EUROPEAN COMMISSION Brussels, 20.7.2016 SWD(2016) 249 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry into the 2030 climate and energy framework and amending Regulation No 525/2013 of the European Parliament and the Council on a mechanism for monitoring and reporting greenhouse gas emissions and other information relevant to climate change {COM(2016) 479 final}

{SWD(2016) 246 final}







Contents 1.Problem definition 1.1.Context 1.1.1.Political context 1.1.2.Regulatory context 1.2.Identifying and describing the main problem components 1.2.1.Lack of governance for LULUCF following the Paris Agreement 1.2.2.Existing measures are not sufficient to reach the 2030 and 2050 EU targets 1.2.3.Accounting of emissions from biomass use 1.3.Baseline scenario, and drivers of the main problems 1.3.1.Continuation of Kyoto rules 1.3.2.LULUCF sector not expected to improve its performance in baseline scenario 1.4.Evidence of the extent of the problems, and identification of solutions 1.4.1.Need to upgrade and improve LULUCF accounting rules

1.4.2.Declining forest removals and increased use of biomass 1.4.3.Lower mitigation potential of the agriculture sector and synergies between mitigation on land and the agriculture non-CO2 sector 1.4.4.Absence of consistent governance framework for forest management 1.5.Who is affected? 2.Subsidiarity: Why should the EU act? 3.Objectives: What should be achieved? 3.1.General objectives 3.2.Specific objectives 3.3.Operational objectives 3.4.Consistency with other policies and the Charter for fundamental rights 4.Policy options 4.1.Improvement of accounting rules 4.1.1.Alternative choice of base year/period 4.1.2.Streamlining of the reporting framework – land-based accounting 4.2.The need for flexibility towards agriculture in the ESD 4.2.1.First screening of flexibility options 4.2.2.Design of flexibility options towards ESD 4.2.3.Options for credit generation in LULUCF and technical conditions 4.3.Forest land: Future governance of the projected forest reference levels 4.4.Summary of options

5.What are the impacts of the different policy options and who will be affected? 5.1.Introduction 5.2.Modelling framework 5.3.Sensitivity analysis is carried out to demonstrate robustness of the modelling tools. Improving LULUCF accounting rules 5.3.1.Impact of the alternative choice of base year/period 5.3.2.Impacts of streamlining the reporting framework 5.3.3.Impact of improved rules: Estimates of the credit generation for afforestation and agricultural land 5.4.Forest Land estimates: governance 5.5.Impact of flexibility options 5.5.1.Distribution of credit potential between Member States 5.5.2.Environmental impacts of flexibility options F1, F2 and F3 5.5.3.Economic impacts: abatement costs and production impacts in the Agriculture sector 5.6.Administrative, monitoring and reporting costs and who would be affected 5.7.Distributional, social and employment impacts 6.Comparing the Options 6.1.Introduction 6.2.Comparison of rule improvements and flexibility options 6.2.1.Comparison of accounting rule improvements 6.2.2.Comparison of options with different levels of flexibility between LULUCF and Agricultural emissions in the ESD 6.2.3.Selection of level of improved rules and flexibility level between LULUCF and agriculture emissions in the ESD

6.3.Selection of options 7.How will monitoring and evaluation be organised? 7.1.Introduction – international framework 7.2.Quality assurance 7.3.Obligations for Member States 7.4.Compliance cycle 7.5.Need to monitoring progress towards the EU Non-ETS target Figures Figure 1: The three main problems addressed and their drivers – structure in this document Figure 2: Projection of reported emissions (+) and removals (-) from LULUCF main activities for the EU28 2005 - 2030, in MtCO2eq Figure 3: Non-CO2 agricultural emissions and the volume of production in the EU28 agriculture sector, 1990-2012 Figure 4: Variable share of agriculture non-CO2 in the ESD, 2008-12. Figure 5: Gross and net mitigation modelled in 2030 (% change versus EcAMPA REF 2030) Figure 6: Four options of trajectories for Agriculture non-CO2 reduction between 2020 and 2030 without and with flexibility (F3 follows the trajectory of Reference 2016) Figure 7: Improving accuracy and coverage in the LULUCF sector in accordance with IPCC guidance Figure 8: Overview of EUCLIMIT modelling components used for the assessment of impacts related to agriculture and LULUCF Tables Table 1: Estimates of potential for credit generation in three major LULUCF activities (Afforestation, Agricultural land and Forest Management) for EU28 for the period 2021-30 under existing Kyoto rules (all figures in MtCO2eq)

Table 2: Biomass demand and LULUCF emissions/removals in the Reference 2016 scenario, 2005 and 2030 Table 3: Extract from EcAMPA [draft] final report, area and production changes for the EU-28 in 2030, all scenarios -20% reductions for agricultural non-CO2 emissions Table 4: Estimated accounted sink (negative)/source (positive) for forest under KP, with different forest management scenarios and different reference levels Table 5: Overview of options considered in this Impact Assessment Table 6: Impact of the base year change on the potentially available LULUCF RMUs for the EU28 from agricultural land, 2021-2030, including additional mitigation enhanced at a carbon price of €20/tonne, in MtCO2, negative value is credits Table 7: Impact of base year/period change on the potential credit generation (removal units) for agricultural land, in MtCO2eq per year (negative numbers represent removals, positive numbers emissions) Table 8: Impact of streamlining framework different accounting rules on credit generation potential for Afforested Land (RMUs in MtCO2eq) EU28 2021-2030 including additional mitigation enhanced at a carbon price of €20/tonne, negative value is credits Table 9: Impact of streamlining the framework different accounting rules on Member States' credit generation potential for Afforested Land (RMUs in MtCO2eq), 2021-2030 per Member State, negative numbers represent removals, positive numbers emissions including additional mitigation enhanced at a carbon price of €20/tonne Table 10: Estimates of total potential credit generation (for RMU's) EU28 for the period 2021-30, under existing Kyoto rules and alternative rules (30 year transition for afforestation, base period 2005-2007 for agricultural land), in MtCO2eq Table 11: Projected credit* generation potential (for RMUs) for Afforestation and Agricultural land per Member State in 2020, 2025, 2030, and total 2021-2030, including additional mitigation enhanced at a carbon price of €20/tonne, in MtCO2. Table 12: Distribution of LULUCF credit limit for the ESD on the basis of share agriculture non-CO2 in the ESD, for Option F2. Table 13: Distribution per Member State of LULUCF credit limit (cap) for the ESD for all three flexibility options (low, medium, high) in MtCO2eq for the period 2021-2030. Negative numbers represent removals. Table 14: Distribution of potential credit generation under the cap, for Options F1, F2 and F3 in MtCO2 for the period 2021-2030 (figures in bold illustrate when the cap will not be reached) Table 15: Direct impact of different levels of flexibility between LULUCF and ESD on GHG abatement costs in the agriculture non-CO2 sector (annual costs in 2030 in € 2013) and assuming a 20% reduction in 2030 compared to 2005 Table 16: Economic impacts in 2030 (% change compared to baseline) based on an assumed 20% reduction in agricultural non-CO2 emissions Table 17: Comparison of the options for flexibility between LULUCF (with improved accounting rules) and agricultural emissions in the ESD



List of acronyms

AFOLU Agriculture, Forestry and Other Land Use ARD Afforestation, Reforestation and Deforestation BAU Business as Usual CAP Common Agricultural Policy CL Cropland CM Cropland management CP2 2nd commitment period of the Kyoto Protocol COP Conference of the Parties D Deforestation ESD Effort Sharing Decision ETS Emissions Trading System FAO Food and Agriculture Organization of the United Nations. FL Forest land FM Forest Management G4M Global Forest Model GDP Gross Domestic Product GHG Greenhouse gas GL Grassland GM Grazing land management GPG Good Practice Guidance HWP Harvested Wood Products INDC Intended Nationally Determined Contribution IPCC Inter-governmental Panel on Climate Change JRC Joint Research Centre of the European Commission KP Kyoto Protocol LULUCF Land Use, Land Use Change and Forestry MRV Monitoring, Reporting and Verification MS(s) Member State(s) NFI National Forest Inventories NGOs Non-Governmental Organizations NIRs National Inventory Reports RMU Removal Units SMEs Small- and Medium sized Enterprises TFEU Treaty on the Functioning of the European Union UNFCCC United Nations Framework Convention on Climate Change



List of definitions Accounting* The use of reported data to quantify meaningful action on mitigation, applying standardised rules and usually in the context of target compliance. Accuracy Accuracy is a relative measure of the exactness of an emission or removal estimate. Estimates should be accurate in the sense that they are systematically neither over nor under true emissions or removals, so far as can be judged, and that uncertainties are reduced so far as is practicable. Appropriate methodologies conforming to guidance on good practices should be used to promote accuracy in inventories. Activity data Data on the magnitude of human activity resulting in emissions or removals taking place during a given period of time. In the LULUCF sector, data on land areas, management systems, lime and fertilizer use are examples of activity data. Additionality* Direct human-induced mitigation, usually considered beyond a business as usual reference Afforestation The direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. Biomass Organic material both above ground and below ground, and both living and dead, e.g. trees, crops, grasses, tree litter, roots etc. Biomass includes the pool definition for above - and below - ground biomass. Carbon pool A reservoir containing carbon, which is a component or components of the climate system where a greenhouse gas or a precursor of a greenhouse gas is stored. Examples of carbon pools are forest biomass, wood products and soils. Carbon stock The quantity of carbon in a carbon pool. Comparability Comparability means that estimates of emissions and removals reported by Parties in inventories should be comparable among Parties. For this purpose, Parties should use the methodologies and formats agreed by the Conference of the Parties (COP) for estimating and reporting inventories. Completeness Completeness means that an inventory covers all sources and sinks for the full geographic coverage, as well as all gases included in the IPCC Guidelines in addition to other existing relevant source/sink categories which are specific to individual Parties (and therefore may not be included in the IPCC Guidelines). Consistency Consistency means that an inventory should be internally consistent in all its elements over a period of years. An inventory is consistent if the same methodologies are used for the base year and all subsequent years and if consistent data sets are used to estimate emissions or removals from sources or sinks. Under certain circumstances referred to in paragraphs 10 and 11 of FCCC/SBSTA/1999/6/Add.1, an inventory using different methodologies for different years can be considered to be consistent if it has been recalculated in a transparent manner taking into account any good practices. [LULUCF] Credit* Removal Units (RMUs) able to be applied to flexibility with other (non-LULUCF) sectors Cropland This category includes arable and tillage land, and agro-forestry systems where vegetation falls below the threshold used for the forest land category, consistent with the selection of national definitions. Cropland management The system of practices on land on which agricultural crops are grown and on land that is set aside or temporarily not being used for crop production. [LULUCF] Debit In the LULUCF sector, the increase in net emissions (or decrease in net removals) requiring compensation from other, non-LULUCF sectors. Deforestation The direct human-induced conversion of forested land to non-forested land. Disturbances* Events including wildfires, insect and disease infestations, extreme weather events and geological disturbances, but not harvesting. Emissions* Release of greenhouse gas to the atmosphere. Emission factor A coefficient that relates the activity data to the amount of chemical compound which is the source of later emissions. Emission factors are often based on a sample of measurement data, averaged to develop a representative rate of emission for a given activity level under a given set of operating conditions. Flexibility* The possible exchange of removal units, credits, or debits,between or within sectors. Forest A minimum area of land of 0.05–1.0 hectare with tree crown cover (or equivalent stocking level) of more than 10–30 per cent with trees with the potential to reach a minimum height of 2–5 metres at maturity in situ. A forest may consist either of closed forest formations where trees of various storeys and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach a crown density of 10–30 per cent or tree height of 2–5 metres are included under forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of human intervention such as harvesting or natural causes but which are expected to revert to forest. Forest land This category includes all land with woody vegetation consistent with thresholds used to define forest land in the national GHG inventory, sub-divided at the national level into managed and unmanaged and also by ecosystem type as specified in the IPCC Guidelines.6 It also includes systems with vegetation that currently falls below, but is expected to exceed, the threshold of the forest land category. Forest management A system of practices for stewardship and use of forest land aimed at fulfilling relevant ecological (including biological diversity), economic and social functions of the forest in a sustainable manner. Grassland This category includes rangelands and pasture land that is not considered as cropland. It also includes systems with vegetation that fall below the threshold used in the forest land category and is not expected to exceed, without human intervention, the thresholds used in the forest land category. This category also includes all grassland from wild lands to recreational areas as well as agricultural and silvo-pastural systems, subdivided into managed and unmanaged, consistent with national definitions. Grazing land management The system of practices on land used for livestock production aimed at manipulating the amount and type of vegetation and livestock produced. Gross-net accounting* Accounting approach for the actual reported net emissions (or removals) in each year of the commitment period without comparing it with 1990 or other base year or reference. Key category A category that is prioritised within the national inventory system because its estimate has a significant influence on a country’s total inventory of direct greenhouse gases in terms of the absolute level of emissions, the trend in emissions, or both. Land Category* The categorisation of land cover/use into basic categories of Forest, Crop, Grass, Settlement, Wetland and Other Land, applied by the UNFCCC reporting approach. Net-net accounting* Accounted using the reported net emissions in each year of the accounting period minus the net emissions in 1990 (or other base year). In the situation where the net emissions have decreased, a country may issue removal units, (RMUs) and if net emissions have increased, it must cancel units (i.e. take on debits). Reforestation The direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the KP first commitment period, reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December 1989. Removals* Used, for the purposes of this report, together with "sink". Removal Units Units showing decrease in emissions or increase in removals within the LULUCF accounts. Revegetation A direct human-induced activity to increase carbon stocks on sites through the establishment of vegetation that covers a minimum area of 0.05 hectares and does not meet the definitions of afforestation and reforestation contained here. Sequestration The process of increasing the carbon content of a carbon pool other than the atmosphere. It is preferred to use the term “sink”. Sink* The rate of build-up of CO2 in the atmosphere can be reduced by taking advantage of the fact that carbon can accumulate in vegetation and soils in terrestrial ecosystems. Any process, activity or mechanism which removes a greenhouse gas from the atmosphere is referred to as a "sink." Denoted in accounting and reporting with the negative (-) sign. Source The rate of emissions of CO2 in the atmosphere can be increased by anthorpogenic action releasing carbon accumulated in vegetation and soils in terrestrial ecosystems. Any process, activity or mechanism which releases a greenhouse gas from the atmosphere is referred to as a "source." Denoted in accounting and reporting with the negative (+) sign. Transparency Transparency means that the assumptions and methodologies used for an inventory should be clearly explained to facilitate replication and assessment of the inventory by users of the reported information. The transparency of inventories is fundamental to the success of the process for the communication and consideration of information. Wetland This category includes land that is covered or saturated by water for all or part of the year (e.g., peatland) and that does not fall into the forest land, cropland, grassland or settlements categories. This category can be subdivided into managed and unmanaged according to national definitions. It includes reservoirs as a managed sub-division and natural rivers and lakes as unmanaged sub-divisions. 1.Problem definition 1.1.Context 1.1.1.Political context The Paris Agreement includes a long-term goal to put the world on track to limit global warming to well below 2°C above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5°C. Regarding the agriculture, forestry and other land use sector, the Paris Agreement spells out that the contribution from land use and forests in reaching the long term climate mitigation objectives will be critical. In line with scientific findings reported by the Intergovernmental Panel on Climate Change (IPCC) in the fourth Assessment Report, the EU's objective, in the context of necessary reductions by developed countries as a group, is to reduce GHG emissions by 80-95% by 2050 compared to 1990. The Commission in its 2050 Low Carbon Economy Roadmap proposed concrete milestones to ensure the EU is on track to reduce these emissions by at least 80% domestically by 2050, with milestones of 40% and 60% reductions in 2030 and 2040. For 2020, the EU had agreed in 2007 on an economy-wide and binding target of at least 20% GHG emission reductions, as well as a binding renewables target of 20% and an indicative target of 20% energy savings. Land use, however, was not included in either of these initiatives. The EU became the first major economy to present its climate plan for the Paris Conference (i.e. Intended Nationally Determined Contribution or "INDC") on 6 March 2015. This reflects the 2030 climate and energy policy framework set by the October 2014 European Council and the European Commission's blueprint for tackling global climate change beyond 2020. The EU has set an ambitious economy-wide domestic target of at least 40% greenhouse gas emission reduction for 2030. The 2014 European Council conclusions also mandated the European Commission to put forward policy to include Land Use, Land Use Change and Forestry (LULUCF) into the EU's 2030 climate and energy framework. The European Council specifically acknowledged "the multiple objectives of the agriculture and land use sector, with their lower mitigation potential, and the need to ensure coherence between the EU's food security and climate change objectives". It invited the Commission "to examine the best means of encouraging the sustainable intensification of food production, while optimising the sector's contribution to greenhouse gas mitigation and sequestration, including through afforestation". The European Council's guidance on including LULUCF into the EU's 2030 climate and energy framework is also reflected in the EU's INDC. The EU announced that its target is "an economy-wide absolute reduction from base year emissions", reaching "at least 40% domestic reduction", covering 100% of the EU's emissions. As for LULUCF, it was added that "policy on how to include Land Use, Land Use Change and Forestry into the 2030 greenhouse gas mitigation framework will be established as soon as technical conditions allow and in any case before 2020." 1.1.2.Regulatory context The current 2020 EU climate policy framework covers most sectors and greenhouse gases. It consists of two main elements: –The EU Emissions Trading System (EU ETS), directly involving more than 11000 large installations in power generation and manufacturing industries, and operators in the aviation sector. –A large part of the emissions from sectors outside the EU ETS are addressed by the Effort Sharing Decision (ESD). The ESD sets 2020 targets, and defines a linear trajectory of corresponding binding emission limits for each year from 2013 to 2020. Progress towards the 2020 targets is ensured through annual reporting obligations and compliance checks, set out in Regulation 525/2013/EC.

Emissions and removals from the land use sector are treated differently: –Land Use, Land Use Change and Forestry (LULUCF) greenhouse gas accounting results were not included in the EU’s domestic reduction target for 2020. –Emission and removals of greenhouse gases in this sector are instead covered by international obligations only, up to 2020. The rules for the LULUCF sector for the first commitment period (2008-2012) of the Kyoto Protocol were finalised among international Parties in 2001, and formally adopted in 2005. A set of improved methodologies and rules, valid for the second commitment period of the Kyoto Protocol (2013 to 2020), was adopted at the Durban climate conference in 2011. –Emissions and removals from LULUCF are accounted applying the so-called "no debit rule". This means that internationally, the EU and each of its Member States need to ensure that the LULUCF sector does not result in extra emissions – after accounting rules are applied. –Reporting – but not accounting – in the LULUCF sector, as part of the EU's annual greenhouse gas inventory, is addressed by Regulation 525/2013/EC. 1.2.Identifying and describing the main problem components 1.2.1.Lack of governance for LULUCF following the Paris Agreement Governance today for LULUCF falls under the auspices of the UNFCCC and is agreed through the relevant decisions of the so-called Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol (CMP). Accounting of removals and emissions in the LULUCF sector is thus contingent on the specific technical guidance developed for the implementation of the Kyoto Protocol, which itself takes into account related IPCC guidelines. The current Kyoto Protocol LULUCF accounting rules have been incorporated into EU legislation by Decision 529/2013/EU ("LULUCF Decision"), but these do not apply beyond the 2nd commitment period of the Kyoto Protocol(2013-2020). Moreover, the results of these accounts play no part in the EU’s domestic reduction target for 2020. In a significant step forward, the Paris Agreement requires all Parties to report information on their LULUCF emissions and removals. In a change to the international framework and contrary to the Kyoto Protocol, however, it does not contain a single harmonised set of legally binding accounting rules. It also does not specify how emissions and removals from land use have to be counted towards national reduction targets. Parties will not be bound by one stringent international set of standards. Instead, they may be allowed to choose from a "menu of options" on how to govern LULUCF. The EU's INDC clearly outlines the principles for the inclusion of LULUCF into its international commitment. The implementation of the current LULUCF Decision is underway and will deliver improved systems and broader coverage of accounting for the Member States, by the end of 2020. Nevertheless, without a legal framework consolidating this implementation and defining the applicable rules for the post-2020 period, the way in which LULUCF would be included into the 2030 framework could be heterogeneous across the EU. In conclusion, in order to address the lack of international governance, governance within the EU needs to be further developed. The LULUCF sector needs to be fully covered under the EU climate policy framework as of 2020, which requires establishing the accounting rules to be applicable before this date. Timely action is needed to ensure that Member States, currently improving systems, direct this work towards the establishment of appropriate monitoring frameworks. EU action on the LULUCF sector could also have a wide-ranging influence on global approaches to land-based emissions and removals, influencing the overall global ambition for the period beyond 2020. 1.2.2.Existing measures are not sufficient to reach the 2030 and 2050 EU targets On the basis of current policies, GHG emissions are not expected to decrease sufficiently to reach the EU's 2030 target of 30% GHG domestic reductions under the ESD. In the EU Reference Scenario 2016, reflecting current trends and policies, emissions covered by the ESD are projected to decrease by around 16% in 2020 and achieve 24% reduction in 2030 compared to 2005. This reflects full implementation of existing legally binding targets as well as adopted policies. This leaves a gap of 6 percentage points to the 30% reduction in 2030, requiring cumulatively still around 1 billion ton additional reductions in the period 2021-2030. The results of earlier impact assessments for 2030 and 2050 firmly underline the growing importance over time of mitigation action in forests and agriculture. In the case of an overall EU emission reduction of 80%, and without additional mitigation action in agriculture compared to today, the proportion of agricultural emissions is estimated to rise to about one third of all EU emissions by 2050. This is double its current share in the EU’s emission budget. At the same time, the LULUCF sector offers untapped potential for emission reduction and enhanced removals through carbon sequestration and substitution of fossil carbon. In conclusion, the importance of both land use and agriculture in terms of climate policy is, therefore, set to increase and additional mitigation efforts both in agriculture and in the LULUCF sector are needed. This is particularly important to prepare for the long-term, as emissions in the period after 2050 may well have to be counterbalanced by higher removals. 1.2.3.Accounting of emissions from biomass use

The increased utilisation of biomass for energy and wood products can lower emissions in other sectors through energy and material substitution. Enhancing the bio-economy can therefore contribute positively to climate mitigation. However, the increased use of biomass for the production of renewable energy and for material substitution shifts the accounting of emissions from the energy and others sectors to the land use sector, in particular to forest management. It is therefore of key importance that the use of biomass is appropriately accounted for in LULUCF. Under the current Kyoto accounting rules, the combustion of biomass counts as zero in the energy sector while the resulting carbon stock changes are accounted as emissions in LULUCF. This avoids double counting of emissions. Under the current EU climate and energy package, bioenergy emissions are counted as zero in the ETS and in the ESD, but LULUCF is not yet fully included in the EU's domestic reduction target. Moreover, in the absence of uniform international rules after the end of the Kyoto regime, accounting for emissions generated by biomass use would be incomplete, and the EU framework would be unbalanced. If a change in the amount of biomass harvested is a result of more biomass being used for bioenergy or materials, the impact of higher than Business as Usual (BAU) harvests would result in decreased accounted removals (or increased emissions) in the LULUCF sector with a corresponding decrease of accounted emissions in the ETS and ESD. The net impact of a harvest rate beyond the BAU in LULUCF accounts would therefore appropriately reflect – and balance – the biogenic emissions of the zero-rated energy feedstock in the full, economy wide accounts. In addition, any benefits (i.e. reduction of emissions) would potentially occur off the accounting sheet of the Member State producing the biomass, if the energy feedstock was exported. In conclusion, a robust and credible accounting regime for the LULUCF sector, within the overall EU accounting framework, is necessary to guarantee that emissions and removals resulting from biomass use are properly accounted. 1.3.Baseline scenario, and drivers of the main problems 1.3.1.Continuation of Kyoto rules In the baseline scenario the continuation of the current (2013-2020) Kyoto accounting rules is assumed including for the three main LULUCF categories: Afforestation and deforestation Agricultural land (crop and grasslands) Forest management. 1.3.1.1. Reporting and accounting rules The internationally agreed Kyoto rules applied by the EU make a key distinction between "reported" and "accounted" emissions and removals in LULUCF. While reporting concerns an inventory of emissions and removals, accounting aims to identify those which are human induced and the result of real action. A significant part of the removals associated with forests and soils is the result of the natural carbon cycle, and needs to be identified. Until the end of the Kyoto Protocol's second commitment period, Member states are required to report in parallel under two different regimes: that of the UNFCCC (where all Parties need to report emissions and removals) and the Kyoto Protocol (specifically for developed countries). At the end of the Kyoto Protocol, this latter obligation will stop. Because of the accounting rules, only a limited amount of carbon sequestration reported in the LULUCF sector can be used towards compliance with Kyoto targets. This restriction helps address methodological uncertainties and preserve environmental integrity. The reporting and accounting of afforestation and deforestation as well as forest management follow the mandatory rules applicable during the 2nd commitment period of the Kyoto Protocol. However, this reporting and accounting is specific to the Kyoto Protocol and not consistent with the reporting required from all parties under the UNFCCC. The LULUCF Decision introduced requirements for Member States to extend their use of reporting on croplands and grasslands. As of 2013, they must provide estimates of accounts for the Kyoto Protocol activities of cropland management and grazing land management to the Commission. The LULUCF Decision provides a step-wise path for implementation, up to the last year of the Kyoto Protocol (2020). The obligation is introduced in a gradual manner, allowing Member States first to submit preliminary and non-binding annual estimates, with full accounting only starting for the accounting year 2021. Significant progress has been made in collating and analysing relevant data. According to a recent study, the level of detail of reporting on cropland and grassland in Member States has improved substantially, since the adoption of the LULUCF Decision in 2013. Nevertheless, Kyoto Protocol reporting and accounting presents issues with respect to being fit for purpose post 2020, and furthermore obliges a double reporting requirement upon Member States. 1.3.1.2.Forest management

Kyoto rules permit the accounting of emissions or removals from forest management against projected forest reference levels, to exclude legacy management effects and other natural factors from accounts. The actual mitigation performance in the sector is compared to a nationally determined projected forest reference level. Member State specific reference levels for 2013-20 are estimates of future removals or emissions. Some are based upon historic trends, others may take policy implementation into account, for instance harvest rates. The Kyoto Protocol granted a significant degree of choice in how these forward-looking estimates are calculated. Indeed the assumptions made in approaches applied by EU Member States, vary to a great extent. Furthermore, under the Kyoto Protocol rules a cap is used in LULUCF accounts to limit the use of potential credits from forest management by a Party. The role of the cap is to limit uncertainty associated with the projections which underpin forest management reference levels , and to ensure the environmental integrity of the accounts. Forest Management removal units used to balance emissions from other LULUCF activities are only allowed up to a maximum of 3.5% of a Party's 1990 total emissions (see Annex 5). 1.3.1.3. Intra-LULUCF flexibility rules Flexibility is already granted within the Member State LULUCF accounts: Member States can use enhanced mitigation in one LULUCF activity (e.g. forests) to compensate for accounted emissions by other LULUCF activities (e.g. emissions resulting from conversion of land to settlements). They can also trade removal units among the Kyoto Protocol Parties. 1.3.1.4.No-debit rule for LULUCF sector As described above, emissions and removals from LULUCF are currently accounted towards the Kyoto Protocol obligations of Member States applying the so-called "no debit rule". These Kyoto accounts mostly concern emissions and removals from afforestation, deforestation and forest management. Few Member States have elected non-forest activities under their international obligations. Under EU legislation for the second commitment period, emission reductions in the LULUCF sector cannot be used to compensate for increased emissions in other sectors. In other words, LULUCF credits and debits are calculated only for reporting purposes and are not taken into account in measuring compliance with the EU 2020 targets in the EU ETS and the Effort Sharing Decision. When distributing the overall EU reduction target to individual Member States, there are strong reasons in favour of keeping the current "no debit" approach, whereby each Member State maintains the obligation to ensure that its LULUCF sector is not in debit: –During the stakeholder consultation and at expert meetings, many Member States signalled a preference of avoiding a complicated target-setting exercise for LULUCF; –As Member States must comply with no debit targets during the second commitment period of the Kyoto Protocol, it would contravene the principle of "no backsliding" to opt for a collective level target in the post-2020 period; –For all options that involve flexibility, LULUCF accounts per Member State can only be calculated using individual Member State LULUCF targets; –Intra-LULUCF trading flexibility already permits the re-distribution of effort between Member States; a target-setting exercise would to some extent duplicate this. In conclusion, the "no debit" approach is retained both for the overall EU target and the individual MS targets. This maintains the same ambition level of the "at least -40%" target, under the conditions as applied today under the Kyoto Protocol. 1.3.1.5. No use of LULUCF credits for compliance under ESD In the baseline scenario, the use of the accounted LULUCF sink, or "flexibility" in the context of this impact assessment, refers only to the possible exchange of removal units within the LULUCF pillar. The baseline scenario assumes that no flexibility (or use) of LULUCF credits is permitted in the Climate and Energy Framework, as is the case for the current 2020 package. Should intra-LULUCF flexibility not be sufficient to comply with the "no-debit rule", Member States can use ESD credits to compensate for inadequate mitigation in the LULUCF sector. In other words, current flexibility between different pillars of the EU's climate policy exists in one direction: from the ESD towards LULUCF. 1.3.1.6.Summary of existing provisions in the baseline scenario The following legacy conditions will, as explained in the sections above, be included in the baseline scenario: Application of accounting rules applicable to the 2nd commitment period of the Kyoto Protocol

Specifically, application of the projected reference level approach for assessing the performance of enhanced removals and emissions from forest land, including the application of the 3.5% cap on removal unit generation. Intra-LULUCF flexibility and trade of removal units between Member States; No-debit rule for the LULUCF sector; Member States must maintain their LULUCF accounts without debits at the end of the applicable compliance period; No use of LULUCF credits for ESD compliance. Variants of these in terms of the options to be compared are specified in Table 5 . 1.3.2.LULUCF sector not expected to improve its performance in baseline scenario The reference scenario projects that the LULUCF sector in 2030 would continue to be an important net sink in the EU-28 (see Table 2 and Figure 2 ). Net removals would decrease slightly from about -299 Mt CO2 in 2005 to -288 Mt CO2 in 2030, under the assumed continuation of the current reporting and accounting regime. To give some scale to this figure, this annual reported net sink from LULUCF is a little over 10% of the annual net emissions of the ESD in 2005. While the overall LULUCF reported sink is projected to remain stable, the contribution by forest management (i.e. harvests of timber), new planting (afforestation), and conversion from forest to other land use (deforestation) does vary over time. In particular the sink related to forest management is projected to decline substantially. This is in part due to the natural cycle of forests in Europe, and in part due to increased biomass demand for energy. Differences among Member States can be substantial. Several Member States expect forest management to become a source by 2020 (i.e. emitting more CO2 than they absorb); examples are Ireland, Estonia, and Austria. By contrast, other countries project the forest management sink to develop positively by 2020, for example Hungary, Slovakia, Spain, Cyprus and the Czech Republic. In addition, the rate of afforestation reached a peak in 2009, and appears to have slowed down. While the effects of earlier Afforested Land will continue to be shown in accounts for a number of decades, this positive impact is in decline. Without additional policies, timber used in the harvested wood products pool is affected; its contribution to the sink decreases by half. The trend for decreasing deforestation is encouraging and the afforestation sink is projected to increase in the reference projection, even if future rates of new planting will decrease in most countries. Concerning agricultural and non-forest land categories, most of the benefits expected in decreased emissions from crops result from more efficient management and (to a limited extent) the emergence of some energy crops. With more land being converted to grassland, a modest improvement in sink is also projected. The remaining emissions of wetlands and settlements are projected to remain stable and of low magnitude. Notes: Removals (sink) and emissions (source) represented as negative and positive values, respectively Source: EUCLIMIT Reference 2016 model projections The impact of increased biomass demand on the EU LULUCF sink is made uncertain by different factors regarding the biomass sources. The emergence of energy crops on marginal agricultural land may perhaps not materialize, or timber demand could be higher, or the expected positive changes in certain LULUCF sub-sectors (e.g. afforestation) might not occur. In these cases, the overall LULUCF sink could decrease more significantly by 2030, having a negative impact on the EU's overall emissions. In conclusion, the baseline scenario shows the complex interaction of land uses and their effects on emission and removals from the LULUCF sector. Biomass demand and supply factors create an important uncertainty in the modelling process. Existing incentives and rules for biomass may undermine the historical trend of an overall sink for the EU, potentially wasting an opportunity to underpin the EU's longer term commitment under the Paris Agreement. 1.4.Evidence of the extent of the problems, and identification of solutions

1.4.1.Need to upgrade and improve LULUCF accounting rules Assuming a continuation of the existing Kyoto Protocol rules, the total accounted sink from LULUCF in 2021-2030 could be in the order of nearly 2000MtCO2eq over the ten-year period (see Table 1 ). Significant uncertainties exist for forest management in particular, as explained in Section 1.4.4. KP Activity: Existing KP rules Afforestation, Deforestation -900 Agricultural land (cropland and grazing land) -720 Forest management Up to -360 Total -1980 Notes: Removals (sink) and emissions (source) represented as negative and positive values, respectively Source: EUCLIMIT modelling At the same time, until the end of the Kyoto Protocol's second commitment period, Member states are required to report in parallel under two different regimes: that of the UNFCCC (where all Parties need to report emissions and removals) and the Kyoto Protocol (specifically for developed countries). This creates additional administrative burden, and renders the reporting system more complex. In conclusion, as the Paris Agreement no longer requires reporting and accounting in technical compliance with the Kyoto Protocol, an opportunity exists to streamline reporting to the one mandatory UNFCCC approach. This would simplify the administrative and technical effort to be made both by Member States and the Commission, and remain compatible internationally with the EU's INDC. 1.4.2.Declining forest removals and increased use of biomass Although overall LULUCF removals are projected to decrease only slightly by 2030, removals on forest land are in decline. Forest land removals are projected to decrease from -353 MtCO2eq in 2005 to approximately -242 MtCO2eq by 2030. This is a more than 30% reduction in the Forest Management sink over these 25 years. A number of interlinked reasons are behind this trend. 2005 2030 Demand biomass (Mtoe) 86.4 178.3 Of which bioenergy production (Mtoe) 85.0 152.0 Of which net imports of bioenergy (Mtoe) 1.4 26.3 Domestic production biomass feedstock (Mtoe) 93.6 188.4 of which: forestry 29.2 53.1 of which: crops 3.5 23.0 Total harvest (million m3) 516.3 564.8 of which forest wood for energy (million m3) 91.2 159.2 plantation wood and energy crops used for energy (million m3) 0.0 13.5 LULUCF emissions/sink (MtCO2) (emissions +ve, removals –ve) -299.1 -288.0 Total forest land -337.1 -321.0 of which forest management -353.7 -242.1 of which afforestation/reforestation -46.2 -99.0 of which deforestation 62.8 20.0 Total Cropland 61.0 49.8 Total Grassland -9.3 -18.6 Total Wetlands 13.9 12.4 Total Settlements 28.0 20.2 Total Other land -1.7 -1.7 Harvested Wood Products -53.8 -29.2 Notes: Emissions and removals are absolute but remain only partially calibrated due to scope and coverage of the modelling framework Source: EUCLIMIT Reference 2016 model projections The decline of the forest removals is partly explained by earlier management decisions. Typically, older forests approach a steady state where gains due to growth are balanced by losses due to decay. Removal rates in mature or unmanaged forest would gradually approach zero. Although in the baseline projection carbon sequestration on afforested land increases, this is due to the maturing of already planted trees and despite an expected decreasing trend in new planting up to 2030. The trend of increased land-take for settlements is also a concern. This land use change is not only reducing the area available for productive land, but also reduces capacity to store carbon. Trends of deforestation are projected to decline but land-take remains a major environmental issue. Another factor that could have an influence is the increasing use of biomass. Forest harvests are driven mainly by demand for material wood products, even though the demand for energy increases in the Reference 2016 projection. Bioenergy is currently the biggest renewable energy source and is projected to remain so up through to 2030. Under the Renewable Energy Directive , binding national targets for 2020 commit Member States to raise the share of renewable energy in their energy consumption. In 2013, biomass use for heat, power and transport represented over 60% (or 105 Mtoe) of the overall EU renewable energy consumption. Under the 2016 Reference scenario, bioenergy consumption in the EU is projected to grow by 20% between 2015 and 2020, and will stabilise or slightly grow between 2020 and 2030. Direct harvest for energy in this scenario expands to 28% (159.2Mm3) of harvest by 2030. Moreover, there is uncertainty to what extent biomass demand would be met through domestic sources (i.e. agriculture, forestry and waste) or imports. If more of the supply gap were met through imports, it could shift the negative impacts on the carbon sink from the EU to non-EU countries. However, the Paris Agreement contains provisions so as to make sure that corresponding international emissions from biomass harvest are to be reported and accounted towards third party nationally determined commitments. The share of imported biomass for bioenergy is projected to increase from less than 4% of the final consumption in 2015 to about 15% in 2020, then slightly decline by 2030.

Many stakeholders, in particular environmental NGOs, have expressed concerns about increased bioenergy use and consider it an important driver of emissions. At the same time, forest or other biomass producers were of the view that current rules focus too much on maintaining the sink, thereby limiting use of wood and other biomass. Overall, many stakeholders pointed out the need to avoid an "accounting gap" in biomass use (Section 1.2.3). In conclusion, biomass and land use change can be identified as key drivers of the LULUCF sink. 1.4.3.Lower mitigation potential of the agriculture sector and synergies between mitigation on land and the agriculture non-CO2 sector Past performance, 1990-2012 Since 1990, agriculture non-CO2 emissions in the EU28 have declined by 24%, or in absolute terms by nearly 150 Mt CO2eq per year. Indeed by 2012, the sector’s emissions amounted to 10.3 % of total emissions in the EU. The largest relative reductions were reported for nine EU Member States that joined the EU in 2004 or later, headed by Bulgaria (-65%), Latvia (-59%) and Estonia (-58%). In the same period, the EU-15 Member States reduced their agricultural GHG emissions by -15%, with the biggest relative reductions reported for the Netherlands (-29%), Denmark (-23%) and Germany (-21%). This decrease demonstrates a significant de-coupling of emissions and agricultural output ( Figure 3 ). This was achieved without specifically addressing the main actors (farmers) under direct climate legislation. The share of agriculture emissions in national greenhouse gas ESD emissions varies considerably within the EU ( Figure 4 ). On the basis of emissions in the period 2008-12, the share is lowest in Luxembourg (7%), Malta (8%), and the Croatia (9%) and highest in Ireland (40%), Lithuania (28%) and Denmark (27%). Member States with higher shares could be expected to need to find more mitigation in the sector to meet their future targets. The most important source of the EU's agriculture non-CO2 emissions is nitrous oxide emissions from agricultural soil management. These represent around half of the total agriculture emissions in the EU, mainly due to the application of manure and mineral nitrogen fertilizer. Enteric fermentation emissions of methane gas make up one-third, mainly from cattle and sheep. Emissions of both gases from manure management add a further 16%. Since 1990, each of these three major sources has shown a decline in emissions of more than 20 %. Figure 3 shows that maintaining agricultural output can be compatible with a reduction of emission intensities. The decrease so far can be attributed to several factors, most of all to productivity increases and a decrease in cattle numbers, as well as improvements in farm management practices. Source: Compiled by European Commission, data from Eurostat and FAO Support for climate-friendly agriculture through the Common Agricultural Policy (CAP) has significantly contributed to this "decoupling". Emission trends have been influenced by CAP measures, such as the decoupling of agricultural production from CAP subsidies since the early 2000s, and the abolishment of milk quotas. Cross-compliance under the CAP with environmental legislation will have played a significant role, such as national and EU legislation to reduce nitrogen and ammonia emissions to water and air. The CAP rural development policy, for instance, supports farm modernisation in order to cut energy consumption, produce renewable energy, improve input efficiency, and thereby reduce emissions. In 2015, it is estimated that €13.6 bn of the CAP budget was climate relevant. Despite these successes, continuing the trend of steady emission reductions from agriculture may be challenging. In most Member States the reduction path slowed down significantly between 2001 and 2012. For some countries, much of the low cost mitigation potential in agriculture non-CO2 emissions has already been utilised. Future prospects until 2030 Agriculture non-CO2 emissions in 2005 amounted to 446 MtCO2 for the EU28. In the Reference 2016 baseline scenario, agriculture emissions are projected to decline by just 2.1% by 2020, compared to an overall 10% reduction that is required for all sectors under the ESD. Regarding agricultural production, medium-term prospects show increasing production of many agricultural commodities, such as cereals, oilseed, sugar, poultry, eggs, milk and dairy products in the period 2015-2025. Even so, the total utilised agricultural area is projected to decrease slightly. Similarly, a small decline in dairy cow numbers is expected, in spite of the domestic increase in dairy product supply. Consistent with this, the Reference 2016 baseline scenario projects very limited reductions of emission to around −2.4% by 2030 compared to 2005. This is significantly more limited than the expected reductions of other ESD sectors, with existing measures. Studies looking into the technical emission reduction potential show that limited opportunities for further reduction of non-CO2 emissions exist in the agricultural sector (see for instance the results of the ECAMPA study in Box 1). This is, to some extent, addressed by availability of cost-efficient CO2 mitigation in the LULUCF sector, also on agricultural land. Furthermore, the importance of its role in mitigation action is dependent upon the importance of the sector, which varies considerably between Member States ( Figure 4 ). Hence, while the agricultural sector has a role to play in reducing emissions, the cost-efficient mitigation potential of agriculture is apparently lower than for other sectors. This has been acknowledged in the European Council Conclusions of October 2014. As the overall 2030 reduction target for the non-ETS sectors has been set at -30 %, other sectors such as buildings, transport, and waste would have to deliver relatively higher emission reductions to compensate for lower mitigation in agriculture. For Member States with agriculture sectors that dominate ESD emissions, this impact would be the even stronger. In conclusion, there are clear synergies between mitigation on land and the agriculture non-CO2 sector. The results of a meta-study on mitigation action on agricultural land (see Box 2) showed considerable cost-effective potential for the reduction of CO2 emissions in agricultural land. This impact assessment will therefore look at using the increased potential of mitigation in LULUCF to address the issues of lower mitigation potential of agriculture.

Source: 2015 MS inventories Box 1: Why can the Agriculture non-CO2 sector only deliver limited mitigation? Objective: The EcAMPA study examined impacts on production, concluding that these would be relatively severe if the sector was to deliver a -20% reduction. In a scenario without explicit subsidization of mitigation technologies [HET20], supply reductions of all activities would be significant, ranging from -1.3% (poultry) to -8.9% (beef meat activities). Livestock herds reduce substantially, especially for beef production (-16.1%). In subsidized scenarios, the production impacts are more limited, although at the cost of a large budget. Note: total supply of beef includes beef from suckler cows, heifers, bulls, dairy cows and calves When complying with a 20% emission reduction target [HET20], farmers may start adopting some technologies to dampen the effect on production. With subsidies in place (SUB80V_20 and SUB80O_20), the rate of implementation increases further, and profitability may return. According to assumptions in the study, subsidies may range from EUR 13.6 billion [SUB80V_20] to EUR15.6 billion [SUB80V_20TD], and subsidies per tonne CO2-equivalent range between EUR 188 and EUR 215. The technologies anaerobic digestion, nitrification inhibitors, fallowing of histosols and precision farming have the largest contribution in total. The impact on displacement of production outside the EU would also be of significance. In the non-subsidised scenarios, nearly 1/3rd (29%) of mitigation achieved could be undermined by leakage. Subsidies may partially alleviate this problem, which however remains significant (14-20% of mitigation achieved). In a scenario with subsidies but no compulsory emission reduction target (SUB80V_noT), the delivery is about 13.5% of emissions' reduction compared to 2005 emissions and no displacement of production outside the EU. In this case, the necessary subsidies would be EUR 12.7 billion (EUR 278/t CO2-eq). Figure 5: Gross and net mitigation modelled in 2030 (% change versus EcAMPA REF 2030) Source for Box1: An economic assessment of GHG mitigation policy options for EU agriculture, JRC Policy and Science Report (Pérez Domínguez et al., 2016 forthcoming) Box 2: Meta-review study of the potential mainstreaming of climate action in the current Common Agricultural Policy (CAP) framework Objective: The study collected existing literature and made a "meta-review" of studies and scientific articles. An expert-reviewed list of mainly CO2 mitigation actions was assessed and information provided per action to aid understanding of their potential, geographic applicability, mode of action and implementation barriers. The study shows that mitigation actions on agricultural land with high potential are mostly related to the actions on agricultural soils, land use management and land use change related practices, and to carbon audits. Of the 22 mitigation actions assessed, 11 showed significant mitigation potential (each at least 500kt CO2eq/yr at EU level). Of these, eight were related to land use, land use change or crop production, and were focussed on carbon sequestration; two related to mitigation of N2O emissions from fertilizer application, and one (carbon audits) is a means of identifying relevant actions at a farm business level. Two mitigation actions (zero tillage and wetland/peatland conservation/restoration) show low EU level potential, but are notable for high potential at regional level where the soil conditions show potential for action. CO2 mitigation actions associated with livestock systems performance generally have low potential (compared with other GHG mitigation actions). The CO2 related feasible additional mitigation potential at EU level in 2030 is estimated to lie within the range of 26-56 Mt CO2eq/yr with a median value of 40,7 Mt CO2eq/yr. The ability and limitations to account mitigation action in national inventories was also assessed. Most of the crop production and land use actions reviewed are relatively straight forward to account for as there is a physical change in the land use or activity that can be observed, recorded and reported. It is more difficult to account for efficiency measures or indirect impact measures (e.g. carbon auditing). Cost to farmers: The evidence collected shows very low opportunity costs associated with the majority of climate mitigation actions, as many encourage efficient means of production, e.g. input use. High opportunity costs occur for measures requiring significant land use changes or high upfront capital costs. The study also points to the issue of profit margins of farming enterprises often being too small to enable cost efficient, long term investments. Adequacy of policy tools: The CAP has an important role to play in encouraging and supporting the agricultural and forest sectors to reduce greenhouse gas emissions and increase removals. The majority of mitigation actions identified in this study, particularly those related to the action on agricultural soils, land use management and change can already be supported under the measures available within the CAP. Attention could be paid to how Member States choose to implement (or not) these policy tools, and how they design the detailed rules, definitions and support measures. Focus should be made on uptake of measures and targeting areas with greatest mitigation potential. Source for Box 2: Effective performance of tools for climate action policy - meta-review of Common Agricultural Policy (CAP) mainstreaming. Prepared by Ricardo-AEA Ltd under contract to European Commission Specific contract number 340202/2014/688088/SER/CLIMA.A.2 implementing Framework Contract CLIMA.A.4/FRA/2011/0027



1.4.4.Absence of consistent governance framework for forest management Under the baseline scenario, forest land would have a broadly neutral impact on the accounted sink due to the application of the projected forest reference level. However, this is sensitive to the chosen forest reference level (FRL) against which the performance of the forest management is assessed. Two hypotheses for post-2020 FRL illustrate the range of possible results. It may be expected that future forest reference levels would be between the outer boundaries (here named "strongest" or "weakest"). For this exercise, the "strongest" hypothesis assumed a continuation of current reference level values in EU legislation. The "weakest" hypothesis was based on the preliminary projections used for the FRL under the period 2013-2020, aligning with a business as usual (BAU) projection. The sensitivity analysis shows a range from -360 MtCO2 (accounted sink) under lower forest harvest conditions, to +840 MtCO2 (accounted source) when a higher than business as usual (BAU) increase in harvests occurs. Table 4: Estimated accounted sink (negative)/source (positive) for forest under KP, with different forest management scenarios and different reference levels Forest (Management) Reference Levels Units MtCO2 2021-2030 Forest Land Scenario FMRL as in LULUCF Decision (strongest) Forest Reference Level 2021-2030 (weakest) Higher forest harvest Low perennials available +840 +430 Normal forest harvest, with high perennials (IA2013 Reference) +400 +15 Lower forest harvest (-10%) -220 -360 Notes: 1) FM 3.5% cap is applied at national level; 2) Emissions/source + (positive), Removals/sink – (negative); 3) Harvested Wood Products (HWP) not included in projections or reference Source: EUCLIMIT and JRC modelling

The sensitivity analysis shows that the variation of the harvest levels within a range of +/- 10% leads to increases or decreases in GHG balance by some 400-600 MtCO2 of the activity through the period, for each reference level hypothesis. Reporting for 2013 and 2014 already shows around a 9% lower harvest than projected for the current Kyoto commitment period, implying an improved sink of around 30 to 40MtCO2 per year at EU 28 level (see Annex 5, Table 5.7). Indeed, some 80 to 100MtCO2eq potential credit is being potentially being generated for the first two years of the period. This may point to a lack of standardisation with respect to the methodology applied, particularly with respect to policy assumptions which drive harvest levels. As stated in Section 1.2.1 above, there will be no international process for establishing forest reference levels under the Paris Agreement. The wide range of projected sink and source outcomes for forest land in the absence of concrete values for FRLs is a major justification for today not including credits from Forest Land as part of the flexibility mechanism towards the ESD. Consequently, a neutral impact of Forest Land is assumed in this impact assessment's analysis, and flexibility approaches with the ESD discussed in this and subsequent chapters will not include direct generation of credits from this land use category. Should the wide range of uncertainty around the projected sink and source outcomes for forest land improve, the inclusion of credits generated from Forest Land as part of the flexibility mechanism could be re-considered. In particular, if Forest Reference Levels will have been established and adopted, and an assessment has shown that they are consistent with projected harvest rates, this option could be taken into account. It has been assumed, however, in the baseline scenario analysis that Forest Land accounting in the sector is to be applied as under today's KP rules. Removal units generated by forest management could still be used by Member States to balance out their national LULUCF accounts, and for LULUCF sector trading between Member States. Any accounted source from Forest Land would need to be offset by enhanced mitigation from other LULUCF activities. Where this would not be possible, additional emission reductions from other non-ETS sectors (i.e. compliance with the no-debit rule) would be needed. In conclusion, a new process to enhance and strengthen the post-2020 process for establishing reference levels for forest land will be required, given the new governance framework of the Paris Agreement. More analysis on this subject is provided in Chapter 5 and Annex 5. 1.5.Who is affected? The projected growing share of agriculture and LULUCF in the EU's emissions budget could be considered a risk if these sectors do not achieve their cost-effective mitigation potential. In such a case, other sectors (transport, buildings, waste etc.) would need to reduce even more, which would come at a higher cost. This failure could affect a wide range of players and economic sectors. In the absence of a proper accounting framework, the zero rating for biomass use (the assumption that the combustion of biomass does not produce emissions) could result in underestimating EU emissions associated with the production of bioenergy. While farmers and foresters are key actors in the implementation of climate action on land, the preceding discussion has shown how the EU has previously successfully protected carbon stores and reduced emissions without directly regulating individual actors. The agriculture sector has historically shown its ability to decouple its decarbonisation process, maintaining overall stable production while simultaneously reducing emissions at the EU28 level. Rather than the small and medium enterprises which comprise the millions of farm and forestry holdings across the EU, the proposed Regulation is addressed at Member States and to be implemented at national level. This is consistent with this past experience. Moreover, it builds on existing legislation which already takes this approach, in particular Decision 529/2013/EU. In conclusion, the proposal maintains this path of further integrating LULUCF into the EU's domestic climate and energy framework, rather than introducing a system change. 2.Subsidiarity: Why should the EU act? Climate change is a trans-boundary problem which cannot be solved by national or local action alone. The European Union competence to take action on climate change derives from Article 191 of the Treaty on the Functioning of the European Union. The reduction of greenhouse gas emissions and the development of renewable energy sources are among the top 10 priorities of the European Commission. As the EU addresses climate change commitments jointly, LULUCF also needs to be addressed in a coordinated manner. The EU has adopted a common emission reduction target through its 2030 Climate and Energy Framework. The implementation of the overall policy framework and its sectoral building blocks require Union-wide legislation. The general problem analysis showing this has been done in the previous impact assessment on the 2030 Climate and Energy Framework. Corresponding to the 2030 Climate and Energy Framework, the EU put forward an intended nationally determined contribution (INDC) under the Paris Agreement. The INDC emission reduction target is economy-wide and therefore includes emissions from agriculture and LULUCF. This Impact Assessment and proposal is a direct response to the request of the European Council, in its 2014 October conclusions, to the European Commission to put forward policy on how to include Land Use, Land Use Change and Forestry (LULUCF) into the EU's 2030 greenhouse gas mitigation framework. As the continuation of current Member State policies would lead to a gap of 7% compared to the necessary 2030 emission reductions of 30% in the non-ETS sectors, Member State action will remain crucial. Responsibility for progress up to 2030 will have to be shared, as is already the case in the current 2020 climate and energy package. The Effort Sharing Decision sets binding national targets, leaving it to Member States to decide how these are to be achieved, while fully respecting the principle of subsidiarity. Similarly, the inclusion of LULUCF into the 2030 framework will provide a common framework on how the sector can be counted towards the EU's joint reduction target. The choice of action in pursuit of the various objectives related to LULUCF will be up to the Member States, thereby also fully respecting subsidiarity. The harmonised elements of such a common framework can ensure the functioning of a single market within the EU's agricultural and forest sector, minimizing any market distortions. The proportionality of the proposed framework is ensured by striking the balance between the multiple objectives of the area, namely: the limited mitigation potential of agriculture, the need to ensure food security, protection of biodiversity and the long term objective of enhancing sinks on land in line with the aspirational target of balancing emissions, post-2050.

3.Objectives: What should be achieved? 3.1.General objectives The general policy objectives of the initiative are: –Contribute to the 10 priorities of the Juncker Commission – in particular the Resilient Energy Union with a Forward-Looking Climate Change Project by consolidating the enabling environment for the transition to a low carbon economy; –Support progress towards the EU's objective to reduce domestic GHG emissions by at least 40% by 2030 compared to 1990, and more specifically, towards the 30% GHG reduction target in non-ETS sectors compared to 2005, while maintaining the environmental integrity of the targets. –Uphold the fairness of the overall policy framework, with respect to the social and distributional effects of the measures. –Reflect the EU's commitment to the long term vision for limiting temperature increase as outlined in the Paris Agreement, as carbon removals will play an increasing role on the road towards 2050. 3.2.Specific objectives The specific objectives of this proposal are to: –Maintain, streamline and improve standardised, internationally recognised monitoring and accounting approaches, thereby addressing the lack of governance created by the end of the Kyoto Protocol; –Determine how agriculture and LULUCF will contribute to supporting the emission reduction objectives laid down by the European Council in October 2014 for the 2030 climate and energy framework, for the non-ETS sectors, particularly with respect to the limited mitigation available in the Agriculture non-CO2 sector; –Ensure that there is no accounting gap relating to the use of biomass for energy in the absence of uniform international rules after the end of the Kyoto regime. 3.3.Operational objectives The operational objectives of this proposal should: –Take into account the specificities of the LULUCF sector, such as non-permanence, natural disturbances, legacy effects in forest management, removals related to existing land use and the need for further improvements related to monitoring and verification of emission reductions related to some LULUCF activities; –Ensure consistency with related policies such as policies on sustainable forest management and protection of biodiversity; –Explore the links between LULUCF and the lower mitigation potential in Member State's agriculture sectors, including in terms of flexibilities; –Determine the least burdensome approach with respect to administrative effort for Member States, best aligned with other policies. 3.4.Consistency with other policies and the Charter for fundamental rights A legal proposal for the inclusion of LULUCF into the 2030 EU climate and energy policy framework is a key part of the Commission framework strategy for a resilient Energy Union with a forward looking climate change policy, underpinning its decarbonisation dimension. In particular, the proposal is a key element needed to complete the integrated framework for climate and energy policies up to 2030 endorsed by the European Council in October 2014.

Sustainable use of biomass can – and must – make a positive contribution to reducing the EU reliance on fossil fuels, and the achievement of the EU's 2030 renewable energy targets. To that end, a robust LULUCF accounting system is required to ensure that the emissions from land use linked to the increased biomass use in the EU can be captured. This is all the more important as under KP accounting rules, biomass combustion counts as zero emissions. Including LULUCF into the EU's 2030 climate and energy framework will be fully complementary and coherent with other related EU policy objectives, specifically: –The EU has set the target to halt global forest cover loss by 2030 and to reduce gross tropical deforestation by at least 50% by 2020 (EU Deforestation Communication of 2008, reiterated in the 7th EAP). –The Biodiversity Strategy emphasises the need for improved integration of biodiversity measures in forestry to support preventing the loss of species and habitats. –The EU's Forest Strategy supports the principle of sustainable forest management throughout the Union. –As the proposed policy primarily addresses Member States as institutional actors, it is consistent with the Charter for fundamental rights. 4.Policy options Chapter 1 described the change in the international governance following the Paris Agreement, highlighting the need to develop LULUCF governance at EU level. It was recalled how the 2014 October European Council conclusions confirmed that LULUCF forms part of the non-ETS part of the overall 2030 policy package. It was also highlighted that a possible "accounting gap" could emerge if biomass use were further increased without a corresponding effect in the LULUCF accounts. In order to include LULUCF in a coherent way and to respond to the Council Conclusions the two most critical design issues that need to be assessed are: –Choice and improvement of underlying accounting rules; –The need and extent for flexibility towards the Agriculture sector in the ESD. 4.1.Improvement of accounting rules The overall contribution of the LULUCF sector to the EU target in 2030 can only be measured once the accounting rules are defined. Accounts are used to determine the possible credits generated or debits incurred. The current rules of the LULUCF Decision are explained in detail in Annex 5. These rules need to be improved with regard to three key elements were identified in consultation with key stakeholders and Member States (see Annex 2): –choice of base year or period; –streamlining the reporting and accounting systems and the move away from a KP-based system; –governance of projected reference levels for forests and harvested wood products. 4.1.1.Alternative choice of base year/period The base year used for the Kyoto Protocol is by default 1990. The level of emissions in this year is used as a reference to compare emissions or removals for major LULUCF categories (e.g. crop land) in a given accounting year. The use of a consistent base year facilitates comparability between commitments internationally, and avoids the selection of a reference that may artificially influence accounting results. Current INDCs annexed to the Paris Agreement use a variety of dates. In the case of land use it is usually 2005 (for example, United States, Canada). Also in contrast to the Kyoto Protocol, the EU Emissions Trading Scheme (ETS) and the ESD uniformly apply 2005 as the base year. However, the ESD applies a period average to determine the starting point of 2020 target trajectories, in order to avoid introducing random "winners and losers" through the selection of one single reporting year. A similar period approach might be suitable for the LULUCF base year.

Conceptually, the use of a more recent base year or period for LULUCF accounting would provide several significant advantages: –Alignment with the Effort Sharing Decision; –Enhance accuracy, and reduce the uncertainty of estimates. Information on agricultural land was significantly enhanced as of 2005 due to reforms in the collection of spatial data on farms under the Common Agricultural Policy ; –Improvement in the assessment of which mitigation action related to cropland and grazing land is truly additional, rather than historical; –Applying a period (e.g. 2005-2007) instead of a single base year would help addressing the issue of high inter-annual variability in LULUCF, while having little overall impact on the aggregated EU accounts. Member states and other stakeholders frequently preferred the application of periods for technical reasons stated above. Consequently, the following two options (Options B0 – B1) will be further assessed: B0: status quo: 1990 Kyoto base year B1: Applying a base period of 2005-2007 4.1.2.Streamlining of the reporting framework – land-based accounting A significant issue for Member States imposed by the Kyoto Protocol is the requirement to maintain two systems for showing national GHG balances from LULUCF: –the reporting and accounting framework of LULUCF under the Kyoto Protocol (carried out by so-called "Annex 1" developed Parties that ratified the Protocol), and –the reporting obligations under the UN Framework Convention on Climate Change (UNFCCC) (to some degree carried out by every Party). Small, but significant differences in the approaches make the conversion to and from these two systems complex. This requires Member States to maintain two parallel systems and thereby substantially increases the administrative burden. In essence, the UNFCCC approach requires reports on the current land cover categories (forest land, grassland or cropland, settlements, etc.), whereas the Kyoto Protocol reporting and accounting is focused on activities (e.g. forest management) or uses (of Harvested Wood Products). Streamlining would require converting Kyoto activities into equivalent UNFCCC land categories. For example, the Kyoto activity of Forest Management would be replaced by the UNFCCC reporting category Forest Land remaining Forest Land. Similarly, the Kyoto activity Afforestation would be replaced by the UNFCCC reporting categories of Land converted to Forest Land. The adoption of the UNFCCC so-called "land-based" accounting approach would present several advantages: –Reporting would be streamlined and simplified, as only one system would need to be managed by Member States and reviewed by the Commission; –The change would be wholly consistent with the change of the base period 2005-7, thereby discounting the historical effects of land management more than 30 years before the start of the 2030 framework period; –It would dismiss the static approach whereby land "afforested" or "deforested" under Kyoto rules continues to be categorised as such indefinitely; –It would ensure more accurate data collection, which would be aligned to the approaches applied for land at EU level, such as LUCAS, the Common Agricultural Policy payment systems IACS, and land monitoring under the COPERNICUS programme;

–Forest land area under Kyoto accounts must continuously decline, as it is never replenished after deforestation. This complicates the monitoring of the sector, since the labelling of an area of land will increasingly not correspond to its current land cover, or even land use. Under a land-based approach this is avoided. –Since few – if any – other international parties plan to continue with the Kyoto-style activity-based approach, land-based accounting would provide better comparability with third countries. At the same time, streamlining would have an impact on the potential to generate LULUCF credits. Land use change categories under UNFCCC reporting transform, after a 20 year transition period , to their destination land category. This is in contrast to Kyoto reporting and accounting, where these areas remain labelled with the activity indefinitely. Specifically, land planted with trees (i.e. afforested) since 1990 under Kyoto remains labelled Afforestation even beyond 2030 and even if it undergoes harvesting, and land labelled Deforestation remains so even if it is replanted. The adaptation of Kyoto Protocol rules to the "land-based" UNFCCC reporting systems has been discussed with Member States and is generally considered practicable (see Annex 2). One question to explore further could be the length of period over which afforested land would be considered as such, before it moves into the forest land category. The 20 year transition period is the default under UNFCCC reporting, and it is appropriate for accounting for land conversion in general. The application of the UNFCCC default would reduce the number of credits from historical afforestation action sharply. By the end of the Kyoto Protocol, the period actually applying to afforestation will be 30yrs (2020 – 1990). Consequently, the application of a 30-year transition period – instead of the IPCC default 20-years – could also be considered for this category , if appropriately justified. A 30 year period may be appropriate for certain Member States because of systematically longer rotation periods, for instance when forests continue to sequester large amounts of carbon during slower forest growth conditions. The following three options (Options R0 – R2) are therefore assessed in Chapter 5: R0 - status quo: continuation of the two concurrent systems of reporting under UNFCCC and Kyoto; R1: land-based UNFCCC reporting with 20yr transition period for Afforested Land; R2: land-based UNFCCC reporting with 30yr transition period for Afforested Land. 4.2.The need for flexibility towards agriculture in the ESD When examining flexibility options, the problem analysis pointed to two key concerns that need to be taken into consideration: The lower mitigation potential of the agriculture sector: The 2014 October European Council established a link between the lower mitigation potential in agriculture and LULUCF, in particular afforestation. Environmental integrity of the non-ETS emissions reduction target: Allowing unlimited use of LULUCF credits in the ESD could significantly weaken incentives for emissions reductions across all ESD sectors, thereby putting the environmental credibility of the ESD as a whole at risk. In Chapter 1, it is shown that the potential credit generation under the continuation of the Kyoto Protocol rules could be as much as 2000MtCO2eq in the period 2021-2030. In a next step, the potential credit need of agriculture's lower mitigation potential, and how to link this with LULUCF mitigation, must also be identified, and how the improved accounting rules would affect this overall amount needs to be explored. 4.2.1.First screening of flexibility options The Communication on "A policy framework for climate and energy in the period from 2020 to 2030" and its impact assessment identified three principal flexibility options: –A0: self-standing pillar for LULUCF ("status quo"), i.e. with no flexibility of credits; this is the current baseline, assuming the application of Kyoto rules; –A1: merge agricultural (non-CO2) emissions with those from LULUCF in a combined land sector pillar; –A2: integrate LULUCF together with agricultural (non-CO2) emissions into the Effort Sharing Decision (ESD). A first screening highlights significant risks related to an unlimited flexibility between LULUCF and Agriculture under the ESD. In particular, the following arguments speak against option A1:

–Option A1 received the least support by the stakeholders in general; it was the least favoured approach in each of the stakeholder groups (governments, non-governmental organisations, business and sectoral organisations). This approach would also oblige Member States to combine sectors rather than flexibility remaining optional. –Overall, the existing ESD delivers the intended outcomes for agriculture efficiently. The ex-post evaluation of the Effort Sharing Decision shows that individual Member States, and the EU as a whole, currently perform well against their annual emission limits under the ESD. Bearing in mind the positive result of this evaluation, changing the ESD scope (i.e. by removing agriculture non-CO2 emissions from the ESD) could be a negative step, reducing overall policy coherence and efficiency. –Reduced Integration, overall: Although Option A1 would facilitate a more integrated approach of landscape management, and could better reflect the sectors' specificities (e.g. permanence, long time-cycles, inter-annual variability, integrated action for mitigation and adaptation), it would lack the advantage of flexibility between agricultural emissions and other sectors within the overall ESD. –Increase in administrative burden: The ESD was found to have resulted in limited additional administrative burden at Member State level. Given the substantial structural change option A1 would entail, it would almost certainly increase administrative burden for Member State authorities. The main arguments against retaining option A2 with broad, unlimited flexibility between the LULUCF and Agriculture non-CO2 sectors are the following; –Allowing unlimited flexibility, in terms of LULUCF compensating for any volume of emissions by any of the ESD sectors, is not foreseen in the 2014 October Council conclusions. Instead, Council guidance points to the need to acknowledge the multiple objectives of agriculture and land use and ensure policy coherence, through optimisation. Stakeholders, especially governments and agriculture sector organisations also emphasized this point in a number of submissions during the stakeholder consultation. –Risk of undermining the environmental ambition of the "at least -40%" reduction target: It is also evident that there are serious concerns among stakeholders regarding the impact of LULUCF credits on the overall ambition of the ESD. It was pointed out in many submissions that unconstrained flexibility from LULUCF would risk reducing the environmental ambition of the "at least -40%" reduction target. Forestry organisations also warned of what they perceived as a risk that emissions in other sectors could be offset by measures in forestry. Finally, many environmental NGOs were strongly opposed to providing any flexibility by using LULUCF credits in the ESD, arguing that this would effectively undermine the credibility of the EU's emission reduction efforts. –Option A2 would increase complexity of the ESD and raise methodological issues, including concerns related to environmental integrity and technical compliance issues, which would have to be specifically addressed (e.g. potentially large annual fluctuations in removals and emissions, or combining accounting of removals from LULUCF with emissions of other non-ETS sectors). In conclusion, neither option A1 nor A2 seems fit for purpose. At the same time, exploring different levels of flexibility points towards a hybrid architecture, combining features from options A0 and A2. Under such an approach, a stand-alone LULUCF policy pillar would continue to be utilised, along with a full range of flexibility to all other non-ETS sectors justified on the need derived from the agriculture sector share for each Member State in the ESD. 4.2.2.Design of flexibility options towards ESD Political guidance from the October 2014 European Council Conclusions clearly links flexibility from LULUCF to the lower mitigation potential of the agricultural sector. Stakeholders, in particular governments and agriculture sector organisations emphasized this link during the stakeholder consultation. At the same time it is evident that there are serious concerns among stakeholders regarding the impact of LULUCF credits on the overall ambition of the ESD. Many submissions point out that unconstrained flexibility from LULUCF could reduce the environmental ambition of the "at least -40%" reduction target. As a consequence, the maximum amount of LULUCF credits that could be used in the other non-ETS sectors should therefore be limited in function of the emission reduction effort required in the agriculture non-CO2 sector of the ESD. As shown in the ESD IA, the Reference Scenario points towards achieving around -16% reductions in 2020 compared to 2005 for the ESD as a whole. This is projected to continue and reach around -23% in 2030. This performance is due to the long term impacts of numerous existing policies such as transport and the Energy Performance standards for buildings, whose influence will continue to be felt in the ESD even after 2020. As shown in Figure 6 , the Reference 2016 scenario projects only a modest reduction of agricultural non-CO2 emissions to around -2.4% by 2030 compared to 2005. An assumed 20% reduction in the agriculture non-CO2 greenhouse gas emissions would require an emission reduction of nearly 425 MtCO2eq between 2021 and 2030, compared to the reference projection. Such a -20% reduction of non-CO2 emissions from agriculture was examined in the EcAMPA study, concluding that the impacts on production would be significant and substantial emission leakage could occur (see Box 1 in Chapter 1). To adjust this effort and avoid adverse impacts on the agriculture sector, flexibility from LULUCF could be envisaged from between around half to the full level of this assumed reduction for the period. Flexibility could be determined for each Member State, in accordance with a need justified by its agriculture non-CO2 sector. Use of flexibility by the other non-ETS sectors would be further enabled throughout the period through banking, under options F1, F2 and F3. As illustrated in Figure 6 , the following four options should be analysed: F0: No flexibility ('status quo'): agricultural non-CO2 emissions would have to be reduced by 20%; no contribution would be provided by LULUCF; F1: Low flexibility: Around half of the assumed agricultural emission reduction effort could be undertaken through reductions in the LULUCF sector, i.e. 190 Mt between 2021-2030; F2: Medium flexibility: Up to two thirds of the assumed emissions reductions could be undertaken in the LULUCF sector, i.e. 280 Mt between 2021-2030; F3: High flexibility: Emissions reductions equivalent to a reduction of non-CO2 agricultural emissions by -20% could be undertaken in the LULUCF sector, i.e. 425 Mt between 2021-2030.

Source: own presentation 4.2.3.Options for credit generation in LULUCF and technical conditions Various options exist regarding the range of activities that could be used to generate credits and deliver flexibility. The possible eligible activities, the following could be considered: are: –Net balance of afforested and deforested land: greenhouse gas fluxes from the direct human-induced conversion of land through planting, seeding, etc. –Net balance of agricultural land: emissions and removals resulting from the management of cropland and grassland, and the associated land use change to and from other land uses. Credit generation from forest management for compliance under the ESD has been excluded because of the high level of uncertainty and the range of variability, as explained in section 1. Moreover, environmental integrity always needs to be kept in mind when considering options allowing the enhanced use of flexibility. Mitigation activities in LULUCF should result in additional, measurable and sustainable enhancement of carbon sinks. Accuracy should be enhanced through a continuous process, and assured through two minimum technical conditions. As a safeguard for compliance, LULUCF sector credit generation should only be permitted: (1)When a Member State's total LULUCF account produces enhanced mitigation, i.e. it has an overall balance with more potential credits than debits, and (2)In Member States where monitoring and reporting meet the technical conditions laid down by EU legislation (see Chapter 7.2) and the Paris Agreement . Source: own presentation Principles for these conditions may include: –Monitoring, reporting and accounting should provide transparent and full coverage of significant sinks and sources; removals may only be accounted for after a complete, comparable and consistent coverage of land categories. –The adoption of international accounting rules as applicable to EU Parties, in accordance with guidance adopted by the Conference of the Parties; –The parameters chosen to apply these accounting approaches, such as base years, business as usual projections, and the data needed to determine these parameters, are determined in accordance with IPCC guidance for higher level tiers and approaches (e.g. Tier 2 and above) as illustrated in Figure 7 ; –The adoption of applicable best practice solutions, to enhance accuracy and environmental integrity of accounts, developed under the LULUCF Decision and agreed between Member States in technical guidance. 4.3.Forest land: Future governance of the projected forest reference levels

As explained in Chapter 1.2.1, the international framework governing climate mitigation policies from 2021 to 2030 will not be the same as under the Kyoto Protocol. This will also apply for the treatment of emissions and removals from LULUCF in general and the criteria for the determination of projected forest reference levels in particular. The latter will be of critical importance for sound forest and biomass GHG accounting. Alternatives to the projected forest reference level approach have been considered – and applied – in the past. In the first commitment period, the reference level was set at zero; in other words, parties could account for the actual reported net emissions (or removals) in each year of the commitment period without comparing it with a base year (so called gross-net accounting). Nevertheless, this approach was subject to much criticism; during the preparation of the Durban COP Decision, there was general agreement on the need for improvement. To address this, an alternative approach was discussed where the annual level of net emissions (or removals) is compared to the historical reference (so-called net-net accounting). This was finally rejected in favour of the projected reference level, combined with a cap (Box3), representing a compromise solution between gross-net and net-net accounting. Based on these considerations and the feedback in the stakeholder consultation, there is a strong rationale for continuing this approach in the post-2020 period, while improving transparency and comparability across Member States' FRL. In view of determining forest management reference levels for the period between 2021 and 2030, two elements are relevant: –the criteria upon which projected forest reference levels would be based, and Box 3: Cap on the use of Forest for generating credits: Under the Kyoto Protocol rules a cap is used in LULUCF accounts to limit the use of potential credits from forest management by a Party. The role of the cap is to limit uncertainty associated with the projections which underpin forest management reference levels , and to underpin environmental integrity of the accounts. Forest Management removal units used to balance emissions from other LULUCF activities are only allowed up to a maximum of 3.5% of a Party's 1990 total emissions (without LULUCF) (see Annex 5). The actual impact of this cap on forest accounting depends on how far the reported forest (and Harvested Wood Product) sink would deviate from the projected forest reference level. If the forest reference level was close to the final reported value, the cap would only have marginal impacts on overall accounting results. But if the reported sink is much greater than the projected reference level, the cap has a strong effect of limiting credits and distorting incentives. However, modifying the cap values or adopting other approaches is difficult without first establishing the projected reference level; additional complications with any changes may outweigh potential short term benefits (see Annex 5). –the governance mode for the setting of forest reference levels. The criteria for the setting of projected forest management (and HWP) reference levels for the second commitment period of the Kyoto Protocol have already been the basis for determining today’s domestic legislation. In essence, and irrespective of the governance approach, the criteria for setting FRL would remain the same as under current rules (see Annex 5), and will address the following points regarding Member States' reference levels and the assumptions used for setting them: –consistency with the goal of achieving a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century as defined in the Paris Agreement Article 4.1; –reflect on how to treat: forest management practices before the start of the accounting period, assumptions on the future impact of policies and markets, and projected harvest rates with existing infrastructures, current technical capacity and economic viability; Clarifying the role of policy assumptions in the establishment of FRL and by adding the long-term goal defined in Paris, would have several benefits for forest land accounting: –it would help avoiding the generation of "business-as-usual" removal units from forest management, which, based on the early evidence from the second commitment period, is a likely result if loose assumptions on future policy and market impacts are factored in the FRL; –it would appropriately reflect – and balance – the biogenic emissions of the zero-rated energy feedstock in the full, economy wide accounts; –it would take national characteristics into account, including national policies preceding the cut-off date (31/12/2009) determined in current international rules, for sustainable forest management, and ensure the establishment of FRL that would nor create undue "business-as-usual" removal units nor undue debits in case of good forestry practices based on sustainability principles. In terms of possible sink and source scenarios, appropriately established FRLs would likely result in the accounted sink being in between the "strongest" and the "weakest" FMRL scenario described in Table 2. In a model case, it would generate close to zero removal units/debits in the absence of significant change in the forest harvest practices (unless such change is justified by the age-class structure and other national forest characteristics). The Kyoto Protocol governance for the setting and review of forest reference levels, however, will discontinue and therefore a new system has to be specified in the legal proposal. Most Member States, as well as other stakeholders, call for the review of the governance process and support the further standardisation of methodologies and enhanced consistency of implementation. The following governance options for determining forest reference levels post 2020 (Options G0 – G2) have therefore been reviewed and their impact will be assessed in Chapter 5: G0 - Status quo: An independent body shall check compliance of the forest reference levels submitted by Member States with existing UNFCCC/IPCC guidance (i.e. technical assessment). G1: The Commission, with the support from experts from Member States, shall check and review that forest reference levels 2021-2030 submitted by Member States are in line with EU guidance on the methodology for forest reference levels. G2: The Commission shall check and review that forest reference levels 2021-2030 submitted by Member States are in line with EU guidance on the methodology for forest reference levels.

4.4.Summary of options Table 5: Overview of options considered in this Impact Assessment Status quo Options Accounting Rules Base year for agricultural land B0: 1990 Kyoto base year B1: Applying a base period of 2005-2007 --- --- Reporting framework R0: continue two systems - UNFCCC and Kyoto R1: land-based UNFCCC reporting with 20yr transition for Afforested Land R2: land-based UNFCCC reporting with 30yr transition for Afforested Land --- Governance of forest reference levels G0: An independent body G1: The Commission, with support from MS G2: The Commission checks and reviews --- Link with ESD Flexibility F0: No flexibility F1: Low flexibility, 190Mt between 2021-2030 F2: Medium flexibility, 280Mt between 2021-2030 F3: High flexibility, 425Mt between 2021-2030 5.What are the impacts of the different policy options and who will be affected? 5.1.Introduction This chapter presents an analysis of the impacts related to the options s