establishment and operation of a market stability reserve because the review of this legal instrument is closely related to the effects on market stability of the increased ambition of the EU ETS. This Directive is also the appropriate instrument to amend Regulation (EU) 2015/757 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport, because this Directive includes CO2 emissions from certain maritime transport activities in the EU ETS, based on emissions data coming from Regulation (EU) 2015/757. 3.RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

•Ex-post evaluations/fitness checks of existing legislation There was no ex-post evaluation or fitness check related to this proposal due to the early stage of implementation of the current ETS legislation, which started to apply in 2021 as amended by Directive (EU) 2018/410 of the European Parliament and of the Council. Consequently, limited data was available for an evaluation. •Stakeholder consultations At various steps in developing this proposal, Member States, industry representatives from the private sector, non-governmental organisations, research and academic institutions, trade unions and citizens were involved. The revision of the EU ETS builds upon the feedback on the 2030 Climate Target Plan and interlinkages of the EU ETS with parallel policies and the broader objectives of the European Green Deal. The main objective of the consultations on the EU ETS revision was to gather stakeholders’ views on the strengthening of the existing EU ETS, the extension of the EU ETS to new sectors (maritime transport as well as buildings, road transport or all fossil fuel combustion) and the review of the MSR. The consultation also looked for inputs on how to address the risk of carbon leakage, the use of revenues and low-carbon support mechanisms. The Commission first invited feedback on an inception impact assessment, outlining the initial considerations and policy options of the revision. The Commission then organised an online public consultation with a questionnaire for each of the proposals of the ‘Fit for 55’ package, receiving almost 500 replies. To support the initiative concerning carbon pricing for maritime transport, a targeted stakeholder survey was carried out accompanied by a targeted interview programme. In addition, the Commission held (virtual) bilateral and multilateral stakeholder meetings, including with industry representatives across different sectors, trade unions, non-governmental organisations and Member States and participated in virtual conferences. Finally, the Commission instructed a contractor to organise two expert workshops on the review of the MSR. The results of the consultation activities are reported in the impact assessment accompanying this proposal and have been taken into account for the current proposal to the extent possible. In general, the public consultations showed broad support for the EU ETS as a policy instrument. Many stakeholders support the strengthening of the existing EU ETS to increase its ambition in line with the new 2030 target and based on cost-efficiency considerations. Only some respondents from the private sector and from civil society argued for, respectively, a lower or higher contribution compared to the cost-efficiency principle. To achieve the strengthened ambition, stakeholders generally found the adjustment of the linear reduction factor important, while some stakeholders also highlighted the importance of a combination with a one-off reduction in the quantity of allowances, as reflected in this proposal. On free allocation and the risk of carbon leakage, a large majority of stakeholders is in favour of amending the current carbon leakage framework, while some industry stakeholders want to maintain the current carbon leakage framework without changes. Opinions on the specific amendment options are mixed and the introduction of other measures to further incentivise greenhouse gas reductions received the largest support. The proposal provides such incentives by making free allocation conditional on investments in techniques to increase energy efficiency. The modification of the benchmark values to ensure faster incorporation of innovation and technological progress obtained support from a wide range of stakeholders except from some parts of the private sector. The proposal includes this approach as it is considered to deliver a fairer and more transparent distribution of free allocation than a higher cut for all sectors by the cross-sectoral correction factor. As regards the use of auction revenues, the proposal reflects the view expressed by many stakeholders that stricter rules are necessary to ensure Member States spend their EU ETS auction revenues in line with climate objectives. With regard to low-carbon funding mechanisms, stakeholders generally welcome an increase in the size of the Innovation Fund as well as the introduction of additional supporting instruments such as carbon contracts for difference. This is duly reflected in the proposal by increasing the size of the Innovation Fund and extending its scope. With regard to the Modernisation Fund, a majority of stakeholders, in particular from civil society and parts of the private sector, supports an increase in the Modernisation Fund, as reflected in this proposal. Stakeholders generally support the streamlining of the types of investments that can be financed by the Modernisation Fund and enhancing the Modernisation Fund’s coherence with the European Green Deal. The proposal contributes to this objective by removing the exception for the financing of fossil fuel-fired district heating in certain Member States. The market stability reserve (MSR) has wide support across stakeholder groups; however, there is no consensus about which changes should be made to its parameters. Civil society expressed more support for a strengthening of the parameters of the MSR than the private sector. There was support for maintaining the invalidation rule, either unreservedly or with an amendment, while some stakeholders suggested that the invalidation rule should be abolished. At the expert workshops, some stakeholders saw a need for a variable intake rate to avoid large threshold effects and more frequent reviews. The proposal strikes a balance between the need to ensure a reduction of the market surplus over a reasonable time horizon, the predictability of the mechanism as well as its complexity. In addition, the proposal to include aviation allowances and emissions in the calculation of the surplus corresponds to the preferred option of the majority of stakeholders. With regard to maritime transport, the vast majority of stakeholders that took part in the targeted survey indicated that the maritime sector should contribute more to climate action than it currently does. The extension of the existing EU ETS to maritime transport is the preferred carbon pricing option expressed by stakeholders out of the proposed options, while the shipping industry stressed the importance of measures at international level. The proposal addresses views expressed by stakeholders by covering emissions from intra-EU voyages and half of the emissions from extra-EU voyages and including a review clause in relation to the work in the International Maritime Organization (IMO) towards global market-based measures. This is one of the five approaches which are still under consideration in the United Nations Framework Convention on Climate Change (UNFCCC) context. With regard to the road transport and buildings sectors, several stakeholders, including social partners from both the employer and employee side, are generally sceptical about an extension of emissions trading to these sectors. Among the presented options, the preferred policy option of a wide range of stakeholders is to start with a separate self-standing system, as reflected in this proposal. Views are divided on whether the EU ETS revision should already determine when and how emissions trading for the road transport and buildings sectors could be gradually integrated into the existing EU ETS. In particular, non-governmental organisations pointed to the risks associated with a linking of the two systems. The proposal duly takes into account such concerns by proposing separate but adjacent emissions trading and a review clause. • Collection and use of expertise This proposal builds upon evidence gathered in the impact assessment for the previous EU ETS revision concluded in 2018, the impact assessment accompanying the 2030 Climate Target Plan, analysis conducted in support of the Commission’s European strategic long-term vision or a prosperous, modern, competitive and climate neutral economy and relevant evidence compiled in other concurrent Green Deal initiatives, as well as earlier studies related to maritime, road transport and buildings greenhouse gas emissions. It builds on emissions data and experiences from the implementation of the EU monitoring, reporting and verification systems. As other proposals and impact assessments of the “Fit for 55” policy package, this proposal also makes use of a collection of integrated modelling tools covering the entire greenhouse gas emissions of the EU economy. These tools are used to produce a set of core scenarios reflecting self-consistent policy packages aligned with the increased 2030 climate target building upon the scenarios developed for the 2030 Climate Target Plan. The scenarios are based on the updated EU Reference Scenario, a projection of the evolution of EU and national energy systems and greenhouse gas emissions under the current policy framework which includes COVID-19 impacts. These scenarios were prepared with the help of a contract with E3M lab, National Technical University of Athens, and the detailed modelling results are published alongside the proposals.

In addition, the Commission bases itself on the growing body of peer-reviewed empirical research on the EU ETS and makes use of several support contracts. Among the support contracts, Vivid Economics conducted a study to support the European Commission in the review of the MSR. Concerning carbon leakage provisions, support work was carried out by Öko-Institut, Trinomics, Ricardo and Adelphi. Furthermore, a study team led by Ricardo conducted a study on “EU ETS for maritime transport and possible alternative options or combinations to reduce greenhouse gas emissions”. •Impact assessment The proposed Directive is accompanied by an impact assessment, which builds on the findings of the comprehensive impact assessment for the 2030 Climate Target Plan. This formed the analytical basis to set the objective of at least net 55 % reduction in greenhouse gas emissions by 2030 compared to 1990. An executive summary and the positive opinion of the regulatory scrutiny board on the impact assessment are also made publicly available. The impact assessment is based on integrated modelling scenarios that reflect the interaction of different policy instruments on economic operators, in order to ensure complementarity, coherence and effectiveness in achieving the 2030 climate ambition. This is complemented by available data and specific analytical tools for addressing specific policy design questions. The impact assessment analyses three types of problems. First, those associated with the need to strengthen the existing EU ETS in a commensurate way with the increased net greenhouse gas emissions reduction target by 2030, compared to 1990, of at least -55 %, while avoiding supply/demand imbalances. Second, the need to ensure certain sectors contribute sufficiently to the achievement the increased target. Finally, the need for increased investment and greater capacity to address the distribution of impacts of emission reduction measures, while funds remain limited. Regarding strengthening the existing EU ETS to increase its ambition in line with the net at least ‑55 % 2030 target, any of the option packages would be effective and efficient in achieving the 2030 objective. The impact assessment also concluded that a more targeted approach to free allocation is needed, where it still applies, in the form of strengthened benchmarks and conditionality on decarbonisation efforts in order to incentivise the uptake of low-carbon technologies. Regarding the MSR, the impact assessment amongst other showed that to maintain the good functioning of the EU ETS, the intake rate should be maintained at 24 % until 2030, and adapted so as to remove the undesired ‘threshold effect’. This threshold effect appears when the total number of allowances in circulation (the TNAC) is very close to the 833 million upper threshold, which determines the intake of allowances in the MSR. In that case, one allowance more or less in the TNAC may trigger the full intake volume of 200 million allowances or nothing, depending on whether the TNAC is above or below the threshold. Uncertainty about this happening or not could create price volatility on the market and increase the risk of market abuse. To extend the climate policy framework to maritime transport, four main options and different geographical scopes were analysed. The preferred option is the integration of the maritime transport sector in the existing EU ETS. The impact assessment looked at establishing emissions trading for road transport and buildings or all fossil fuel combustion as a new self-standing emissions trading as a main option. Both options would provide additional economic incentives and via the cap ensure the delivery of the same relative reduction in emissions in the sectors concerned, of 43 % by 2030 compared to 2005. Including only buildings and road transport in the scope of an additional emission trading system, as opposed to all fossil fuel-consuming sectors currently outside the ETS, has clear benefits in terms of economic efficiency, notably as it would avoid the creation of a new carbon leakage risk protection regime for those parts of small industry, who would need such a regime, but would be subject to a burden that would probably be disproportionate to its benefits. • Regulatory fitness and simplification The EU ETS legislation has consistently favoured approaches to minimise the regulatory burden for both economic operators and administrations. While the majority of installations under the EU ETS are in the energy-intensive industries with market structures characterised by large enterprises, the proposal also caters for small emitters, which may be owned by SMEs or micro enterprises. In particular, in addition to existing rules alleviating the administrative burden and costs of monitoring and reporting emissions, installations with low emissions benefit from the possibility for Member States to exclude them from the EU ETS if they are subject to national measures leading to an equivalent contribution to emission reductions. In line with the Commission’s commitment to Better Regulation, this proposal has been prepared inclusively, based on full transparency and continuous engagement with stakeholders, listening to external feedback and taking into account external scrutiny to ensure the proposal strikes the right balance (see also section on the collection and use of expertise). The envisaged extension to maritime transport would build on existing monitoring, reporting and verification (MRV) mechanisms that exempt small ships and that will need to be amended with a view to make them fit for emissions trading. Keeping a single MRV system will keep the compliance efforts and administrative burden for shipping companies lower than if there were several systems. The new EU ETS for other sectors would apply upstream, building on existing provisions regulating tax warehouses or fuel suppliers. •Fundamental rights The proposal respects fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union. In particular, it contributes to the objective of a high level of environmental protection in accordance with the principle of sustainable development as laid down in Article 37 of the Charter. 4.BUDGETARY IMPLICATIONS The EU ETS generates significant revenues. At present most of those auction revenues accrue to Member States. Adjustments to the EU budgetary framework will be presented by the Commission as part of the upcoming Own Resources package including a proposal to amend the multiannual financial framework.National budgets of Member States will benefit from the extension of the EU ETS scope to maritime transport and from the new emissions trading for road transport and buildings. The secure operation of the Union registry is funded from the Union budget. Extending the EU ETS scope to maritime transport and the new EU ETS for road transport and buildings will require additional resources for the secure operation of the Union registry, as specified in the financial statement accompanying this proposal. These resources will be made available through redeployment in the light of the budgetary and staffing constraints for European Public Administration under the current Multiannual Financial Framework while related operational expenditure will be funded with the LIFE programme envelope. IT development and procurement choices will be performed according to the Communication on the guidelines on financing of information technology and cybersecurity, of 10 September 2020, which includes pre-approval by the European Commission Information Technology and Cybersecurity Board for certain IT expenditure. 5.OTHER ELEMENTS

•Implementation plans and monitoring, evaluation and reporting arrangements The Commission will continue to monitor and evaluate the functioning of the EU ETS in its annual Carbon Market Report, as provided under Article 10(5) of the ETS Directive. This covers also the impacts of the current revision of the EU ETS. The Commission’s annual Carbon Market Report and Member States annual report shall also apply to the sectors to which emissions trading is extended. The monitoring, reporting and verification data obtained through the regulation of the new sectors will be a key source of information for the Commission to evaluate progress in the sectors concerned. The monitoring, reporting and verification rules for shipping should follow the rules laid down in Regulation (EU) 2015/757 of the European Parliament and of the Council, as amended by proposal COM(2019) 38 final and this proposal. Furthermore, evaluation of progress on the application of the ETS Directive is provided for in the current Article 21 of the Directive itself. The initiative builds on the process based on integrated national energy and climate plans and the robust transparency framework for greenhouse gas emissions and other climate information that is contained in Regulation (EU) 2018/1999 of the European Parliament and of the Council. The Commission will use inter alia the information submitted and reported by Member States under the Governance Regulation as a basis for its regular assessment of progress. Also, the provisions for the reporting on the use of auctioning revenues generated under this Directive are set in Regulation (EU) 2018/1999. The impacts of the changes in this Directive will need to be analysed and might require a subsequent amendment of that Regulation to ensure coherence between the two legal acts. Further details on monitoring and evaluation are provided in section 9 of the impact assessment accompanying this proposal. •Detailed explanation of the specific provisions of the proposal The main elements of the ETS Directive which are amended are the following: Maritime Transport (Article 3, Articles 3g to 3ge, and Article 16) The proposal extends the scope of the EU’s Emissions Trading System to cover maritime transport. To this end, the proposal amends the definition of “emissions” in Article 3(b) to include emissions from ships performing a maritime transport activity, expands Chapter II of the Directive to cover “aviation and maritime transport” and adds maritime transport as a new activity in Annex I. Further, it includes new definitions for “shipping company” and “administering authority in respect of shipping companies” in Article 3(v) and Article 3(w) respectively. To expand Chapter II to maritime transport, it inserts Articles 3g to 3ge. The extension of the EU ETS to maritime transport applies in respect of emissions from intra-EU voyages, half of the emissions from extra-EU voyages and emissions occurring at berth in an EU port; the same rules that apply to other sectors covered by the EU ETS should apply to maritime transport with regard to auctioning, the transfer, surrender and cancellation of allowances, penalties and registries (Article 16). The obligation to surrender allowances in the maritime transport sector is gradually phased-in over the period 2023 to 2025, with shipping companies having to surrender 100 % of their verified emissions as of 2026 (Article 3ga). In accordance with this phase-in, to the extent fewer allowances are surrendered in respect of verified emissions for maritime transport during those years, the amount of allowances not surrendered should be cancelled. The monitoring and reporting rules, as well as verification and accreditation rules laid out in Regulation (EU) 2015/757, as amended, shall apply (Articles 3gb and 3gc). In addition to the general EU ETS rules on penalties, expulsion orders can be issued against ships under the responsibility of a shipping company that has failed to surrender allowances for two or more consecutive reporting periods, with the result that ships under its responsibility can be detained by the flag Member State and denied entry into a port under the jurisdiction of a Member State other than the flag State (Article 16(11a)). Each shipping company falling within the scope of application of the EU ETS is attributed to a Member State – the administering authority – for its administration under the Directive. The administering authority is determined based on where the shipping company is registered. If the company is not registered in a Member State, it is attributed to the Member State where it had the highest number of port calls in the two previous monitoring years. As of 2024, the Commission is to publish and regularly update a list of shipping companies covered by the Directive and their respective administering authority (Article 3gd). Administering authorities may request the assistance of the European Maritime Safety Agency (EMSA) to carry out their obligations under this Directive, in particular as regards the approval of monitoring plans and the verification of emissions (Article 18b). Owing to its experience in the implementation of Regulation (EU) 2015/757 and its IT tools, EMSA could further assist administering authorities in implementing the Directive, for example by facilitating the exchange of information or by developing guidelines and criteria. A reporting and review clause is included (Article 3ge) to monitor the implementation of this Chapter and to take account of relevant developments at the level of the International Maritime Organization. Linear reduction factor and one-off cap reduction (Art. 9) The linear reduction factor is changed to 4,2 % from the year following the entry into force of this Directive amending the ETS Directive. The increased linear reduction factor is combined with a one-off downward adjustment of the cap so the new linear reduction factor has the same effect as if it would have applied from 2021. This ensures that the overall quantity of allowances ('cap') will decline at an increased annual pace resulting in an overall emission reduction of sectors under the EU ETS of 61 % by 2030 compared to 2005. In addition, from the year following entry into force of this Directive, the cap is to be increased by an amount of allowances corresponding to the maritime transport emissions to be included in the EU ETS and derived from data from the EU Maritime transport MRV system for the years 2018 and 2019, adjusted, from year 2021, by the linear reduction factor. Use of auction revenues (Article 10) To address the increased needs in low-carbon investments, the provision on the use of auction revenues is amended so that Member States must use all the revenues, to the extent they are not attributed to the Union budget, for climate-related purposes, including to support low-income households’ sustainable renovation. Adjustments to the EU budgetary framework will be presented by the Commission as part of the upcoming Own Resources package including a proposal to amend the multiannual financial framework. Further, to address the distributional and social effects of the transition, the proposal provides for auctioning an additional 2,5 % of the cap to fund the energy transition of the Member States with GDP per capita below 65 % of the EU average in 2016-2018, through the Modernisation Fund. More stringent benchmark approach and establishing conditionality for free allocation (Article 10a(1)) To reduce the possibility of applying the cross-sectoral correction factor following the adjustment of the cap, the update of the benchmarks is proposed to follow closer the emission reductions in sectors and sub-sectors, by increasing the maximum update rate to 2,5 % per year as of 2026 instead of the current 1,6 %. This approach is considered to deliver a fairer and more transparent distribution of free allocation compared to a higher cut for all sectors via the cross-sectoral correction factor. In addition, free allocation is made conditional on decarbonisation efforts in order to incentivise the uptake of low-carbon technologies. Installations covered by the obligation to conduct an energy audit under the current Article 8(4) of the Energy Efficiency Directive (‘EED’) will be required to implement recommendations of the audit report, or to demonstrate the implementation of other measures which lead to greenhouse gas emission reductions equivalent to those recommended by the audit report. Otherwise, they would see their free allocation reduced. In accordance with the current Article 8(4) EED, SMEs are not subject to an energy audit. Further, under the conditions of Article 8(6) EED, enterprises that are not SMEs and that are implementing an energy or environmental management system are exempted from the energy audit requirement. The rules determining the exemption to carry out an energy audit are proposed to change under the revised EED, from the exemption of SMEs to an exemption based on energy consumption. Such an exemption rule would also be appropriate for the conditionality of free allocation. Carbon border adjustment measures (Article 10a(1))

A Carbon Border Adjustment Measure (CBAM) is an alternative measure to mitigate carbon leakage risks. Sectors and subsectors covered by that measure should therefore not receive free allocation. A transitional period is established to allow producers, importers and traders to adjust to the new regime, with a gradual reduction of free allocation as the CBAM is phased in. Rules are also established on the calculation of the final amount to deduct from the free allocation to be auctioned. Carbon contracts for difference and increase of the Innovation Fund (Article 10a(8)) Carbon contracts for difference (CCDs) are an important element to trigger emission reductions in industry, offering the EU the opportunity to guarantee investors in innovative climate-friendly technologies a fixed price that rewards CO2 emission reductions above the current price levels in the EU ETS. The scope of the Innovation Fund is extended to allow it to provide support to projects through competitive tendering mechanisms such as CCDs. In addition, the Innovation Fund is increased by 50 million allowances sourced in the same manner from the allowances available for free allocation and for auctioning as is the case for the current endowment of the Fund. As a result, 40 million allowances will stem from the allowances available for free allocation, and 10 million allowances from the allowances to be auctioned. Modernisation Fund (Article 10d) This proposal aligns the Modernisation Fund with the new climate objectives of the Union by requiring that investments are consistent with the objectives of the European Green Deal and the European Climate Law and by eliminating support to investments related to any fossil fuels, not only solid fossil fuels as is currently the case. In addition, the proposal: increases the percentage of the fund that needs to be invested in priority investments; gives more prominence to renewable sources and energy efficiency investments in transport, buildings, waste and agriculture; targets energy efficiency as a priority area at the demand side, including industry explicitly as eligible sector; and includes the support of households to address energy poverty. Carbon Capture and Utilisation (Articles 3 point (b) and Article 12(3b)) The increased climate ambition will encourage making use of all the technological solutions to reduce emissions, including carbon capture and utilisation. As a result, the proposal establishes that surrender obligations do not arise for emissions of CO2 that end up permanently chemically bound in a product so that they do not enter the atmosphere under normal use. Removal of barriers for innovative low-carbon technologies by modifying the EU ETS scope and benchmarks (Article 2, Article 10a and Annex I) The EU ETS free allocation rules are amended to better support decarbonisation of energy intensive industries by the deployment of break-through technologies. Efficient technologies just below benchmark level receive more free allocation than they emit. This puts innovative technologies outside the EU ETS at a competitive disadvantage, so investments in those technologies may be discouraged. Innovative installations can fall out of the EU ETS because they change their production process or because their total rated thermal input of the combustion units of an installation decreases to less than 20 MW. This disincentive is addressed by: (i) specifying that installations stay within the EU ETS where they reduce the total capacity of their combustions units to reduce greenhouse gas emissions (e.g. through electrification); (ii) making the definitions of activities technology neutral (removing references to fossil fuels or specific production processes); (iii) referring to production capacities instead of combustion capacities and (iv) reviewing the benchmark definitions to ensure equal treatment of installations independently of the technology used, including when using low- or zero-carbon technologies. Maintaining innovative installations in the EU ETS will also reduce benchmark values and thus encourage greater emissions reductions. Introduction of emissions trading for buildings and road transport (Chapter IVa) New emissions trading for buildings and road transport should be established as a separate self-standing system from 2025 (Chapter IVa). During the first year, the regulated entities will be required to hold a greenhouse gas emissions permit and to report their emissions for years 2024 and 2025 (Articles 30b and 30f). The issuance of allowances and compliance obligations for these entities will be applicable only from 2026, which will allow the new system to start functioning in an orderly and efficient manner (Articles 30c, 30d and 30e). As there is a substantially large number of small emitters in the sectors of buildings and road transport, and for reasons of technical feasibility and administrative efficiency, the point of regulation is established not with the emitters, but further upstream the supply chain (Article 30b and Annex III). Therefore, the release for consumption of fuels which are used for combustion in the sectors of buildings and road transport will be the activity regulated for the new system (Annex III). The scope of the sectors of buildings and road transport is defined on the basis of relevant sources of emissions included in 2006 IPCC Guidelines for National Greenhouse Gas Inventories (Annex III). The regulated entities are defined in line with the system of excise duty of Council Directive (EU) 2020/262, since a robust monitoring and reporting mechanism for the quantities of fuels released for consumption already exists for tax purposes under that Directive. The monitoring, reporting and verification obligations in the sectors of buildings and road transport will be aligned to the extent possible with the well-functioning mechanisms established for stationary installations and aviation (Article 30(f)). The emissions cap for the new emissions trading system will be set from 2026 based on data collected under the Effort Sharing Regulation and ambition level and decrease to reach emission reductions of 43 % in 2030 compared to 2005 for the sectors of buildings and road transport (Article 30c and Annex IIIa). A corresponding linear reduction factor is defined. Once the monitoring and reporting of the new emissions trading is established, the total quantity of allowances for 2028 will be adjusted on the basis of the available MRV data for the period 2024 to 2026. The linear reduction factor will be revised only if the MRV data is significantly higher than the initial cap, and not due to small-scale differences with EU UNFCCC inventory data. The allowances for the new emissions trading will be auctioned as no free allocation is provided (Article 30d). In order to ensure a smooth start of emissions trading in the new sectors, a certain amount of allowances will be front-loaded (first subparagraph of Article 30d(2)). In addition, to ensure market stability from the start a Market Stability Reserve will also operate in the sectors concerned based on specific rules (second subparagraph of Article 30d(2)). As the system is new, mitigation measures are established in order to address the potential risk of excessive price volatility, which might be particularly high at the start of emissions trading in the new sectors (Article 30h). In order to address some of the transitional and social challenges from the carbon pricing in the new sectors, as well as to ensure targeted support for innovation, emissions trading for road transport and buildings will also contribute to the already existing low-carbon funds. Thus, 150 million allowances issued under the new emissions trading system for road transport and buildings will be made available to the Innovation Fund to stimulate the green transition (Article 30d(4)). The Commission will monitor the application of the rules of the new emissions trading and, if necessary, it will propose a review by 1 January 2028 to improve its effectiveness, administration and practical application (Article 30i). The main elements of the MSR Decision amended through the proposal are the following: Taking into account net demand from aviation (Article 1(4a)) and the maritime sector The proposal amends the calculation of the total number of allowances in circulation so that it includes aviation emissions, and allowances issued in respect of aviation. Regulation (EU) 2017/2392 of the European Parliament and of the Council amended Article 12(3) of the EU ETS Directive to allow all operators to use all allowances that are issued for their surrender obligations, including aviation allowances. The accuracy and the efficacy of the reserve as a measure of the market’s stability through its supply and demand will be improved by including aviation allowances in the calculation of the reserve, while preserving its environmental integrity. If this proposal to amend the EU ETS is adopted, aviation emissions and allowances will be counted into the total number of allowances in circulation where they occurred, or were issued, as of the year following the entry into force of this amendment. Although there are no separate maritime allowances, the text also needs to be modified to include allowances and emissions in relation to the maritime sector in the calculation, as the text currently only refers to emissions and allowances for installations. To avoid distortion from the phase-in of requirements for maritime transport, the difference between verified emissions and allowances surrendered for the maritime sector, which will be cancelled rather than auctioned, will be counted in the total number of allowances in circulation as if the allowances had been issued.

Intake rate (Article 1(5)) The intake rate is amended in order to address the ‘threshold effect’ that would take place when the total number of allowances in circulation (the TNAC) is very close to the upper threshold. In that case, one allowance more or less in the TNAC may trigger or not intakes, depending on whether the TNAC is above or below the threshold. Uncertainty about this happening or not risks creating price volatility on the market. The proposal modifies the mechanism of the intake rate. It proposes a buffer market stability reserve (MSR) intake when the TNAC is between 833 million and 1096 million. In that case, the intake will be the difference between the TNAC and the 833 million threshold. As long as the TNAC is above 1096 million allowances, the normal intake rate would apply (24 % until 2030). The reason for choosing the figure of 1096 million allowances is that, at that amount, the 24 % intake and the difference between the TNAC and the upper threshold are close to each other. This addresses the threshold effect, all the while maintaining an efficient MSR intake if the TNAC is higher. Definition of the total number of allowances in circulation (TNAC) (Article 1(5)) When calculating the TNAC, the formula will specify that only allowances issued and not put in reserve are included in the supply of allowances, and the number of allowances in the reserve is no longer subtracted from the supply of allowances. This change makes the calculation of the total number of allowances in circulation clearer, and has no material impact on its result, including on the past calculations of the TNAC. Invalidation mechanism (Article 1(5a)) As of 2023, allowances in the market stability reserve (MSR) above the level of auction volumes of the previous year are invalidated. However, the level of auction volumes of the previous year depends on various elements, such as the cap and the operation of the MSR itself. In order to ensure that the level of allowances that remains in the reserve after the invalidation is more predictable, it is proposed to limit the number of allowances in the reserve at a level of 400 million allowances. This value also corresponds to the lower threshold for the value of the TNAC, below which allowances are released from the MSR. Market stability reserve (MSR) for the emissions trading for road transport and buildings (Article 1a) To address the risk of an imbalance between supply and demand, a Market Stability Reserve will also operate for the new emissions trading for road transport and buildings, with allowance intakes and releases based on the thresholds for the surplus of allowances in that market. Moreover, to allow that the MSR can operate as an effective tool to address imbalances on the market from the start of emissions trading in the two sectors, a number of allowances for the new sectors will be created in the reserve. In order to address the potential risk of excessive price volatility, measures are established to allow for release of additional allowances from the MSR. However the triggering mechanism for this additional release will be based on the increase in the average allowance price and not on the surplus of allowances in the market. The main elements of Regulation (EU) 2015/757, known as the MRV Regulation, which are amended through this proposal are the following: The proposal introduces new definitions of ‘administering authority’ and ‘aggregated emissions data at company level’. In addition, the proposed amendments oblige companies to submit their monitoring plans to the responsible administering authorities for approval (amended Articles 6 and 7), to report aggregated emissions data at company level (amended Article 4) and, following the verification of the aggregated emissions data at company level (amended Articles 13 to 16), to submit these verified aggregated data to the responsible administering authority (new Article 11a and amended Article 12). The verifier has no obligation to verify the emissions report at ship level and report referred to in Article 11(2) of Regulation (EU) 2015/757, as these reports at ship level have already been verified. The proposal also confers to the Commission the power to adopt delegated acts to amend the monitoring methods and rules to make them fit for emissions trading (amended article 5(2)) and to supplement Regulation (EU) 2015/757 with the rules for the approval of monitoring plans and changes thereof by administering authorities, the rules for the monitoring, reporting and submission of the aggregated emissions data at company level (Articles 6(8), 7(5) and 11a(4)), and the rules for the verification of the aggregated emissions data at company level and for the issuance of a verification report in respect of the aggregated emissions data at company level (Articles 13(6) and 15(6)). In proposing to amend the MRV Regulation, this proposal complements Commission proposal COM(2019) 38 final. 2021/0211 (COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757 (Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 192(1) thereof,

Having regard to the proposal from the European Commission, After transmission of the draft legislative act to the national parliaments, Having regard to the opinion of the European Economic and Social Committee, Having regard to the opinion of the Committee of the Regions, Acting in accordance with the ordinary legislative procedure, Whereas: (1)The Paris Agreement, adopted in December 2015 under the United Nations Framework Convention on Climate Change (UNFCCC) entered into force in November 2016 (“the Paris Agreement”). Its Parties have agreed to hold the increase in the global average temperature well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1,5 °C above pre-industrial levels. (2)Tackling climate and environmental-related challenges and reaching the objectives of the Paris Agreement are at the core of the Communication on “The European Green Deal”, adopted by the Commission on 11 December 2019. (3)The European Green Deal combines a comprehensive set of mutually reinforcing measures and initiatives aimed at achieving climate neutrality in the EU by 2050, and sets out a new growth strategy that aims to transform the Union into a fair and prosperous society, with a modern, resource-efficient and competitive economy, where economic growth is decoupled from resource use. It also aims to protect, conserve and enhance the Union's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. At the same time, this transition affects women and men differently and has a particular impact on some disadvantaged groups, such as older people, persons with disabilities and persons with a minority racial or ethnic background. It must therefore be ensured that the transition is just and inclusive, leaving no one behind. (4)The necessity and value of the European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on the health, living and working conditions and well-being of the Union’s citizens, which have shown that our society and our economy need to improve their resilience to external shocks and act early to prevent or mitigate them. European citizens continue to express strong views that this applies in particular to climate change. (5)The Union committed to reduce to reduce the Union’s economy-wide net greenhouse gas emissions by at least 55 % by 2030 below 1990 levels in the updated nationally determined contribution submitted to the UNFCCC Secretariat on 17 December 2020. (6)In Regulation (EU) 2021/1119 of the European Parliament and of the Council the Union has enshrined the target of economy-wide climate neutrality by 2050 in legislation. That Regulation also establishes a binding Union domestic reduction commitment of net greenhouse gas emissions (emissions after deduction of removals) of at least 55 % below 1990 levels by 2030. (7)All sectors of the economy need to contribute to achieving those emission reductions. Therefore, the ambition of the EU Emissions Trading System (EU ETS), established by Directive 2003/87/EC of the European Parliament and of the Council to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner, should be increased in a manner commensurate with this economy-wide net greenhouse gas emissions reduction target for 2030. (8)The EU ETS should incentivise production from installations that partly or fully reduce greenhouse gas emissions. Therefore, the description of some categories of activities in Annex I to Directive 2003/87/EC should be amended to ensure an equal treatment of installations in the sectors concerned. In addition, free allocation for the production of a product should be independent of the nature of the production process. It is therefore necessary to modify the definition of the products and of the processes and emissions covered for some benchmarks to ensure a level playing field for new and existing technologies. It is also necessary to decouple the update of the benchmark values for refineries and for hydrogen to reflect the increasing importance of production of hydrogen outside the refineries sector. (9)Council Directive 96/61/EC was repealed by Directive 2010/75/EU of the European Parliament and of the Council. The references to Directive 96/61/EC in Article 2 of Directive 2003/87/EC and in its Annex IV should be updated accordingly. Given the need for urgent economy-wide emission reductions, Member States should be able to act to reduce greenhouse gas emissions that are under the scope of the EU ETS through other policies than emission limits adopted pursuant to Directive 2010/75/EU. (10)In its Communication ‘Pathway to a Healthy Planet for All’, the Commission calls for steering the EU towards zero pollution by 2050, by reducing pollution across air, freshwaters, seas and soils to levels which are no longer expected to be harmful for health and natural ecosystems. Measures under Directive 2010/75/EU, as the main instrument regulating air, water and soil pollutant emissions, will often also enable emissions greenhouse gases to be reduced. In line with Article 8 of Directive 2003/87/EC, Member States should ensure coordination between the permit requirements of Directive 2003/87/EC and those of Directive 2010/75/EU. (11)Recognising that new innovative technologies will often allow reducing emissions of both greenhouse gases and pollutants, it is important to ensure synergies between policies delivering reductions of emissions of both greenhouse gases and pollutants, namely Directive 2010/75/EU, and review their effectiveness in this regard. (12)The definition of electricity generators was used to determine the maximum amount of free allocation to industry in the period from 2013 to 2020, but led to different treatment of cogeneration power plants compared to industrial installations. In order to incentivise the use of high efficiency cogeneration and to ensure equal treatment of all installations receiving free allocation for heat production and district heating, all references to electricity generators in Directive 2003/87/EC should be deleted. In addition, Commission Delegated Regulation (EU) 2019/331 specifies the eligibility of all industrial processes for free allocation. Therefore, the provisions on carbon capture and storage in Article 10a(3) of Directive 2003/87/EC have become obsolete and should be deleted. (13)Greenhouse gases that are not directly released into the atmosphere should be considered emissions under the EU ETS and allowances should be surrendered for those emissions unless they are stored in a storage site in accordance with Directive 2009/31/EC of the European Parliament and of the Council, or they are permanently chemically bound in a product so that they do not enter the atmosphere under normal use. The Commission should be empowered to adopt implementing acts specifying the conditions where greenhouse gases are to be considered as permanently chemically bound in a product so that they do not enter the atmosphere under normal use, including obtaining a carbon removal certificate, where appropriate, in view of regulatory developments with regard to the certification of carbon removals. (14)International maritime transport activity, consisting of voyages between ports under the jurisdiction of two different Member States or between a port under the jurisdiction of a Member State and a port outside the jurisdiction of any Member State, has been the only means of transportation not included in the Union's past commitments to reduce greenhouse gas emissions. Emissions from fuel sold in the Union for journeys that depart in one Member State and arrive in a different Member State or a third country have grown by around 36 % since 1990. Those emissions represent close to 90 % of all Union navigation emissions as emissions from fuel sold in the Union for journeys departing and arriving in the same Member State have been reduced by 26 % since 1990. In a business-as-usual scenario, emissions from international maritime transport activities are projected to grow by around 14 % between 2015 and 2030 and 34 % between 2015 and 2050. If the climate change impact of maritime transport activities grows as projected, it would significantly undermine reductions made by other sectors to combat climate change.

(15)In 2013, the Commission adopted a strategy for progressively integrating maritime emissions into the Union's policy for reducing greenhouse gas emissions. As a first step in this approach, the Union established a system to monitor, report and verify emissions from maritime transport in Regulation (EU) 2015/757 of the European Parliament and of the Council, to be followed by the laying down of reduction targets for the maritime sector and the application of a market based measure. In line with the commitment of the co-legislators expressed in Directive (EU) 2018/410 of the European Parliament and of the Council, action by the International Maritime Organization (IMO) or the Union should start from 2023, including preparatory work on adoption and implementation of a measure ensuring that the sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement and due consideration being given by all stakeholders. (16)Pursuant to Directive (EU) 2018/410, the Commission should report to the European Parliament and to the Council on the progress achieved in the IMO towards an ambitious emission reduction objective, and on accompanying measures to ensure that the maritime transport sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement. Efforts to limit global maritime emissions through the IMO are under way and should be encouraged. However, while the recent progress achieved through the IMO is welcome, these measures will not be sufficient to achieve the objectives of the Paris Agreement. (17)In the European Green Deal, the Commission stated its intention to take additional measures to address greenhouse gas emissions from the maritime transport sector through a basket of measures to enable the Union to reach its emissions reduction targets. In this context, Directive 2003/87/EC should be amended to include the maritime transport sector in the EU ETS in order to ensure this sector contributes to the increased climate objectives of the Union as well as to the objectives of the Paris Agreement, which requires developed countries to take the lead by undertaking economy-wide emission reduction targets, while developing countries are encouraged to move over time towards economy-wide emission reduction or limitation targets. Considering that emissions from international aviation outside Europe should be capped from January 2021 by global market-based action while there is no action in place that caps or prices maritime transport emissions, it is appropriate that the EU ETS covers a share of the emissions from voyages between a port under the jurisdiction of a Member State and port under the jurisdiction of a third country, with the third country being able to decide on appropriate action in respect of the other share of emissions. The extension of the EU ETS to the maritime transport sector should thus include half of the emissions from ships performing voyages arriving at a port under the jurisdiction of a Member State from a port outside the jurisdiction of a Member State, half of the emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State, emissions from ships performing voyages arriving at a port under the jurisdiction of a Member State from a port under the jurisdiction of a Member State, and emissions at berth in a port under the jurisdiction of a Member State. This approach has been noted as a practical way to solve the issue of Common but Differentiated Responsibilities and Capabilities, which has been a longstanding challenge in the UNFCCC context. The coverage of a share of the emissions from both incoming and outgoing voyages between the Union and third countries ensures the effectiveness of the EU ETS, notably by increasing the environmental impact of the measure compared to a geographical scope limited to voyages within the EU, while limiting the risk of evasive port calls and the risk of delocalisation of transhipment activities outside the Union. To ensure a smooth inclusion of the sector in the EU ETS, the surrendering of allowances by shipping companies should be gradually increased with respect to verified emissions reported for the period 2023 to 2025. To protect the environmental integrity of the system, to the extent that fewer allowances are surrendered in respect of verified emissions for maritime transport during those years, once the difference between verified emissions and allowances surrendered has been established each year, a corresponding a number of allowances should be cancelled. As from 2026, shipping companies should surrender the number of allowances corresponding to all of their verified emissions reported in the preceding year. (18)The provisions of Directive 2003/87/EC as regards maritime transport activities should be kept under review in light of future international developments and efforts undertaken to achieve the objectives of the Paris Agreement, including the second global stocktake in 2028, and subsequent global stocktakes every five years thereafter, intended to inform successive nationally determined contributions. In particular, the Commission should report any time before the second global stocktake in 2028 - and therefore no later than by 30 September 2028 - to the European Parliament and to the Council on progress in the IMO negotiations concerning a global market-based measure. In its report, the Commission should analyse the International Maritime Organization instruments and, assess, as relevant, how to implement those instruments in Union law through a revision of Directive 2003/87/EC. In its report, the Commission should include proposals as appropriate. (19)The Commission should review the functioning of Directive 2003/87/EC in relation to maritime transport activities in the light of experience of its application, including in relation to possible evasive practices, and should then propose measures to ensure its effectiveness. (20)The person or organisation responsible for the compliance with the EU ETS should be the shipping company, defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention. This definition is based on the definition of ‘company’ in Article 3, point (d) of Regulation (EU) 2015/757, and in line with the global data collection system established in 2016 by the IMO. In line with the polluter pays principle, the shipping company could, by means of a contractual arrangement, hold the entity that is directly responsible for the decisions affecting the CO2 emissions of the ship accountable for the compliance costs under this Directive. This entity would normally be the entity that is responsible for the choice of fuel, route and speed of the ship. (21)In order to reduce the administrative burden on shipping companies, one Member State should be responsible for each shipping company. The Commission should publish an initial list of shipping companies that performed a maritime activity falling within the scope of the EU ETS, which specifies the administering authority in respect of each shipping company. The list should be updated at least every two years to reattribute shipping companies to another administering authority as relevant. For shipping companies registered in a Member State, the administering authority should be that Member State. For shipping companies registered in a third country, the administering authority should be the Member State in which the shipping company had the greatest estimated number of port calls from voyages falling within the scope of Directive 2003/87/EC in the last two monitoring years. For shipping companies registered in a third country and which did not perform any voyage falling within the scope of Directive 2003/87/EC in the last two monitoring years, the administering authority should be the Member State from where the shipping company started its first voyage falling within the scope of that Directive. The Commission should publish and update on a biennial basis a list of shipping companies falling within the scope of Directive 2003/87/EC specifying the administering authority for each shipping company. In order to ensure equal treatment of shipping companies, Member States should follow harmonised rules for the administration of shipping companies for which they have responsibility, in accordance with detailed rules to be established by the Commission. (22)Member States should ensure that the shipping companies that they administer comply with the requirements of Directive 2003/87/EC. In the event that a shipping company fails to comply with those requirements and any enforcement measures taken by the administering authority have failed to ensure compliance, Member States should act in solidarity. As a last resort measure, Member States should be able to refuse entry to the ships under the responsibility of the shipping company concerned, except for the Member State whose flag the ship is flying, which should be able to detain that ship. (23)Shipping companies should monitor and report their aggregated emissions data from maritime transport activities at company level in accordance with the rules laid down in Regulation (EU) 2015/757. The reports on aggregated emissions data at company level should be verified in accordance with the rules laid down in that Regulation. When performing the verifications at company level, the verifier should not verify the emissions report at ship level and the report referred to in Article 11(2) of that Regulation, as those reports at ship level would have been already verified. (24)Based on experience from similar tasks related to environmental protection, the European Maritime Safety Agency (EMSA) or another relevant organisation should, as appropriate and in accordance with its mandate, assist the Commission and the administering authorities in respect of the implementation of Directive 2003/87/EC. Owing to its experience with the implementation of Regulation (EU) 2015/757 and its IT tools, EMSA could assist the administering authorities notably as regards the monitoring, reporting and verification of emissions generated by maritime activities under the scope of this Directive by facilitating the exchange of information or developing guidelines and criteria. (25)Regulation (EU) 2017/2392 of the European Parliament and of the Council amended Article 12(3) of Directive 2003/87/EC to allow all operators to use all allowances that are issued. The requirement for greenhouse gas emissions permits to contain an obligation to surrender allowances, pursuant to Article 6(2), point (e), of that Directive, should be aligned accordingly. (26)Achieving the Union’s emissions reduction target for 2030 will require a reduction in the emissions of the sectors covered by the EU ETS of 61 % compared to 2005. The Union-wide quantity of allowances of the EU ETS needs to be reduced to create the necessary long-term carbon price signal and drive for this degree of decarbonisation. To this end, the linear reduction factor should be increased, also taking into account the inclusion of emissions from maritime transport. The latter should be derived from the emissions from maritime transport activities reported in accordance with Regulation (EU) 2015/757 for 2018 and 2019 in the Union, adjusted, from year 2021, by the linear reduction factor. (27)Bearing in mind that this Directive amends Directive 2003/87/EC in respect of a period of implementation that has already started on 1 January 2021, for reasons of predictability, environmental effectiveness and simplicity, the steeper linear reduction pathway of the EU ETS should be a straight line from 2021 to 2030, such as to achieve emission reductions in the EU ETS of 61 % by 2030, as the appropriate intermediate step towards Union economy-wide climate neutrality in 2050. As the increased linear reduction factor can only apply from the year following the entry into force of this Directive, a one-off reduction of the quantity of allowances should reduce the total quantity of allowances so that it is in line with this level of annual reduction having been made from 2021 onwards. (28)Achieving the increased climate ambition will require substantial public resources in the EU as well as national budgets to be dedicated to the climate transition. To complement and reinforce the substantial climate-related spending in the EU budget, all auction revenues that are not attributed to the Union budget should be used for climate-related purposes. This includes the use for financial support to address social aspects in lower- and middle-income households by reducing distortive taxes. Further, to address distributional and social effects of the transition in low-income Member States, an additional amount of 2,5 % of the Union-wide quantity of allowances from [year of entry into force of the Directive] to 2030 should be used to fund the energy transition of the Member States with a gross domestic product (GDP) per capita below 65 % of the Union average in 2016-2018, through the Modernisation Fund referred to in Article 10d of Directive 2003/87/EC. (29)Further incentives to reduce greenhouse gas emissions by using cost-efficient techniques should be provided. To that end, the free allocation of emission allowances to stationary installations from 2026 onwards should be conditional on investments in techniques to increase energy efficiency and reduce emissions. Ensuring that this is focused on larger energy users would result in a substantial reduction in burden for businesses with lower energy use, which may be owned by small and medium sized enterprises or micro-enterprises. [Reference to be confirmed with the revised EED]. The relevant delegated acts should be adjusted accordingly. (30)The Carbon Border Adjustment Mechanism (CBAM), established under Regulation (EU) […./..] of the European Parliament and of the Council, is an alternative to free allocation to address the risk of carbon leakage. To the extent that sectors and subsectors are covered by that measure, they should not receive free allocation. However, a transitional phasing-out of free allowances is needed to allow producers, importers and traders to adjust to the new regime. The reduction of free allocation should be implemented by applying a factor to free allocation for CBAM sectors, while the CBAM is phased in. This percentage (CBAM factor) should be equal to 100 % during the transitional period between the entry into force of [CBAM Regulation] and 2025, 90 % in 2026 and should be reduced by 10 percentage points each year to reach 0 % and thereby eliminate free allocation by the tenth year. The relevant delegated acts on free allocation should be adjusted accordingly for the sectors and subsectors covered by the CBAM. The free allocation no longer provided to the CBAM sectors based on this calculation (CBAM demand) must be auctioned and the revenues will accrue to the Innovation Fund, so as to support innovation in low carbon technologies, carbon capture and utilisation (‘CCU’), carbon capture and geological storage (‘CCS’), renewable energy and energy storage, in a way that contributes to mitigating climate change. Special attention should be given to projects in CBAM sectors. To respect the proportion of the free allocation available for the non-CBAM sectors, the final amount to deduct from the free allocation and to be auctioned should be calculated based on the proportion that the CBAM demand represents in respect of the free allocation needs of all sectors receiving free allocation. (31)In order to better reflect technological progress and adjust the corresponding benchmark values to the relevant period of allocation while ensuring emission reduction incentives and properly rewarding innovation, the maximum adjustment of the benchmark values should be increased from 1,6 % to 2,5 % per year. For the period from 2026 to 2030, the benchmark values should thus be adjusted within a range of 4 % to 50 % compared to the value applicable in the period from 2013 to 2020. (32)A comprehensive approach to innovation is essential for achieving the European Green Deal objectives. At EU level, the necessary research and innovation efforts are supported, among others, through Horizon Europe which include significant funding and new instruments for the sectors coming under the ETS. Member States should ensure that the national transposition provisions do not hamper innovations and are technologically neutral. (33)The scope of the Innovation Fund referred to in Article 10a(8) of Directive 2003/87/EC should be extended to support innovation in low-carbon technologies and processes that concern the consumption of fuels in the sectors of buildings and road transport. In addition, the Innovation Fund should serve to support investments to decarbonise the maritime transport sector, including investments in sustainable alternative fuels, such as hydrogen and ammonia that are produced from renewables, as well as zero-emission propulsion technologies like wind technologies. Considering that revenues generated from penalties raised in Regulation xxxx/xxxx [FuelEU Maritime] are allocated to the Innovation Fund as external assigned revenue in accordance with Article 21(5) of the Financial Regulation, the Commission should ensure that due consideration is given to support for innovative projects aimed at accelerating the development and deployment of renewable and low carbon fuels in the maritime sector, as specified in Article 21(1) of Regulation xxxx/xxxx [FuelEU Maritime]. To ensure sufficient funding is available for innovation within this extended scope, the Innovation Fund should be supplemented with 50 million allowances, stemming partly from the allowances that could otherwise be auctioned, and partly from the allowances that could otherwise be allocated for free, in accordance with the current proportion of funding provided from each source to the Innovation Fund. (34)Pursuant to Article 10 of Commission Regulation (EU) No 2019/1122, where aircraft operators no longer operate flights covered by the EU ETS, their accounts are set to excluded status, and processes may no longer be initiated from those accounts. To preserve the environmental integrity of the system, allowances which are not issued to aircraft operators due to their closure should be used to cover any shortfall in surrenders by those operators, and any leftover allowances should be used to accelerate action to tackle climate change by being placed in the Innovation Fund.

(35)Carbon Contracts for Difference (CCDs) are an important element to trigger emission reductions in industry, offering the opportunity to guarantee investors in innovative climate-friendly technologies a price that rewards CO2 emission reductions above those induced by the current price levels in the EU ETS. The range of measures that the Innovation Fund can support should be extended to provide support to projects through price-competitive tendering, such as CCDs. The Commission should be empowered to adopt delegated acts on the precise rules for this type of support. (36)Where an installation’s activity is temporarily suspended, free allocation is adjusted to the activity levels which are mandatorily reported annually. In addition, competent authorities can suspend the issuance of emission allowances to installations that have suspended operations as long as there is no evidence that they will resume operations. Therefore, operators should no longer be required to demonstrate to the competent authority that their installation will resume production within a specified and reasonable time in case of a temporary suspension of the activities. (37)Corrections of free allocation granted to stationary installations pursuant to Article 11(2) of Directive 2003/87/EC can require granting additional free allowances or transferring back surplus allowances. The allowances set aside for new entrants under Article 10a(7) of Directive 2003/87/EC should be used for those purposes. (38)The scope of the Modernisation Fund should be aligned with the most recent climate objectives of the Union by requiring that investments are consistent with the objectives of the European Green Deal and Regulation (EU) 2021/1119, and eliminating the support to any investments related to fossil fuels. In addition, the percentage of the Modernisation Fund that needs to be devoted to priority investments should be increased to 80 %; energy efficiency should be targeted as a priority area at the demand side; and support of households to address energy poverty, including in rural and remote areas, should be included within the scope of the priority investments. (39)Commission Implementing Regulation (EU) 2018/2066 lays down rules on the monitoring of emissions from biomass which are consistent with the rules on the use of biomass laid down in the Union legislation on renewable energy. As the legislation becomes more elaborate on the sustainability criteria for biomass with the latest rules established in Directive (EU) 2018/2001 of the European Parliament and of the Council, the conferral of implementing powers in Article 14(1) of Directive 2003/87/EC should be explicitly extended to the adoption of the necessary adjustments for the application in the EU ETS of sustainability criteria for biomass, including biofuels, bioliquids and biomass fuels. In addition, the Commission should be empowered to adopt implementing acts to specify how to account for the storage of emissions from mixes of zero-rated biomass and biomass that is not from zero-rated sources. (40)Renewable liquid and gaseous fuels of non-biological origin and recycled carbon fuels can be important to reduce greenhouse gas emissions in sectors that are hard to decarbonise. Where recycled carbon fuels and renewable liquid and gaseous fuels of non-biological origin are produced from captured carbon dioxide under an activity covered by this Directive, the emissions