EUROPEAN COMMISSION Brussels, 14.7.2021 SWD(2021) 611 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Regulation (EU) 2018/842 on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 contributing to climate action to meet commitments under the Paris Agreement {COM(2021) 555 final} - {SEC(2021) 555 final} - {SWD(2021) 553 final} - {SWD(2021) 612 final}



Table of Contents 1.Introduction: Political and legal context 1.1.Overall Policy context 1.2.The Effort Sharing Regulation within the overall Climate Policy architecture 1.3.Key aspects of the Effort Sharing Regulation 2.Problem definition 2.1.What are the problems and their drivers? 2.2.How will the problem evolve? 3.Why should the EU act? 3.1.Legal basis 3.2.Necessity (why EU action) and subsidiarity (why EU action instead of Member States) 4.Objectives: What is to be achieved? 4.1.General objectives 4.2.Specific objectives 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? 5.2.What policy scenarios are assessed? 5.3.Description of the policy options 5.3.1. Option 1: Keep current ESR sectoral scope in parallel to extending emissions trading

5.3.2. Option 2: Maintain in the ESR only the sectors not covered by emissions trading 5.2.3. Option 3: Phase out of the Effort Sharing Regulation and replacement by other policy instruments 5.4.Effort Sharing Regulation options discarded at an early stage 6.What are the impacts of the policy options? 6.1.Option package 1: Keep current ESR sectoral scope unchanged 6.1.1. Efficiency and environmental impacts of the 2030 targets in the ESR 6.1.2. National targets and distributional impacts in the ESR 6.1.3. Starting point and trajectory in the ESR and environmental integrity 6.1.4. Assessing the impact of the existing ETS and LULUCF flexibilities over the period 2021-2030 6.1.5. The role of existing flexibilities in the ESR (transfers, banking, borrowing) 6.1.6. Administrative impacts of the current compliance rules for option 1 6.2.Option 2: Reduced scope ESR in line with the extended ETS scope to building and road transport 6.2.1. Efficiency and environmental impacts of the 2030 point targets in a reduced scope ESR 6.2.2. National targets and distributional impacts in a reduced scope ESR 6.2.3. Starting point and trajectory in the ESR in a reduced scope 6.2.4. Assessing the impact of the existing ETS and LULUCF flexibilities over the period 2021-2030 in a reduced scope ESR 6.2.5. Administrative impacts of the current compliance rules for option 2 6.3.Option 3: Phase out of the Effort Sharing Regulation and replacement by other policy instruments 6.3.1. Environmental and cost-efficiency impacts 6.3.2. Administrative impacts of the current compliance rules for option 3

6.4.Other impacts 6.5.Coherence with related legislation and other policy initiatives 7.How do the options compare? 8.Preferred option 9.How will actual impacts be monitored and evaluated? 10.Annexes 10.1.Procedural information 10.1.1. Lead DG, Decide Planning/CWP references 10.1.2. Organisation and timing 10.1.3. Consultation of the RSB 10.1.4. Evidence, sources and quality 10.2.Stakeholder consultation 10.2.1. Feedback received on the ESR Inception Impact Assessment 10.2.2. Feedback received on the Open Public Consultation (OPC) 10.3.Who is affected and how? 10.4.Analytical methods Common analytical framework for the Impact Assessments of the revision of ESR, ETS, LULUCF, RED and EED 10.4.1. Introduction 10.4.2. Modelling tools for assessments of policies 10.4.3. Assumptions on technology, economics and energy prices

10.4.4. The existing 2030 framework: the EU Reference Scenario 2020 10.4.5. Scenarios for the “Fit for 55” policy analysis 10.4.6. Results per Member State 10.4.7. Specific analytical elements for this impact assessment 10.5.Distributional impacts 10.5.1. Overview potential gaps and surpluses for ESR review in options 1.1 and 1.2 10.5.2. Overview Member States with GDP per capita below or above the EU average(s) 10.6.Further information on related policies impacting notably energy system emissions in the ESR 10.6.1. Related policy initiatives on the EU-level 10.6.2. National measures in the building and transport sectors 10.6.3. Untapped potential for additional emissions reductions in EU level policy as per National Energy and Climate Plans 10.7.Starting point and trajectory of annual emission allocations – further analysis 10.8.Climate Target Plan policy conclusions 10.9.Glossary



Figures

Figure 1: Current climate policy architecture to achieve -40% GHG reductions in 2030 compared to 1990 Figure 2: Overview of relevant interactions identified between different EU legislative instruments in relation to Effort Sharing Figure 3: Overview of the sectors currently covered under Effort Sharing Regulation Figure 4: Member State greenhouse gas emission reductions in 2030 in relation to their 2005 levels determined in Effort Sharing Regulation Figure 5: Overview of the intervention logic of Effort Sharing Regulation review to define the scope and contribution of the Effort Sharing Regulation including drivers, problems and objectives. Figure 6: Option 1.1. national targets based on GDP/cap formula using 2017-2019 data under option 1.1 delivering -40% GHG reductions in ESR (in orange) as compared to current legislative ESR target (in blue) Figure 7: Option 1.2. National targets based on GDP/cap under option 1.2 delivering -35% GHG reductions (in grey) as compared to current legislative ESR target (in blue) Figure 8: Gap in 2030 between GDP per capita -based targets and cost-efficient EU emission reductions for high income Member States (as pp of 2005 emissions) to achieve overall -40% GHG reductions in the ESR Figure 9: Gap in 2030 between GDP per capita -based targets with a limited target correction and cost-efficient EU emission reductions for high income Member States (as a % of 2005 emissions) to achieve overall -40% GHG reductions in the ESR Figure 10: Gap (-) in 2030 between GDP per capita-based targets and cost-efficient EU emission reductions for low and middle income Member States (as pp of 2005 emissions) to achieve overall -40% GHG reductions in the ESR Figure 11 GHG emissions (CO2equivalent) per capita in 2005 for each Member State and the EU Figure 12 GHG emissions (CO2equivalent) per capita in 2030 for each Member State and the EU Figure 13: Emission profiles for ESR, sensitivity analysis Figure 14: Options A, B and C related to target trajectory updated ESR with increased ambition to achieve -40% GHG reductions (option 1.1) Figure 15: Option D related to target trajectory updated ESR with increased ambition to achieve -40% GHG reductions (option 1.1) Figure 16: Annual average gap or surplus over the period, high income Member States Figure 17: Annual average gap or surplus over the period, low income Member States Figure 18: Impact of reduced scope on gap between target (based on the GDP per capita formula only) and cost efficient projections for high income Member States. Figure 19: Impact of reduced scope on surplus (gap) between target and cost efficient projections for low income Member States Figure 20: Impact of ETS and LULUCF flexibilities on high income Member State gaps in case of a reduced scope ESR

Figure 21: Impact of ETS and LULUCF flexibilities on low income Member State surpluses and gaps in case of a reduced scope ESR Figure 22: Member States' share of GHG emissions per gas for option 3 Figure 23: Member States' GHG emissions per gas in option 3 Figure 24: EU Recovery and Resilience funds available per Member States in relation to GDP, 2021-2023 Figure 25: Distribution of respondents to the review of ESR open public consultation by type and country based on data related to EU-based respondents. Figure 26: Distribution of CO2 and other GHGs in the ESR emissions (2015) Figure 27: Distribution of 2015 non-CO2 GHG emissions per current ESR sector Figure 28: Evolution (2030 vs. 2015) of GHG emissions of sectors currently under ESR Figure 29: New vehicles per type of drivetrain Figure 30: Final energy consumption in road transport Figure 31: GHG emissions from buildings Figure 32: Final energy consumption in buildings Figure 33: GHG emissions from agriculture Figure 34: GHG emissions from other current ESR sectors Figure 35: Interlinkages between models Figure 36: Schematic representation of the PRIMES model Figure 37: Fuel mix evolution of the Reference Scenario 2020 Figure 38: Share of energy carriers in final energy consumption in the Reference Scenario 2020 Figure 39: Final energy demand by sector in the Reference Scenario 2020 Figure 40: Interactions between different policy tools





Tables Table 1: GHG reductions in ESR sectors 2030 compared to 2005 in option 1.1 Table 2: Comparison of current emission reduction targets in 2030 delivering -29% and targets based on GDP/cap formula using 2017-2019 data delivering -40% (option 1.1.) and delivering -35% (option 1.2.) Table 3: Grouping of high income Member States according to gap between cost efficient projections and GDP per capita (avg. 2017-2019) based targets achieving -40% GHG reductions in the ESR Table 4: Target correction for high income Member States under option 1.1 Table 5: Overview of potential target corrections and resulting targets under option 1 Table 6: Characteristic of alternative AEA trajectories A, B and C for option 1.1 Table 7: Characteristic of alternative AEA trajectory D for option 1.1 Table 8: Member States having access to the ETS flexibility under the current Effort Sharing Regulation Table 9: Potential sellers and buyers of allocations for option 1.1 and 1.2 Table 10: GHG reductions in a reduced scope ESR (excluding road transport and buildings) in 2030 compared to 2005 Table 11: Overview of emission reduction targets in 2030 for ESR with reduced scope, excluding buildings and road transportation under options 2.1 and 2.2. Table 12: Size and type of gas in a reduced scope ESR as of 2020 (option 3.1 - all energy combustion emission fall under ETS and all agriculture emissions under a new land instrument) Table 13: Weight and type of sector in a reduced scope ESR as of 2020 (option 3.1 - all energy combustion emission fall under ETS and all agriculture emissions under a new land instrument) Table 14: EU Just Transition funds available per Member States, 2021-2027, EUR billion expressed in 2018 prices. Table 15: Comparison overview with all possible options Table 16: Energy-related costs as a % of GDP for residential, services and transport (excluding carbon pricing related to the ETS extension) Table 17: Lowered emissions of air pollutants Table 18: Health and economic impacts of improved air quality

Table 19. Projected population and GDP growth per MS Table 20: International fuel prices assumptions Table 21: REF2020 summary energy and climate indicators. Table 22: Scenario assumptions description (scenarios produced with the PRIMES-GAINS-GLOBIOM modelling suite) Table 23: ETS prices by 2030 in the difference scenarios (€2015/tCO2) Table 24: Energy efficiency value and renewable energy value (averaged 2025-2035) Table 25: Carbon value applied to non-CO2 emissions in the GAINS model (€2015/tCO2) Table 26: Comparison of key scenario results Table 27: Member States ESR GDP target (avg 2017-2019) compared to the efficient emission reduction (MIX scenario) for options 1.1 and 1.2 [High Income Member States in grey, gap in bold] Table 28: Overview of Member States’ GDP data used for calculating high income Member States Table 29: Examples of Member State level policies in buildings and transport Table 30: Characteristics of alternative trajectories for option 1.2 Table 31: Alternative AEA trajectories and total emission allowances for option 2.1 Table 32: Key characteristics of emission allocations for option 2.2 Table 33: Key policy conclusions of the Climate Target Plan Table 34: Glossary



1.Introduction: Political and legal context 1.1.Overall Policy context The European Green Deal aims to transform the EU into a fairer and more prosperous society with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases by 2050 and where economic growth is decoupled from resource use. The climate neutrality objective has been endorsed by the European Council and Parliament and is laid down in a legally binding manner in the European Climate Law . At the same time, the transition must be just and inclusive.

The European Green Deal also aims to protect, conserve and enhance the EU's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. The necessity and value of the European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on our health and economic well-being. Unprecedented near term investments will be needed to reverse the negative impacts of the COVID-19 crisis on jobs, incomes and businesses. In this regard, the agreed Next Generation EU recovery instrument and its centerpiece, the Recovery and Resilience Facility, with a budget of EUR 672.5 billion, will strongly support the green and digital transitions, with at least 37% allocation to the first and 20% to the latter. With its Communication on stepping up Europe’s 2030 climate ambition (the 2030 Climate Target Plan) , the Commission proposes to raise the EU's ambition on reducing greenhouse gas emissions to at least 55% below 1990 levels by 2030 in a responsible way. This is a substantial increase compared to the existing target of at least 40%. It is in line with the Paris Agreement objective to keep the global temperature increase to well below 2°C and pursue efforts to keep it to 1.5°C. The December 2020 European Council (hereafter referred to as European Council) confirmed this ambition level and the European Climate Law ensures that it is legally binding. The European Council asked for delivering the target collectively by the EU in the most cost-effective manner possible, preserving EU’s competitiveness and taking account of Member States’ different starting points, specific national circumstances and emission reduction potential. It gave further guidance on key elements for a 2030 Climate and Energy Policy Framework . They invited the Commission to rapidly present all the remaining relevant proposals to this end so as to swiftly inaugurate the legislative process. To this end, the Commission has started the next steps towards implementing these targets and will review the relevant climate-related policy instruments. To achieve 55% GHG reductions economy wide, the sectors under the Effort Sharing Regulation will need to step up efforts. The analysis supporting the Climate Target Plan indicated that overall reductions would need to increase by around 10 percentage points. The Climate Target Plan pointed out the need to review the ESR, decide on its scope and increase its ambition. The European Council conclusions in May 2021 reaffirmed the December 2020 conclusions. 1.2.The Effort Sharing Regulation within the overall Climate Policy architecture -The EU Emission Trading System (ETS) covers large point sources in power and industry, as well as currently intra EU aviation, taken together representing approximately 40% of EU GHG emissions. The ETS will reduce GHG emissions in those sectors by 43% compared to 2005. -The Effort Sharing Regulation covers the other 60% GHG emissions, notably in sectors such as road transport, heating in buildings, agriculture and other non-CO2 emissions (e.g. waste, F-gases). Overall, these sectors need to reduce emissions by 30% compared to 2005, which is a lower ambition than the ETS, notably due to the large cost-efficient emission reduction potential in the power sector in the ETS. -Thirdly, the land use sector is presently required to meet the so-called “No-Debit” rule, which requires that the land use sink should not deteriorate compared to how the sink would evolve under current land use and forest management practices. Source: Commission services This impact assessment focusses on the implementation of the Climate Target Plan as regards the Regulation on binding annual greenhouse gas (GHG) reductions by Member States, the so-called Effort Sharing Regulation (ESR). The ESR primarily addresses Member States as institutional actors and thus in first instance affects national administrations. The Effort Sharing Regulation (ESR) combines national accountability for achieving the common climate objectives (environmental integrity) with flexibility for Member States to implement the appropriate measures taking into account national circumstances (subsidiarity). A range of European policies and measures play an important role to help Member States reduce emissions in the sectors covered by the ESR. The interaction between EU-level measures and Member States measures has been growing in importance and intensity. Examples are: ·The Renewable Energy Directive (RED) and the Energy Efficiency Directive (EED) drive the uptake of energy efficient and renewable technologies, helping reduce GHG emissions in all sectors. ·CO2 standards for new vehicles (cars, vans, trucks) reduce GHG emissions in the road transport sector as the existing vehicle stock is gradually replaced by cleaner vehicles. ·The Directive on Alternative Fuels Infrastructure ensures the development of EU wide infrastructure that is required to allow the transport sector to switch to electricity or other low carbon fuels. ·The building sector will also see emission reductions following the implementation of the requirements of the Energy Performance of Buildings Directive. ·Strategic plans under the Common Agriculture Policy allow Member States to focus agriculture funding on improving GHG efficiency of its agriculture.

·Waste legislation aims to reduce landfilling of bio-waste and associated methane emissions. ·F-gases are phased down by a set of EU regulations regulating their placing on the EU market, in conformity with the Montreal Protocol. The Revision of Effort Sharing Regulation presented in this impact assessment thus must be in coherence with the updates of other 2030 climate, energy and transport policies (see Figure 2 ). Policies being updated that interact with the ESR are notably the EU Emissions Trading System (ETS) Directive and the Land Use, Land Use Change and Forestry (LULUCF) Regulation. Policies being updated that contribute to reducing emissions in the ESR are CO2 Emissions Performance Standards for Cars and Vans, the Renewable Energy Directive, the Energy Efficiency Directive, the Energy Performance of Buildings Directive, the Energy Taxation Directive, the revision of the Directive on Deployment of Alternative Fuels Infrastructure and the new legislative initiatives to reduce methane emissions in the energy sector. Source: Commission services Further information on related policies and policy initiatives notably impacting the emissions from the energy system in the ESR is provided in annex 10.6. 1.3.Key aspects of the Effort Sharing Regulation The ESR currently covers all GHG emissions included in the EU’s target which are covered neither by the EU Emissions Trading System (ETS) nor by the Regulation on Land-Use, Land-Use Change and Forestry (LULUCF). It currently covers direct GHG emissions from transport (except aviation and non-domestic shipping), buildings, agriculture, industrial installations and gases not covered by the EU ETS and waste as well as non-combustion related emissions from energy and product use (see Figure 3 ). It includes both CO2 emissions as well as a significant share of non-CO2 emissions. Source: Commission services The current ESR aims at reducing covered greenhouse gas emissions by 30 % below 2005 levels by 2030. It sets “minimum contributions” in the form of binding national emission reduction targets for each Member State for the period from 2021 to 2030 to reduce GHG emissions in the sectors covered by the Regulation, which for 2030 vary between 0% and -40% compared to 2005. The distribution key is based on economic capacity, i.e. GDP per capita, with some limited adjustments to reflect cost-efficiency in a fair and balanced manner. It also sets binding national emission trajectories from 2021 to 2030, starting from the average of 2016 to 2018 emissions. Source: Commission services In order to provide for flexibility for Member States in implementing their commitments and as a means to enhance the overall cost-efficiency of reaching the EU-wide 2030 target, the ESR provides a range of flexibility instruments: ·Emission allocations can be banked and borrowed with certain limitations. ·Transfers of allocations between Member States are possible. This flexibility instrument can make a major contribution to achieve the overall target in a cost-efficient way: it allows Member States to be rewarded for overachievement, while the transfer of allocations facilitates compliance for Member States with a more ambitious target at a lower cost.

·The ESR contains limited flexibilities with the existing ETS and LULUCF sectors. Member States that have access to the ETS flexibility had to communicate the intended use of the allocated maximum amount, and can then use it under the ESR. Each Member State has been allocated a maximum amount of flexibility with LULUCF, which can only be used if a Member State overachieves its LULUCF “No-Debit” commitment and if it needs it for ESR compliance. There is a compliance check at five-year intervals, with non-financial penalties for non-compliance. This is a significant administrative simplification compared to the preceding Effort Sharing Decision, based on an annual compliance check. The Effort Sharing Regulation related planning, monitoring and reporting requirements, including the National Energy and Climate Plans, are set under the Regulation on the Governance of the Energy Union and Climate Action (Governance Regulation). Climate-related reporting obligations had already been streamlined under the preceding Monitoring Mechanism Regulation. The Governance Regulation provides a further step by integrating these with streamlined energy related reporting obligations, which were before set in different sectoral laws. Achievement of the targets under the ESR is therefore linked with adequate and effectively implemented National Climate and Energy Plans (NECPs), with a range of national policies and measures, many of them needing to be implemented at national level for reasons of subsidiarity. The ESR leaves it to Member States to decide through which measures they achieve their targets, although a number of EU policies contribute in all Member States to emission reductions. In the context of the Governance Regulation, all Member States have established NECPs, outlining their existing and planned policies and measures, including energy efficiency and renewable energy targets and measures. Under the Governance Regulation, Commission recommendations can guide Member States in the establishment of ambition and the implementation of the necessary policies and measures. Overall this approach is based on subsidiarity, and allows Member States to develop the measures that are best suited for their own national circumstances. The Climate Target Plan concluded that all key climate and energy policies need to be reviewed, increased in ambition and that this should be done in a coherent manner. It listed a number of policy options for the ESR in this context, with a focus on what the scope of the ESR could be in relation to notably a new Emission Trading System for sector presently included in the ESR. Therefore this impact assessment mainly focusses on: ·Scope of ESR and resulting EU wide target. ·Member State targets and trajectories keeping fairness and cost efficiency as key principles for the Effort Sharing Regulation. ·Use of existing flexibilities to enhance cost efficiency (trade, banking and borrowing, LULUCF and ETS flexibilities), respecting two principles: environmental integrity and preserving the balance of efforts among all sectors of the economy. 2.Problem definition 2.1. What are the problems and their drivers? Higher 2030 climate ambition is imperative to ensure the EU is set on a gradual and balanced trajectory to reach climate neutrality by 2050. As part of the Green Deal to increase the climate ambition from at least -40% to at least -55%, the Commission will present proposals to revise most of the EU measures presented in section 1.2, with a view to meeting the new target and to improve further the interactions between different measures, at whatever level these are adopted and implemented. The general problem is that with current national targets agreed for 2030 (a EU-27 reduction of 29% compared to 2005) and existing and planned policies, GHG emissions in ESR sectors are not expected to sufficiently decrease by 2030 to achieve the contribution of these sectors to the new overall EU target of at least 55%. The Climate Target Plan indicated the need to review the ESR, decide on its scope and increase ambition with a view of stepping up efforts by the sectors under the Effort Sharing Regulation. The Climate Target Plan and its Impact Assessment indicated that as part of the overall step up from at least -40% to at least -55% GHG reductions for all sectors, the overall reductions in the Effort Sharing sectors would need to increase approximately by 10 percentage points. This needs to be further considered within an overall coherent revision of the regulatory framework that ensures environmental integrity, including the revision of the ambition undertaken in the existing Emissions Trading System and the revision of the Land Use, Land Use Change and Forestry Regulation. This Impact Assessment assesses also options that set targets at lower ambition in the ESR and assesses if in combination with the achievement of other policies, this would still allow to reach a combined effect of at least 55% GHG emissions economy wide by 2030. The Climate Target Plan concluded that all key climate and energy policies need to be reviewed, increased in ambition and that this should be done in a coherent manner. To ensure this, all impact assessments build on the same set of coherent modelling scenarios. The modelling is based on an updated baseline, i.e. the Reference scenario that incorporates existing policies as represented in the National Energy and Climate Plans. In the EU Reference scenario (see section 5.1), reflecting current trends and the foreseen implementation of NECP’s, emissions covered by the ESR are projected to decrease by around 32% in 2030, thereby overachieving the current ESR target, while the Impact assessment of the Climate Target Plan projects a substantially higher contribution in those sectors of around 39%-40% to be consistent with the overall EU target of at least 55%. Scope of the ESR So far, the ETS, the ESR and the LULUCF Regulation together have covered the GHG emissions of different parts of the economy, as shown in Figure 1 , each of them defining the contribution of the covered sectors to the overall target. Specific questions arise from the possible extension of carbon pricing, an important tool to combat greenhouse gas emissions, to new sectors. The possible extension of the ETS warrants the consideration of the scope of the Effort Sharing Regulation itself, taking into account the effectiveness, cost-efficiency and fairness of the instrument and the climate policy architecture as a whole. Similarly a change in scope of the LULUCF Regulation towards a Land Use instrument could also impact the ESR scope. Concretely, in case emission trading, and/or a Land Use instrument, is set up for certain sectors covered by the current ESR, different options for the scope of the ESR need to be considered, notably whether or not a sector is included both in the ESR and in one of the other instruments. The consequences of these options need to be compared in terms of the overall effectiveness, fairness and cost-efficiency of each option for the policy architecture.

For instance the potential application of emissions trading to sectors such as buildings and road transport would cover around half of the emissions of today’s Effort Sharing Regulation. As with the current ETS, such a system would integrate the price of CO2 in economic and financial decisions and would be an important tool to incentivise cost effective action by business and consumers in these sectors across all Member States. At the same time, a carbon price on its own would not deliver the required transformation in the sectors concerned in an efficient manner. The Climate Target Plan concluded that there is a clear need for complementary and targeted policies. These can address market failures and split incentives, accelerate technological change and develop the required infrastructure in a coordinated way (e.g. for building renovation, electrification and hydrogen technology for industry). Distribution of targets For each of the options for a different scope of a revised ESR, a further question concerns how the overall EU level effort in the ESR sectors should be distributed among Member States. ESR target setting needs to be considered within an overall coherent revision of the regulatory framework that ensures environmental integrity, including the revision of the ambition undertaken in the existing Emissions Trading System and the revision of the Land Use, Land Use Change and Forestry Regulation. Fairness and cost efficiency remain key principles for the Effort Sharing Regulation. This includes a target setting approach that takes into account differences in capacity to act while considering adjustments to take into account specific national circumstances. In this respect, European Council conclusions of December 2020 provided clear guidance and those of May 2020 reaffirmed them. The current ESR addressed the differences in economic capacity by differentiating national targets according to relative differences in GDP per capita. However, setting targets based solely on GDP per capita may result in large differences in the costs per ton reduced emissions between Member States if the reductions have to be achieved domestically, and might induce very costly efforts for those higher income Member States with more limited remaining mitigation potentials. For this reason, in the current ESR, the targets for Member States with a GDP per capita above the EU average have been relatively adjusted to reflect cost-efficiency in a fair and balanced manner. This issue needs to be reassessed in the context of the higher ambition, and in the context of a potentially revised scope of the ESR. Flexibility instruments to enhance cost-efficiency Flexibility between Member States to reward overachievement and allow for cost efficient attainment of the collective target will also remain important with increased ambition. Limited and appropriate flexibilities will need to respect environmental integrity and preserve the balance of efforts among all sectors of the economy, as outlined in the 2030 Climate Target Plan. The flexibility requirements that are currently foreseen in the ESR contribute to achieving overall cost-efficiency in reaching the EU’s GHG emission reduction target, while respecting environmental integrity. The access to and use of flexibilities will need to be reassessed taking into account the different options for the scope of a revised ESR. The ESR provides for temporal flexibility (within certain boundaries to keep environmental integrity) around the target trajectory through banking and borrowing. An important but so far not frequently used element of the current Effort Sharing legislation, is the possibility of AEA (annual emission allocations) transfers across Member States, whereby a Member State overachieving its target can transfer these AEA’s to a country that is not meeting its target domestically (geographical flexibility). Member States have currently also the possibility to transfer a limited amount of credit generated under the LULUCF legislation for compliance in the ESR. This so called LULUCF flexibility can only be used to cover for own deficits and cannot be transferred to other Member States. However this flexibility is impacted by the agreement under the Climate Law that the contribution of net removals to the at least -55% net GHG reduction target should be limited to 225 MtCO2-eq. While this provision in the Climate Law is without prejudice to the revision of Union legislation, the impact of any continued use of the LULUCF flexibility within the ESR on the likelihood or not to meet this requirement under the Climate Law will also be assessed in this impact assessment. Finally, the limited flexibility from the existing ETS towards the ESR, for Members States with targets above the EU average target and above their own cost-efficient reduction potential, needs to be reassessed in the context of the higher ambition and in the context of a potentially revised scope of the ESR. Figure 5 sets out the intervention logic. It summarises the described problems specific to the revision of the Effort Sharing Regulation, the relevant problem drivers, and outlines possible approaches to address them, setting them in relation with the objectives to pursue and the available policy options. The latter two elements are described in section 4 and 5. Figure 5: Overview of the intervention logic of Effort Sharing Regulation review to define the scope and contribution of the Effort Sharing Regulation including drivers, problems and objectives. 2.2. How will the problem evolve? The need to revisit the scope of the Effort Sharing Regulation and/or the ambition level of its 2030 target and the distribution of the effort among Member States is a consequence of the proposal by the Commission endorsed by the European Council and confirmed by the co-legislators in the Climate Law, to step up the ambition of the climate target 2030 to at least -55 %. The existing framework of the ESR is projected to deliver by 2030 an overall reduction of greenhouse gases in the effort sharing sectors of 32 % compared to 2005. Leaving both the scope and ambition level of the Effort Sharing Regulation unchanged would put the entire additional burden of faster decarbonisation onto the Emissions Trading System and LULUCF sectors, as well as on the strengthening of the other instruments relevant for these sectors, and the Energy Efficiency Directive, the Renewable Energy Directive and the Energy Performance Buildings Directive in particular. This could potentially have high economic costs, especially in the sectors included in the ETS. It would also leave untapped the potential of the ESR to hold national governments accountable for decarbonisation and to allow for country specific policy approaches.

3.Why should the EU act? 3.1.Legal basis The legal basis of this initiative is to be found in the Treaty on the Functioning of the European Union (TFEU). According to Article 11 of TFEU, environmental protection requirements must be integrated into the Union's policies and activities, in particular with a view to promoting sustainable development. Articles 191, 192 and 193 of TFEU further clarify that Union policy preserves, protects, and improves the quality of the environment; protects human health; and promotes measures at the international level to deal with regional or worldwide environmental problems. Article 191 mentions climate change as one such problem in particular. Article 192(1) of TFEU empowers the European Parliament and the Council to decide what action is to be taken by the Union to combat climate change, as an objective of the Union policy per article 191(1) TFEU. 3.2.Necessity (why EU action) and subsidiarity (why EU action instead of Member States) Climate change is a trans-boundary problem where coordinated EU action can supplement and reinforce national and local action effectively. Thus, individual action is unlikely to lead to optimal outcomes and action at EU level is therefore indispensable. The EU has worked since the UNFCCC was established to develop joint solutions and drive forward a European approach to fight climate change. Coordinated EU action can effectively supplement and reinforce national and local action. Coordination at the European level enhances climate action and EU action is thus justified on grounds of subsidiarity in line with Article 191 of the Treaty on the Functioning of the European Union. The reduction of greenhouse gas emissions across the European Union benefits from coordination at the EU level given the EU’s single market. An increase in the 2030 target for EU GHG reductions will impact all sectors included under the current Effort Sharing Regulation. Action at the EU level is therefore indispensable and coordinated EU policies have a much bigger chance of leading to a true transformation towards a climate neutral economy by 2050, while avoiding fragmentation of the internal market. Coordinated action at the EU level furthermore facilitates the full consideration of the different capabilities to act among Member States. The EU single market moreover acts as a strong driver for cost-efficient change. The impacts of such ambition increase and related policies on growth and jobs creation, fairness and cost-effectiveness are examples of elements that can be better considered at the EU level. Coordinated EU policies have a much bigger chance of leading to a true transformation, particularly in light of the global dimension of the challenge. This approach must take into account different mitigation potential between Member States, as well as the EU single market as a strong driver for cost-efficient change and upward convergence. Coordinated EU action is therefore needed to achieve the EU-wide 55% net GHG reductions for 2030, in particular to ensure a cost-efficient and fair distribution of efforts across the EU and its Member States. Also Norway and Iceland have committed to the same GHG ambition levels as the EU and in 2019 joined the EU's effort sharing . Nevertheless, the role of Member State action is crucial to achieve the increased overall EU ambition, in particular in areas where the competence for specific policies and measures lies mainly with Member States for reasons of subsidiarity. The responsibility for continued progress up to 2030 will have to be shared, as is already the case in current climate and energy package, which lays down EU and Member State obligations until 2030, including an EU governance system with their National Energy and Climate Plans . The legally binding national targets under the Effort Sharing Regulation leave it to Member States to decide how to achieve them allowing for certain flexibilities between Member States and other legislative instruments, such as LULUCF and ETS, fully respecting the principle of subsidiarity. 4.Objectives: What is to be achieved? 4.1. General objectives The general objectives of this initiative is to reach at least 55% net greenhouse gas emission reductions by 2030 compared to 1990, in line with the 2030 Climate Target Plan, with a view to achieving climate neutrality (i.e. net zero GHG emissions) by 2050 in a gradual and balanced way. This articulation of targets and objectives requires a coherent strengthening of the policy architecture, including the Effort Sharing Regulation. 4.2. Specific objectives There are three specific objectives for the review of the Effort Sharing Regulation: The first specific objective is to define the scope of the ESR so that it remains coherent with other related and proposed legislation of the Fit for 55 package, as well with the overall architecture incentivising a cost-efficient contribution of all sectors to meet the overall objective. This is of particular importance in view of the interactions of ESR scope and ambition with the possible ETS extension and of considerations on a joint instrument for agricultural and LULUCF emissions (Land Use instrument), taking into account also linkages with other instruments in the 2030 Climate and Energy package (the Energy Efficiency Directive, the Renewable Energy Directive, the Energy Taxation Directive and the Regulation on the Governance of the Energy Union and Climate Action – amongst others). The second specific objective is that additional efforts should be shared in a consistent, fair and equitable manner between Member States. Fairness is a core principle of the effort sharing legislation. A key element in this kind of legislation so far has been to correlate the ambition level of national targets with national economic capacity, and there is clear guidance from the European Council that this correlation ought to be maintained. The ambition should also be consistent with the national energy and climate plans for 2030 as starting point for additional efforts, reflecting national circumstances as called for by the European Council. The third specific objective is to promote cost-efficient solutions for further reducing emissions in effort sharing sectors. In the current ESR this is done by some target adjustments and the appropriate design of targeted flexibilities. This implies: ·Ensuring that the set targets are achievable with reasonable efforts, taking into account differences in cost-efficient mitigation potentials between Member States,

·Providing sufficient flexibility over time and across Member States in the attainment of ESR targets, ·Providing appropriate flexibility between ETS, LULUCF and ESR sectors. 5.What are the available policy options? 5.1. What is the baseline from which options are assessed? The baseline for this initiative is the continuation of the current Effort Sharing Regulation (EU) 2018/842 (ESR) as adopted in 2018, without any changes. In modelling terms, this is reflected in the EU Reference Scenario 2020. The Reference scenario assumes the full implementation of existing climate, energy, transport and energy policies. For climate it includes the revised ETS Directive , the Effort Sharing Regulation, and the LULUCF Regulation , and it assumes the achievement of the target of at least 40% GHG reductions by 2030. For energy it includes the Energy Efficiency Directive and the Renewable Energy Directive . For a detailed description of the Reference scenario see Annex 10.4. In this respect, it is important to note that the Reference scenario is based on the implementation of existing EU measures as well as the National Energy and Climate Plans (“NECPs”) foreseen by the Regulation on the Governance of the Energy Union and Climate Action. The Reference scenario focusses on a bottom up representation of these national contributions to achieve the national renewable energy and energy efficiency policies and targets, as these are set out in the NECPs as well as existing policies related to non-CO2 emissions. While the Reference scenario projects a limited overachievement of the EU 32% target for renewable energy, it also projects an underachievement of around 3 percentage points for the 32.5% energy efficiency target. At EU level, it projects for the ESR, an overall reduction of emissions of 32% by 2030 as compared to 2005. This is in line with the aggregation of the Member States’ NECPs which estimates the EU wide aggregate reduction of emissions for ESR sectors at -32%. Thereby full implementation of current policies see a collectively overachievement of the EU-27 wide target of -29% as outlined in the ESR. Nevertheless, it must be noted that while the projections in the Reference scenario achieve broadly the national renewable energy and energy efficiency ambition of the NECPs, they do not always match fully the GHG reductions at Member States’ level referred to in the NECPs. 5.2.What policy scenarios are assessed? This impact assessment uses a number of policy scenarios that achieve net 55% GHG emission reductions economy wide by 2030 compared to 1990. They were developed to ensure coherence across the different impact assessments of the “Fit for 55 Package”. For more information regarding the policy scenarios, see annex 10.4. These core policy scenarios (MIX, MIX CP, and REG) build further upon the logic of the MIX and REG scenarios as included in the impact assessment supporting the 2030 Climate Target Plan, but are based on the updated Reference scenario as baseline. The central policy scenario used in this impact assessment is the MIX scenario, which assumes an extended emissions trading system in buildings and road transport, combined with additional, medium to high ambition, renewable energy and energy efficiency policies. In the MIX scenario the emission trading system for new sectors is assumed to be separate from the existing ETS, but its parameters are supposed to be set at a level of ambition that would lead to carbon prices similar to those projected for the existing ETS. The MIX CP scenario also assumes that a separate ETS is implemented for buildings and road transport. In the MIX-CP scenario energy policies are less ambitious resulting in higher carbon prices in the new ETS sectors than the existing ETS. The REG scenario instead assumes no extension of emission trading to new sectors, but delivers increased ambition in the non-ETS sectors by other regulatory interventions and incentives, notably related to very ambitious energy efficiency and renewable energy policies. Finally a scenario, referred to as ‘MIX-NECP-plus’ is developed. Whereas the Reference scenario mimics national energy efficiency and renewable energy targets, it sometimes overshoots or undershoots emission reductions in the ESR compared to individual Member States estimates in the NECP. For those Member States where the Reference does not project the achievement of the NECPs ambition in the ESR, the MIX-NECP-plus scenario assumes the achievement of additional reductions compared to the MIX scenario, equal to half of the gap between the Reference and the NECPs. Conversely, for those Member States where the Reference overshoots the NECPs estimates, the MIX-NECP-plus scenario assumes less reductions compared to the MIX scenario equal to half of this gap. This is an alternative manner to recognise better national assumed starting points in the ESR with respect to emission reductions, while still recognising the reduction potential seen in the modelling based on the energy mix goals of the NECPs. 5.3.Description of the policy options As outlined in the Climate Target Plan, the potential extension of the scope of the ETS to sectors that are currently covered by the ESR, and the potential set-up of a Land Use instrument, warrants an analysis whether the scope of the ESR needs to be changed. This can have a profound impact on the role of the ESR in the overall climate policy architecture. The main options of this impact assessment therefore relate to potential changes to the scope of the ESR. However, the assessment also allows to draw conclusions on how the ESR can be updated in case of no extension of ETS scope, with the results of the REG scenario representing EU wide cost efficient projections without an extension of the ETS to new sectors. In addition, the main features of the ESR, in terms of the distribution of targets (based on fairness), and in terms of flexibilities (based on cost-efficiency) vis-à-vis the ETS and LULUCF sectors and across Member States, require the definition of different sub-options, within the different main options for the scope. 5.3.1.Option 1: Keep current ESR sectoral scope in parallel to extending emissions trading In this option, the scope of the Effort Sharing Regulation is kept unchanged. Impacts of increasing the target in the ESR are assessed through a high and a low ambition level increase. Furthermore, this option is assessed in terms of what the interactions can be with an expanded Emissions Trading System. This means that some sectors would be covered by both instruments.

The sectors which lend themselves to the extension of the Emissions Trading System most straightforwardly, not least for reasons of the volume of the associated greenhouse gas emissions, are road transport and buildings. The introduction of EU-wide emissions trading for these sectors is being analysed in the impact assessment on the amendment of the Emissions Trading System. Issues to analyse are the distribution of effort across Member States, balancing fairness and solidarity with cost-efficiency, taking into account national circumstances as well as the environmental integrity of the instrument. Flexibility mechanisms are further instruments to attain this balance. Lastly, the implications of the two policy variants on the ESR targets on the Governance Regulation, and Member States’ NECPs and related reporting and monitoring, also warrant consideration. Option 1.1: Parallel coverage ETS/ESR, strong increase in ESR ambition A strong increase in overall ESR target is analysed under this option. This corresponds to the cost-efficient contribution of the relevant sectors – the current ESR sectors within an unchanged scope – to the 55% overall net GHG emissions reduction target. This option implies a reduction of emissions in these sectors by 39% to 40% relative to 2005, which is an increase of 10 to 11 percentage points relative to the baseline. For the distribution of the increased ambition in the ESR the following sub-options are considered: -Target option 1.1.1: baseline, where the distribution of targets is purely based on an update of the GDP/capita data methodology used under fairness target setting (see 5.1). -Target option 1.1.2: based on the same GDP/capita data methodology but with additional adjustments to reflect cost-efficiency concerns The appropriateness of the current flexibility mechanisms is particularly relevant. For the EU-27, the current energy and climate framework allows for a limited ESR-ETS flexibility of up to 100 million tonnes, and up to 262 million tonnes are available for ESR-LULUCF flexibility for Member States who overachieve their LULUCF commitment. As regards the LULUCF flexibility, this will need to be assessed also in the light of the requirements foreseen under the Climate Law. For both target options it will be assessed what the impact would be of continuing or discontinuing the current ETS and LULUCF flexibility. In the case of continuing them, the assessment considers what could be changed, also taking into account considerations following the Climate Law. Option 1.2: Parallel coverage ETS/ESR, limited increase in ESR ambition and in flexibilities The introduction of a new expanded ETS has raised the question if this should lead to a reduced ambition update in the ESR. This option considers the impact of setting a target equivalent to emission reductions of around 35% relative to 2005 in the effort sharing sectors. This would set the target in the ESR at a level lower than what the projections see fit as contribution by the sectors to the overall economy wide GHG target. The assessment will focus notably on how the ESR would interact with an expanded EU ETS that has a target set at a level in-line with cost efficient emission reduction projections, given the significant synergies between the two systems. 5.3.2.Option 2: Maintain in the ESR only the sectors not covered by emissions trading A second option is a scope reduction of the Effort Sharing Regulation mirroring the extension of the EU Emissions Trading System to road transport and buildings, keeping these two instruments separate. In this context it will be assessed what the impact would be of keeping the ESR targets at current level, but applied to this reduced scope, or to increase them in line with cost-efficient projections. For both variants, in view of differences in the role of the sectors shifted to the ETS, the distribution of effort across Member States needs to be revisited, with particular attention to differences between fairness and cost-efficiency and the role and impact of existing LULUCF and ETS flexibility.

Option 2.1: ESR reduced scope without buildings and transport, targets increased to cost-efficient ESR ambition level The first variant studies the cost-efficient ambition level for the reduced-scope effort sharing sectors for the overall 2030 target of -55 % relative to 1990. This is projected to be around -35 % relative to 2005. Option 2.2: ESR reduced scope without buildings and transport, current ESR targets maintained The second variant is to keep the current national ESR targets unchanged. In the reduced ESR scope the application of national targets reduces the scale of required reductions to -27 % relative to 2005 for the EU-27. The assessment will also look in a more limited manner at what would happen if the scope of the ESR is further reduced with all fossil fuel combustion emissions being removed from the ESR scope (and thus assuming that all these sectors would be covered in an expanded ETS). In this case the ESR would be left to cover agricultural and energy-related non-CO2 emissions, some industrial process emissions – not related to fuel combustions –, F-gases and waste and wastewater related methane emissions, covering to date about one third of the present effort sharing sector emissions. Some instruments put strong constraints on some of these emissions to date (solid waste and F-gases) while for other emissions (energy, agriculture and waste water) there are no sector specific policies that put effective caps on their non-CO2 emissions. 5.2.3. Option 3: Phase out of the Effort Sharing Regulation and replacement by other policy instruments This option foresees a phase-out of the ESR following on the one hand an extension of the ETS to all fossil fuel combustion emissions and, on the other hand, covering agriculture and the LULUCF sector with a single climate policy instrument with its own objectives and rules. A repeal or phase-out of the Effort Sharing Regulation would necessitate appropriate regulation for the remaining limited greenhouse gas emissions not covered by either the extended ETS or the new land instrument. This applies in particular to emissions from waste water treatment installations, and methane emissions from fossil fuel based energy installations. 5.4.Effort Sharing Regulation options discarded at an early stage The following options have been discarded at an early stage: ·ESR ambition levels which go beyond cost-efficient projected contributions given that this would not facilitate a cost-efficient sharing of efforts between Member States and between sectors. It is to be noted that Member States have the option to aim for more ambition beyond the binding national targets as enshrined in the ESR. The policy scenarios as used for this impact assessment do typically show for a number of Member States overachievement of their target if policies are implemented cost efficiently across the EU. ·An ESR scope that is reduced by more than the sectors that are covered by an ETS extension as envisaged in the climate target plan, i.e. where the ESR scope would be reduced to cover only non-CO2 emissions other than agriculture. This is seen as a scope not viable for a full ESR system, and the option assessed (see option 3) is rather to phase-out the ESR in this case. ·In case of the policy option to include maritime transport in the EU ETS, which includes also part of the domestic navigation emissions, the option to remove domestic navigation emissions from the ESR scope was discarded at an early stage. In its current form, the Effort Sharing Regulation covers emissions from domestic navigation. This includes emissions from fuels used by vessels that depart and arrive in the same country . In 2018, domestic navigation emissions represented around 16.6 MtCO2eq, i.e. around 11% of all international and domestic navigation emissions as reported in the EU GHG inventory. The possible extension of emissions trading to at least intra-EU maritime transport, as called in the Climate Target Plan communication, could have some implications on the scope of the ESR. Different options could be envisaged. If, on one hand, the scope of the ESR were to be maintained, it would create an overlap between the domestic navigation emissions covered by the EU ETS and the ESR. It would provide an opportunity for Member States to continue taking subsidiary action to reduce emissions from domestic shipping. In addition, the overlap would only be partial as a substantial part of these domestic navigation emissions might not actually fall under the emissions trading system, if this one is based on the EU maritime transport MRV regulation that neither cover inland shipping, nor emissions from ships below 5 000 gross tonnage such as small ferries, motor boats or workboats, nor ship movements and activities not serving the purpose of transporting cargo or passengers for commercial purposes, such as dredging, ice-breaking, pipe laying or offshore installation activities. According to the EU maritime transport Regulation, the ships below 5 000 gross tonnage are estimated to represent 45% of all ships calling into EU ports and around 10 % of all maritime transport related emissions. A large share of these ships are assumed to be involved in domestic navigation. Alternatively, another option would be to reduce the scope of the ESR by only deducting the domestic emissions that are covered by the ETS. Such an option would be difficult to implement in practice as the EU maritime transport MRV regulation considers domestic emissions as intra-EEA emissions and because it does not allow disaggregating navigation emissions per EEA countries. It is therefore assumed that emissions from domestic navigation would continue being covered under the ESR. 6.What are the impacts of the policy options? 6.1. Option package 1: Keep current ESR sectoral scope unchanged

Option 1 is the option where the ESR sectoral scope is kept unchanged and where emission trading is potentially introduced in new sectors, notably the building and road transport sectors, at the same time. Two options are assessed. Under option 1.1 where the collective target at the EU level is increased in-line with cost efficient projections resulting in an increase from around 29% currently to 40% emissions reductions by 2030 compared to 2005. A second intermediate option, 1.2, sees an intermediate target increase of 35%. The majority of stakeholders’ views in the public consultation wanted to maintain the current scope of the ESR. NGO’s in particular did not see a new ETS as a policy tool that should replace the ESR or result in a reduced scope for the ESR. This was also the main message stemming from the social media campaign launched to reply to the ESR open public consultation, to which 45,500 EU citizens contributed. A number of Member States rather indicated that they wanted to see how an extended ETS would work before deciding to reduce the scope of the ESR. Business replies were more diverse. A significant share of stakeholders representing the energy sector supported that the ESR scope could be reduced if an ETS were expanded in the future. A majority of stakeholders was in favour of continuing to include agricultural non-CO2 emissions under the ESR. No stakeholders, nor Member States asked to expand the ESR to existing ETS sectors (see section 10.2.2). As regards ambition, 94% of stakeholders (229) agreed with increasing the ESR ambition level in line with Member States stepping-up their efforts and pursuing more ambitious targets. This is the case because stakeholders such as citizens, NGOs, public authorities and private actors indicated that keeping a stable framework and increasing targets would keep national governments accountable for the climate actions and also in line with the Climate Target Plan. A very limited number of stakeholders from the energy sector (4) did not agree to Member States’ increased ambition. They stated that ESR would not need to reflect an increase ambition but rather ETS as a market price driver would be the driver for bringing down emissions in relevant sectors (including transferring those of building and transport from ETS to ESR). 6.1.1.Efficiency and environmental impacts of the 2030 targets in the ESR In option 1.1, the ESR target would be set up at 40% reduction of emissions by 2030 compared to 2005. This is an increase relative to the baseline of 11 percentage points. This is fully in line with cost efficient projections across different scenarios. GHG reductions in ESR sectors in 2030 compared to 2005 (PRIMES base year data for 2005) REG MIX MIX CP EU -40.6% -39.9% -39.0% Source: Commission Services If a separate ETS for road transport and buildings is implemented, it would cover a bit more than 50% of total ESR emissions and contribute around 50% of the additional emission reductions required in the coming decade in the ESR sectors. As such it would provide additional means to achieve environmental integrity of the overall ESR target. If the extension of emission trading would include all fossil fuel CO2 emissions, the scope would cover around 2/3rd of all ESR emission in the EU, with a similar share of cost-efficient ESR emission reductions projected over the coming decade. Clearly, the larger the scope of an ETS with a cap set at the level of cost-efficient reduction projections economy-wide, the more the ETS would contribute in achieving the ESR target. Conversely, the achievement of the ESR cannot be assumed to be only driven by the ETS. Firstly, it does not cover all emissions in the ESR. Secondly, the ESR-driven incentive to undertake action at government level should not be limited to the sectors not covered by the new ETS. In fact, for the sectors covered by a separate ETS, there is no certainty for all Member States that the private sector would deliver an emission profile in these sectors that meets the fairness-based differentiated targets under the ESR. There will thus be a need for those Member States to take national action also in sectors to be covered by the new ETS, or to acquire annual emission allocations (AEAs). This is an important feature for sectors like buildings and road transport, where alongside efficient pricing incentives, other policies are also important to achieve highly ambitious greenhouse gas emission reductions. Examples are providing the necessary infrastructure, addressing the lack of alternatives (e.g. the development of zero emission cars) and the correction of split incentives. Such policies in turn will reduce the impact of carbon pricing on individual consumers, providing an incentive to all Member States to provide a conducive regulatory framework. In option 1.2, a lower ambition increase would consider emission reductions of 35% relative to 2005 in the effort sharing sectors. This option clearly has risks related to environmental integrity. On the one hand one still could expect a separate ETS to drive emission reductions in a significant part of the ESR. On the other hand, even in this case, still around half of the ESR emissions need to be reduced by other regulatory actions. Assuming the new ETS sectors meet their cap, the ESR as a whole may not achieve their required reduction potential (-40%), if the other ESR sectors not included in the new ETS do not see additional reductions. If these other sectors were to simply meet their Reference projections, overall the ESR would achieve -36% emission reductions, which would be compliant with the -35% ESR target but clearly not in line with the required reduction of -40%. If the ETS scope extension is increased to all fossil fuels, and if these achieve cost efficient reduction projections, and other ESR emissions are kept as projected in the Reference scenario, then the ESR overall would achieve -37% emission reductions, which would be compliant with the -35% ESR target but clearly not in line with the required reduction of -40%. Indeed, missing the ESR target by 2 to 3 percentage points is equivalent to missing the EU wide target of net -55% compared to 1990 by around 1 to 1.5 percentage points. With all fossil fuels covered by an ETS, most remaining emissions in the ESR would be non-CO2 emissions, representing around 1/3 of the whole ESR currently. Achieving the ESR contribution to the overall -55% target in option 1.2 would thus require significant policy initiatives that, next to existing policies in waste and F-gas emissions, would also limit agriculture non-CO2 and methane leakage in the energy system. Strengthened EU policies related to methane leakage from the energy system as well a revision of the F-gas legislation that may contribute to closing any potential gap in this situation are in fact under preparation. Conversely, in the largest remaining non-ETS sector, that is, agriculture, achievability of further reductions will depend strongly on the implementation of ambitious CAP strategic plans by Member States. Member States action in this regard clearly would be further encouraged by setting high ambition goals in the ESR in line with option 1.1 rather than option 1.2. It could be considered to put stopgaps in place in other regulatory instruments that would ensure overall achievement of the net 55% greenhouse gas reduction target. Increasing targets beyond cost-efficient reductions in the existing ETS and the new ETS could increase environmental integrity. This would however imply a risk of higher corresponding economic impacts and an uneven distribution of effort between “ETS covered” and “not ETS covered” ESR sectors.

Finally, by limiting the assessment in this section to the year 2030 only, it does not take into account the potential accumulation of surpluses early in the period resulting from emissions that are lower than the annual emission allocation in early years. These surpluses can then be used to offset deficits in later years when emissions may be higher than the annual emission allocation. The accumulation of surpluses early in the period could thus reduce also later in the period the incentives to act. This clearly results in bigger environmental risks over time in option 1.2 than option 1.1. This will be assessed in more detail in section 6.1.3. Conclusion: From a perspective of efficiency and environmental integrity, option 1.1 clearly gives the strongest incentive to Member States to adopt additional policies to achieve their national target and can facilitate a cost efficient combination of EU and national measures. In this context, it is important to note that many measures for ESR sectors (buildings, road transport, waste, agriculture) are taken at national level for reasons of subsidiarity, and that a significant part of the ESR would not be covered anyway by a new ETS for building and road transport. Option 1.1 is therefore characterised by a combination of carbon pricing, EU measures and national measures, which enhances the ability to deliver targets, and therefore enhances environmental integrity. From an economic perspective, this combination of measures can be important to enhance cost-efficiency of the overall policy because (1) some cost-efficient solutions can only be taken at national or subnational level and (2) such policies can help to unlock the full potential of cost-efficient measures taken at EU level, including the carbon pricing incentive from an extended emission trading to building and road transport. Option 1.2 does not have the same environmental integrity, and clearly risks missing the required reductions in the ESR sectors. A larger scope of a new ETS to road transport and building sectors, and a higher target in this new ETS, would lower this risk. Similarly, setting higher ambition in the existing ETS or the LULUCF sector, beyond what is needed under the cost-efficient projections, may compensate for this risk, but may create new issues in terms of environmental integrity or cost in those sectors. 6.1.2.National targets and distributional impacts in the ESR The national targets under the Effort Sharing Regulation for 2030 adding up for EU-27 to -29% compared to 2005 emissions are based on differentiation of efforts depending on relative GDP per capita for 2013 with GDP measured at market prices within a range from 0% to -40% compared to 2005 emission levels. The view of the majority of stakeholders is that the ambition increase at the EU level of the instrument should be in line with the cost effective reduction potential (such as described in the impact assessment of the 2030 Climate Target Plan). A majority of respondents of the open public consultation supported fairness (i.e. GDP per capita) and cost-efficiency as the key parameters for setting national targets in the ESR, taking into account specific national circumstances. Indeed, 56% of respondents (154) believed fairness is a right criteria, mainly EU citizens, NGOs and business associations. The energy sector expressed mixed views, since while being the most positive sector of activity in favour of fairness criteria (27) it was, at the same time, the relatively larger sector against (6). As regards cost-effectiveness, a majority of 51% rated it as a positive or very positive criterion, with EU citizens (46) and business associations (47) representing the largest groups in favour. NGOs rated cost-efficiency negatively (17 against and only 6 in favour) as they claimed all Member States should do their best to reduce emissions even if it comes at a higher abatement costs. Public authorities were mostly in favour of this criteria (except 2) since they consider cost-effectiveness a useful and valid distribution key for those countries with higher abatement costs. Most representatives from the energy sector rated positive or very positive this cost-effectiveness criteria, together with building & housing and manufacturing sectors. They considered that cost-effectiveness criteria is valuable when it comes to reflect real abatement costs for GHG emission reductions. The starting point for calculating the 2030 targets to reach up to 40% reductions in the ESR compared to 2005 emissions is to apply all elements of the previous 2030 methodology with the same differentiation in efforts depending on GDP per capita. In terms of the EU target, the GHG emission limits will have to be reduced by 11 percentage points in the first option 1.1 with high ambition in the ESR and by 6 percentage points in the second option 1.2 with more limited ambition, delivering respectively -40% and -35% (compared to 2005 emissions) as the collective EU target. It is opted to continue limiting the overall spread in targets in the EU to a range of 40 percentage points (pp) with reductions in option 1 varying in the range of -10% to -50% and in option 2 in the range of -5% to 45%. This is in itself a measure that addresses cost efficiency concerns, as it notably caps the required emission reduction efforts for some high income Member States compared to a situation that only the GDP per capita formula is applied and contributes as such to convergence of efforts across the EU. Furthermore, updating the target ambition also allows to include more recent data for GDP per capita to better reflect capacity to act. This section includes therefore an update from the 2013 data to more recent and stable 2017-2019 data. By taking a more recent base year for target calculation the capacity to act is most representative of the updated timeframe and by averaging it out over 3 year one avoids annual variability issues, which can be seen as an improvement of the applied methodology. Table 2 below represents the current national emission reduction targets in 2030 for the ESR. It furthermore includes the increase required to achieve an overall 40% target and 35% target in the ESR based an update of the GDP per capita formula only. In brackets the unbound result of the formula is represented (before applying the range). The approach includes also limited deviations for Greece, Latvia and Slovenia as included in the 2020 targets under the Effort Sharing Decision to address specific Member State concerns and as maintained in the target setting approach under the current Effort Sharing Regulation. Figure 6 and Figure 7 below represent the same information respectively for a step up in ambition to -40% and -35% compared to 2005 emissions. From this assessment, Ireland and Malta are the two Member States with the highest target increase (in percentage points) compared to the existing 2030 targets. EU-27 / Member State Current ESR 2030 target ESR Review 2030 target delivering -40% (option 1.1.) ESR Review 2030 target delivering -35% (option 1.2.) Target based on GDP/capita formula update, bound to a range of -10% to -50% [unbound target] Target based on GDP/capita formula update, bound to a range of -5% to -45% [unbound target] EU-27 -29% -40% -35% Belgium -35% -49% -44% Bulgaria 0% -10% [-8%] -5% [-3%] Czechia -14% -28% -22% Denmark -39% -50% [-55%] -45% [-50%] Germany -38% -50% -44% Estonia -13% -27% -22% Ireland -30% -50% [-62%] -45% [-57%] Greece -16% -22% -17% Spain -26% -37% -32% France -37% -47% -42% Croatia -7% -16% -11% Italy -33% -43% -38% Cyprus -24% -35% -30% Latvia -6% -18% -13% Lithuania -9% -22% -17% Luxembourg -40% -50% [-77%] -45% [-72%] Hungary -7% -18% -13% Malta -19% -38% -33% Netherlands -36% -50% [-52%] -45% [-47%] Austria -36% -50% [-51%] -45% [-46%] Poland -7% -17% -11% Portugal -17% -28% -23% Romania -2% -12% -7% Slovenia -15% -28% -23% Slovakia -12% -22% -17% Finland -39% -50% -45% Sweden -40% -50% [-53%] -45% [-47%] Source: Commission Services using EUROSTAT data on GDP per capita Source: Commission Services using EUROSTAT data on GDP per capita for 2017-2019

Source: Commission Services using EUROSTAT data on GDP per capita for 2017-2019 Cost efficiency adjustments The current ESR targets are based on GDP per capita data but also include specific adjustments to take into account that for certain high income Member States a target based purely on GDP is substantially more ambitious than the cost-efficient contribution. High income Member States are Member States with a GDP per capita above the EU-27 average. Figure 8 below represents the gap, for high income Member States, between a target based only on the GDP per capita formula and cost efficient emissions projections in the ESR from the updated MIX scenario as well as a number of different emission reduction scenarios that also achieve economy wide 55% GHG reductions in the EU. Source: Commission Services Without adjustments, high income Member States would be expected to reduce emissions more than their respective cost efficient reduction potential. These results are structurally similar to those obtained in 2016 for high income Member States. Within the group of high income Member States, the following main sub-groups could be distinguished ( Table 3 ): High Income Member States Group 1 No or very low cost efficiency gap (well below 5 pp) Group 2 Low cost efficiency gap (well below 10 pp) Group 3 High cost efficiency gap (around 15 pp) Group 4 Very high cost efficiency gap (above 20 pp) LU, SE, FR DE, NL, FI, BE AT, DK IE Source: Commission services (based on MIX scenario) Sweden and Luxembourg have no gap, even with high reduction targets. Ireland instead shows the largest gap, in part driven by the large share of agriculture non-CO2 emissions in their emission profile. For all high income Member States, except Austria and the Netherlands, the MIX NECP plus scenario outperforms the MIX scenario. This indicates that typically our reference projection is conservative compared to what higher income Member States have planned in their NECPs regarding the ESR emissions. It shows that high income Member States in current NECPs are ready to take action and reduce emissions beyond cost-efficient levels. In order to reflect high income Member States’ differences between their cost-efficient reduction potential and targets based on GDP per capita only, a limited cost efficiency adjustment to the GDP based targets can be made, similar to what was done for the current 2030 ESR targets. The aim is to smoothen part of the differences between high income Member States, based on a cost efficiency reflective adjustment: group 1 contributes with 0.5 pp of additional reductions (but capped at -50%); group 2 stays with the targets defined by their GDP per capita; and groups 3 and 4 receive a less ambition target (for group 3 this adjustment is set at the same level as for the current target redistribution for cost efficiency reasons, that is, a decrease by 3 pp in the 2030 point target). Ireland is a specific case as the cost efficiency gap for Ireland is particularly high. The target for Ireland has increased significantly due to the update in GDP per capita data from 2013 data to average 2017-2019 data. Ireland has seen strong upward revisions in its GDP since 2013 resulting in a target increase based on the GDP per capita formula of 23pp. Even with a target correction of 9 pp., as is currently made for Ireland in the ESR, Ireland would still have a 50% target, 20 pp higher than their current 2030 target, which was set at 30% after target correction. What is specific about Ireland is that its GDP is already significantly higher than its GNI, and its GNI grew at a lower rate. Would targets be calculated based on GNI, then the target based formula would give Ireland a -55% target, which would result in a -46% target with a 9 pp target correction. Due to the exceptionally large cost efficiency gap in Ireland, the currently applied 9 pp. target correction for Ireland will be assessed for a target based on GNI. Table 4 gives the resulting target corrections. Target correction ESR Review 2030 target delivering -40% (option 1.1) Target based on GDP/capita formula update, bound to a range of -10% to -50% [unbound target] After target correction Austria 3 pp -50% [-51%] -48% Belgium 0 pp -49% -49% Denmark 3 pp -50% [-55%] -50% Finland 0 pp -50% -50% France -0,5 pp -47% -47,5% Germany 0 pp -50% -50% Ireland 9 pp GNI based -50% [-62%] -46% Luxembourg -0.5 pp -50% [-76%] -50% Netherlands 0 pp -50% [-51%] -50% Sweden -0.5 pp -50% [-53%] -50%

Source: Commission services As can be seen from Figure 9 below, the differences in gaps between Member States are reduced with such a gap correction, though not to such an extent that the relative rankings change much. Figure 9: Gap in 2030 between GDP per capita -based targets with a limited target correction and cost-efficient EU emission reductions for high income Member States (as a % of 2005 emissions) to achieve overall -40% GHG reductions in the ESR Source: Commission Services Figure 10 below represents the gap in low and middle income Member States between a GDP per capita target based only on the GDP per capita formula and cost efficient emissions projections in the ESR. Generally, low and middle income Member States, i.e. Member States with a GDP below the EU average, see emissions decrease more when achieving their cost efficient reduction potential than the target they would receive. Figure 10: Gap (-) in 2030 between GDP per capita-based targets and cost-efficient EU emission reductions for low and middle income Member States (as pp of 2005 emissions) to achieve overall -40% GHG reductions in the ESR Source: Commission Services For many low and middle income Member States, the MIX NECP plus scenario underperforms compared to the MIX scenario. This indicates that typically our reference projection is optimistic compared to what lower income Member States have planned in their NECPs regarding the ESR emissions. But even taking into account the more pessimistic starting point of the NECPs in the MIX NECP plus scenario, overall the picture remains the same. Estonia, Cyprus, Latvia and Lithuania face a negative gap between their GDP based target and their cost efficient emission reductions, which is however more modest than for those high income Member States that receive a target correction. Instead, the gap for Malta, using the latest projections is of the order of magnitude of 55 pp. A target correction for Estonia and Cyprus of 3 pp and Lithuania and Latvia of 1 pp would reduce their gap but not eliminate it. Important in this context is also to assess what the potential role may be of notably the LULUCF flexibility, which under the existing ESR is also available to this group of countries (see section 6.1.4). Given this level of target correction is small (at levels less or up to the correction applied in the group 3 of the high income Member States) and due to the size of these countries, this would not majorly negatively impact the overall environmental integrity at the EU level. For Malta the large gap between its calculated GDP based target and its projected cost-efficient emissions merits considering an approach with a higher target correction. With the gap running into levels of around 55 pp., even a GDP based target reduction of 19 pp. (to a level of -19%, which is equal to its current target) would still result in a gap of around 36%. Convergence of targets The distribution of efforts among Member States based on the continued application of the formula based approach as used for the existing Effort Sharing Regulation, together with an update based on most recent GDP per capita data, has as a consequence that while at the EU level the collective target increase compared to the existing 2030 target is 11 pp, a number of Member States see significantly higher increases in their individual targets. This is not beneficial to improve convergence of targets between Member States. Assuming Member States will try to meet targets domestically, higher target increases may be more challenging to implement and lead to higher cost concerns.

Therefore, in order to contain target increases closer to the increase in the collective target, an additional correction is assessed: no Member States should see its target increase by more than 12 pp. The application of this cap limits the target (further) for a few high, middle or lower income Member States. Taking into account the potential target corrections as discussed above, it would correct the target of Ireland by a further 4 pp, the targets for Belgium, Czechia, and the Netherlands by 2 pp and the target for Slovenia by 1 pp. It is further noted that Austria, Estonia, Lithuania and Malta are already within the 12 pp cap due to the potential cost efficiency adjustments explained above. If these correction for cost efficiency would not have been introduced, they would have benefited also from this 12 pp limitation in target increase. This type of target correction would of course require an increase in target of other Member States to ensure environmental integrity. This should not be expected from Member States that have a gap when comparing cost efficient projections with updated target, that already have contributed to a target correction or that are already at the boundaries of the target range. Thus in order not to jeopardise environmental integrity, the targets for Member States with no gap, i.e. Croatia, Greece, Hungary, Italia, Poland, Portugal, Romania, Slovakia, and Spain, are increased by 0.7 pp to ensure the ESR delivers on a -40% emission reduction compared to 2005. The result of the 12 pp cap on the target increase can thus address cost efficiency concerns and leads to more reduced variance (and thus improved convergence) of Member States’ targets compared to a target setting approach that has no such cap on target increase. Overview of potential target corrections Member States under option 1.1.EU-27 / Member State Target based on GDP/capita formula update, bound to a range of -10% to -50% [unbound target] Cost Efficiency correction based on gap assessment [applied on unbound target] Correction for 12 pp cap [applied after cost efficiency correction and after bounded target] Target after corrections EU-27 -40% -40% Belgium -49% 2 pp -47% Bulgaria -10% [-8%] -10% Czechia -28% 2 pp -26% Denmark -50% [-55%] 3 pp -50% Germany -50% -50% Estonia -27% 3 pp -24% Ireland -50% [-62%] 9 pp (GNI based) 4 pp -42% Greece -22% -0.7 pp -22.7% Spain -37% -0.7 pp -37.7% France -47% -0.5 pp -47.5% Croatia -16% -0.7 pp -16.7% Italy -43% -0.7 pp -43.7% Cyprus -35% 3 pp -32% Latvia -18% 1 pp -17% Lithuania -22% 1 pp -21% Luxembourg -50% [-77%] -0.5 pp -50% Hungary -18% -0.7 pp -18.7% Malta -38% 19 pp -19% Netherlands -50% [-52%] 2 pp -48% Austria -50% [-51%] 3 pp -48% Poland -17% -0.7 pp -17.7% Portugal -28% -0.7 pp -28.7% Romania -12% -0.7 pp -12.7% Slovenia -28% 1 pp -27% Slovakia -22% -0.7 pp -22.7% Finland -50% -50% Sweden -50% [-53%] -0.5 pp -50% Clearly, for option 1.2 with the more limited GDP based target setting at -35% as compared to -40%, any gaps between the (lower) GDP based target in option 1.2 and the cost-efficient emissions projections (unchanged from option 1.1) would correspondingly be smaller. For more detail on the corresponding potential gap and surplus estimates, see annex 10.5.1. Convergence to low emissions per capita The long-term aim to achieve low emissions would require over time a convergence of the per capita emissions to levels that are overall lower than today. Figure 12 shows that with targets set at a level representing the right column in Table 5 , strong convergence is expected by 2030. By 2030, 21 Member States have an allocated emissions level per capita within a range of 1 ton around EU average, as opposed to 10 in 2005 (see Figure 11 ). Two higher income Member States (Luxembourg, Ireland) and two lower income Member State (Czechia, Greece) have allocated emissions per capita above this range. Sweden and Malta have allocated emissions per capita below this range. This convergence is also significant compared to the existing 2030 targets. In reality, actual emissions per capita can deviate in 2030 depending on the extent to which flexibilities are used. Note: the actual figure for Luxembourg is 21,93 which is not visible from the chart. Figure 12 GHG emissions (CO2equivalent) per capita in 2030 for each Member State and the EU Source: MIX scenario

Conclusion: In general the GDP/cap approach remains a valid approach in order to distribute the effort among Member States in a fair way reflecting different economic capacity. The choice of the 2017-2019 average reference period for GDP per capita ensures this is based on the most recent, stable economic data. A detailed comparison with the MIX scenario that achieves a cost-efficient contribution makes clear that for selected high and low or middle-income countries, a limited adjustment gives a fairer distribution of effort. For 2 countries, i.e. Ireland and Malta, a more extensive adjustment is warranted to take into account very specific national circumstances. In order to avoid a too high target increase for Member States any increase in Member States’ targets could be capped. A small target increase for Member States with no gap would ensure the ESR delivers still on a 40% emission reduction compared to 2005. In addition, the above overall approach would imply that GHG emissions per capita converge strongly by 2030. 6.1.3.Starting point and trajectory in the ESR and environmental integrity The present set of annual emission allocations (AEA) for the EU-27 Member States draws a trajectory of allowed emissions in the period 2021-2030. In 2030 it translates in a point target equal to 29% reductions by 2030 compared to 2005. The sum of annual allocations over the period provides for an AEA budget in that decade of 19,944 Mt CO2eq, close to 20 Gt. In the reference scenario, Member States’ aggregate emissions are projected to cumulate in 2021-2030 to 19346 Mt CO2eq. This reflects a limited 2030 target overachievement planned in the NECPs (-31% reductions achieved in the ESR) and the significant impact of COVID-19 reducing emissions in 2020. With policy changes to promote faster decarbonisation as modelled in the MIX scenario, EU-27 greenhouse gas emissions are projected to decrease cumulative by around 1.1 Gt compared to the Reference scenario. The MIX scenario foresees a fair degree of progress with decarbonisation already in the first half of the next decade. But there is high uncertainty what the impact or COVID will be in the coming years. For this assessment of the impact of trajectory over time, and given the uncertainties related to the COVID-19 pandemic recovery, two sensitivity scenarios are introduced. One with an emission profile that is more conservative than MIX and one with higher emission reductions than MIX. The more conservative profile is referred to as REF-MIX. This scenario sees a higher rebound in emissions in 2021 than assumed in Reference and MIX, and an emission profile between 2021 and 2024 going towards the 2025 Reference projection, only declining faster from there to the 2030 level of the MIX scenario. Cumulative emissions under this outlook are around 0.4 Gt more than in the MIX scenario, but still around 0.7 Gt less than the Reference scenario. Instead the Low Emissions scenario would see a very low rebound in 2021, with emissions straight onwards on a decreasing trajectory towards the 2030 level of the MIX scenario, with emissions already in 2025 below the MIX scenario. Cumulative emissions under this outlook are around 0.3 Gt lower than in the MIX scenario, and 1.4 Gt less than the Reference scenario. Alternative AEA trajectories that achieve -40% GHG reductions The 2030 endpoints of alternative AEA trajectories are set at the point targets as defined by options 1.1 and 1.2, i.e. a reduction of respectively 40% and 35% respectively compared to 2005. But regarding the overall trajectory of the target, the following issues warrant consideration: ·The starting point and value for a new linear AEA trajectory. At present, the AEA trajectory for the period 2021-2030 starts at five twelfths of the point between 2019 and 2020, with the average of the emissions 2016-2018. ·The entry into force of the new AEAs in lieu of those in force currently.

·The question if unused AEAs should be carried over into the time period with updated AEAs, or if banking (as specified in Art. 5(3) of the Effort Sharing Regulation) should be discontinued or at least constrained and resulting in a tightening instead. On these grounds, for both options 1.1 and 1.2 each, a number of options for AEA trajectories are assessed. For a representation regarding AEA trajectories for option 1.1 see Figure 14 with the blue dotted lines representing different possible emission profiles as presented in Figure 13 and the yellow, green and red lines showing possible new target trajectories. Up until the year of entry into force of the updated ESR scheme, the trajectory currently in force achieving -29% by 2030 (red line) would apply: ·Trajectory A: AEAs remain unchanged compared to existing legislation until 2025, and are reduced faster as of 2026, in a linear manner to reach the increased 2030 ambition. For the -40% target this results in an AEA budget over 10 years of 19.1 billion (one AEA being 1 ton of CO2eq). ·Trajectory B: AEAs remain unchanged in 2021 and 2022; steeper reductions are mandated as of 2023, assuming a fast legislative process, to reach the increased 2030 ambition targets. The early tightening allows for more gradual year-by-year reductions but delivers an overall smaller budget. For the -40% target this results in an AEA budget over 10 years of 18.7 billion. ·Trajectory C: the starting point and method for the calculation for the annual emission allocations and their linear decreasing trajectory spelled out in Art. 4 ESR is maintained, including the starting point of the calculation (i.e. at five twelfths of the distance between the points for 2019 and 2020), but now taking into account the new 2030 target. New AEAs are applied as of 2023. With this approach, a step change would arise in 2023. For the 40% target this results in an AEA budget over 10 years of 18.4 billion. Source: Commission services For the AEA trajectories as described above, the following impacts need to be assessed: (1)Would the transition to a more ambitious trajectory allow for AEA transfers among Member States in line with article 5 (4) ESR to smoothly operate? The tighter the system overall, the less likely that those Member States that have a gap will be able to find Member States willing to sell any surplus generated. (2)Is the AEA budget defined by the new trajectory tight enough, so as not to corrupt the credibility of the 2030 target? The more lenient the trajectory, the higher the risk that early on large surpluses are built up that may provide a reduced incentive to take action later on in-line with the actual target trajectory. Assessing impacts of different AEA trajectories that achieve -40% GHG reductions For option 1.1 relevant characteristics of the alternative AEA trajectories and implied budgets are summarized in Table 6 below and compared to the possible emission profiles of the MIX, REF-MIX and LOW scenarios. In annex 10.7 similar information is provided for option 1.2. Option 1.1: Possible new AEA trajectories A B C Current trajectory 2021-2025 2021-22 2021-22 New trajectory Period 2026-2030 2023-2030 2023-2030 Trajectory starting value Current AEA 2025 Current AEA 2023 2016-18 emissions Trajectory starting time 2025 2022 2019+5/12 Total AEAs (Mt CO2-eq) 19090 18664 18421 AEAs Current trajectory 10534 4368 4368 AEAs New trajectory 8556 14295 14052 Evaluation with REF-MIX projection, Unused (surplus) or gap of AEAs, annual average, Mt CO2-eq. 2021-2030 37 -5 -30 % of 2005 ESR base year 1.5% -0.2% -1.2% Current trajectory 43 35 35 % of 2005 ESR base year 1.7% 1.4% 1.4% New trajectory 32 -15 -46 % of 2005 ESR base year 1.3% -0.6% -1.8% Evaluation with MIX projection, Unused (surplus) or gap of AEAs, annual average, Mt CO2-eq. 2021-2030 79 37 12 % of 2005 ESR base year 3.2% 1.5% 0.5% Current trajectory 103 83 83 % of 2005 ESR base year 4.1% 3.3% 3.3% New trajectory 55 25 -5 % of 2005 ESR base year 2.2% 1.0% -0.2% Evaluation with LOW projection, Unused (surplus) or gap of AEAs, annual average, Mt CO2-eq. 2021-2030 111 69 44 % of 2005 ESR base year 4.4% 2.7% 1.8% Current trajectory 152 141 141 % of 2005 ESR base year 6.1% 5.6% 5.6% New trajectory 70 51 20 % of 2005 ESR base year 2.8% 2.0% 0.8% For option 1.1, achieving 40% GHG reductions in the ESR by 2030, the target trajectories considered result in total stocks of AEAs that are 4.3% to 7.6% smaller than the one defined by the AEAs presently in force. Under the MIX emission profile, target trajectory C would leave the overall budget very tight, with only the equivalent of 0.5% of 2005 base year emissions left unused. Target trajectory A instead would be generous, resulting in a surplus of unused carbon budget equivalent to 3.2% of 2005 base year emissions. Target trajectory B is in the middle, with a surplus of unused carbon budget equivalent to 1.5% of 2005 base year emissions. Target trajectory C is the tightest trajectory. For the REF-MIX emission profile target trajectory C would result in a deficit over the whole period of -1.2%. For the MIX scenario, if excess AEAs from the beginning of the period are not admitted for further banking from 2023 onwards, this results for target trajectory C that is tighter than the MIX emission profile with a resulting gap of -0.6 % under the updated target trajectory. Even with banking in case of the MIX emission profile, the market is tight. This will increase the risks that there are not enough Member States willing to enter into transfers to allow those with deficits to compensate for them. Overall target trajectory C seems too tight. Instead target trajectory A is the most generous. It results in all emission profiles in significant surplus, increase to as much as 4.4% of base year emissions in case of the LOW emission profile. Not allowing to bank unused AEAs into the period 2026-2030 when the target trajectory is updated, does reduce the surplus significantly in case of the LOW emission profile.

Target trajectory B is in the middle. It generates a surplus of unused AEAs equivalent to 1.5% of base year emissions in the MIX scenario. The target trajectory has the disadvantage that with a high rebound of emissions and/or a delayed start of reductions early in this decade, as represented in the REF-MIX scenario, it results in an overall deficit over the period of -0.2%, aggravated if no banking would be allowed once the target trajectory update comes in place in 2023. With the COVID crisis unfolding, there is high uncertainty of the rebound and thus the emission profile early on in the period. To take this into account a fourth target trajectory option D is assessed. In this option the first 5 years the target trajectory follows target trajectory B. But in 2026 and update is implemented. In practical terms, in 2025, information on actual emissions for the years 2021-2023 will be available. The average of these will be taken to start a new trajectory as of 2024, to arrive at the 2030 target of -40% relative to 2005 in 2030. Figure 15 below represents option D. The update of the target trajectory is dependent on the level of emissions in 2021-2023, and thus different target trajectories can be drawn depending on the emission profile that will develop. Figure 15: Option D related to target trajectory updated ESR with increased ambition to achieve -40% GHG reductions (option 1.1) For option 1.1 relevant characteristics of the target trajectory D is summarized in Table 7 below. Clearly trajectory D has the benefit that even in case of a high rebound, or a delay in the increase of reductions, the emission profile would be updated, allowing for a deficit that may have build-up early, to be compensated. This may be crucial to allow a market to develop early on, where Member States are willing to transfer AEAs to other Member States with deficits already in the period 2021-2025. Without it, the compliance cycle for the period 2021-2025 may become more difficult in case of higher emission profiles early on. On the other hand, if emission are low early on, the update will remain limited. In the example employed it remains close to the initial target trajectory B, and can go below if emissions would be even lower in 2021-2023 than assumed in the LOW emission profile. Overall surplus build up is similar to target trajectory B. While the surplus is significant, it also can only develop if the system is on an emission pathway that is already early on more in-line with what is required to achieve the 2030 targets. If necessary, and only in case of such low emission profiles, one could see purpose in limiting partly the banking from the one period into the other. Option 1.1: Target trajectory D Current trajectory 2021-22 New trajectory Period 2023-2025 like trajectory B 2026-2030 Trajectory starting value 2021-23 emissions Trajectory starting time 2024 Emission profile LOW MIX REF-MIX Total AEAs (Mt CO2-eq) 18.713 18.804 18.895 AEAs 2021-2025 10321 10321 10321 AEAs 2026-2030 8392 8483 8574 Unused (surplus) or gap of AEAs, annual average, Mt CO2-eq. 2021-2030 74 51 18 % of 2005 ESR base year 2.9% 2.0% 0.7% 2021-2025 110 61 0 % of 2005 ESR base year 4.4% 2.4% 0.0% 2026-2030 38 41 35 % of 2005 ESR base year 1.5% 1.6% 1.4% In summary, for option 1.1 trajectories A would appear generous. Trajectories C appears too tight. Instead trajectory B seems accep