EUROPEAN COMMISSION Brussels, 20.7.2016 SWD(2016) 247 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 for a resilient Energy Union and to meet commitments under the Paris Agreement and amending Regulation No 525/2013 of the European Parliament and the Council on a mechanism for monitoring and reporting greenhouse gas emissions and other information relevant to climate change {COM(2016) 482 final}

{SWD(2016) 248 final}



Contents 1.What is the problem and why is it a problem? 1.1.Policy context 1.2.The Effort Sharing Decision 1.2.1.Background 1.2.2.Progress made and lessons learnt 1.3.What is the problem that should be addressed? 1.4.LULUCF policies and its integration into the 2030 framework 1.5.Who will be affected and how? 2.Why should the EU act? 3.What should be achieved? 3.1.General objective 3.2.Specific objective 3.3.Operational objective 3.4.Consistency with other policies and the Charter for fundamental rights 4.What are the various options to achieve the objectives? 4.1.Policy options for setting national 2030 targets 4.2.Policy options for setting the starting point for target trajectories

4.3.Policy options for a one-off flexibility between ETS and non-ETS 4.4.Options to include a limited LULUCF flexibility into the Effort Sharing 4.5.Policy options for enhancing existing flexibility instruments 4.6.Policy options for administering compliance 5.What are the impacts of the different policy options and who will be affected? 5.1.Assessing policy options for setting national 2030 targets 5.1.1.Calculating Effort Sharing Targets based on fairness (policy baseline option) 5.1.2.Methodology for assessing policy options related to adjustment to targets within the group of higher income Member States 5.1.3.Divergence of cost efficient projection and targets, using updated projections with various levels of energy efficiency based on the 2016 Reference 5.1.4.Divergence of cost efficient projection and targets, using additional projections to confirm robustness 5.1.5.Assessment of target adjustment options based on grouping of Member States 5.1.6.Assessment of 50/50 target adjustment options based on Member States proposals 5.2.Assessing the trajectory starting point 5.3.Assessing options for the one-off ETS/non-ETS flexibility 5.3.1.Determining limits for eligibility and amount of access 5.3.2.Assessment of impacts 5.4.Assessing options for the integration of LULUCF 5.5.Assessing policy options for enhanced flexibilities 5.5.1.Inter-temporal flexibility 5.5.2.Inter-Member State flexibility

5.6.Assessing policy options for administering compliance 6.How do the options compare? 6.1.Comparing and combining the approaches to 2030 target setting, starting point, one-off flexibility and access to LULUCF credits 6.2.Comparing and combining the approaches related to existing flexibilities and compliance 7.How would actual impacts be monitored and evaluated? 8.Annexes 8.1.Annex 8.1: Procedural information 8.1.1.Organisation and timing 8.1.2.Consultation of the Regulatory Scrutiny Board 8.1.3.Evidence and external expertise used 8.2.Annex 8.2: Stakeholder consultation 8.2.1.Introduction 8.2.2.Enhancing existing flexibility mechanisms 8.2.3.Monitoring, reporting and compliance 8.2.4.How to reflect cost-effectiveness in a fair and balanced manner when setting national greenhouse gas reduction targets 8.2.5.Complementary EU-wide action 8.2.6.Need for EU-organised capacity building and other support to implementation at national, regional and local level 8.2.7.Appendix 1: Consultation on the Green Paper on a 2030 framework for climate and energy policies relevant - key conclusions relevant to the 2030 ESD 8.2.8.Appendix 2: Geographical distribution of the 2015 ESD public consultation's respondents: 8.3.Annex 8.3: Who is affected by the initiative and how

8.4.Annex 8.4: Analytical models and model-based scenarios used in preparing the impact assessment. 8.4.1.Description of analytical models used 8.4.2.The EU Reference scenario 2016 8.4.3.Overview of model based policy scenarios used 8.5.Annex 8.5: GDP per capita data used 8.6.Annex 8.6: Assessing impacts on Member States using the EUCO27 projection 8.7.Annex 8.7: Impacts on Member States of combinations of options for target distribution, access to the one-off ETS/ESR flexibility and LULUCF flexibility 8.8.Annex 8.8: Analysis of the starting point methodology 8.9.Annex 8.9: Analysis of interaction between the one-off transfer between ETS and ESR sectors and the Market Stability Reserve152 8.10.Annex 8.10: Provisions for flexibility instruments in the Effort Sharing Decision155 8.11.Annex 8.11: ESD emissions in Member States in 2014156



Figures Figure 1: Member State greenhouse gas emission limits in 2020 under the ESD Figure 2: Achieved EU-wide ESD emission reductions 2005-2013 Figure 3: Actual and projected total ESD emissions 2005-2020 Figure 4: Emissions projected under current trends and policies and required reductions to achieve the 2030 target Figure 5: Intervention logic Impact Assessment Figure 6: National effort sharing targets for 2020 and 2030 resulting from the current methodology in relation to GDP per capita

Figure 7: Gap in 2030 between GDP-based targets and cost-effective EU emission reductions for high income Member States (as a % of 2005 emissions) Figure 8: Gap between GDP-based 2030 targets and cost-efficient emission reductions for high income Member States (as a % of 2005 emissions) Figure 9: Gap between GDP-based 2030 targets and EUCO27 and EUCO30 projections for different target adjustments between groupings (as a % of 2005 emissions) Figure 10: Towards convergence of ESR GHG per capita in 2030: T2 Figure 11: 2021-2030 target trajectory Figure 12: Comparing 2021-2030 target trajectories using different starting points Figure 13: Sensitivity S3 sees overachievement in 2021 but risks underachievement in 2030 Figure 14: Gap in 2030 between GDP-based targets and cost-efficient emission reductions for all Member States with a target above -30% Figure 15: Stakeholders profiles – Based on 114 replies Figure 16: Number of responses per question by stakeholder group Figure 17 Stakeholders by country Figure 18: Inter-linkages between models Figure 19: EU28 Gross Inland Consumption (Mtoe, left; shares (%), right) 119 Figure 20: EU28 energy production (Mtoe) Figure 21: Gas - production, net imports and demand (volumes expressed in bcm) Figure 22: EU power generation (net) by fuel Figure 23: Net power capacity investments by plant type (MWh – for five year period) Figure 24: Decomposition of electricity generation costs and prices (Euro'13 MWh) Figure 25: Investment expenditures (5-year period) - demand side (left, excluding transport) and supply side (right) Figure 26: Decoupling of EU energy use and intensity from GDP (2005=100)

Figure 27: Evolution of final energy demand by sector (Mtoe – left, shares – right) Figure 28: Evolution of final energy demand by fuel (Mtoe – left, shares – right) Figure 29: Industrial energy demand versus activity (value added) Figure 30: Final energy demand in the residential sector Figure 31: Trends in transport activity and energy consumption Figure 32: Evolution of CO2 emissions (Mt) by sector Figure 33: Non CO2 GHG emissions by sector Figure 34: EU28 emissions/removals in the LULUCF sector in Mt CO2 until 2050 Figure 35: Illustrative levelized cost of electricity (expressed in €'2013/MWh-net) Figure 36: Evolution of activity of passenger cars and vans by type and fuel Figure 37: Projected evolution of energy system costs Figure 38: Analysing the existing starting point methodology Figure 39: Gap between ESD emissions and annual limits in 2014



Tables Table 1: Targets for the non-ETS sectors based on GDP/Capita alone Table 2: Example of Gap analysis between cost-efficiency and GDP per capita Table 3: Target adjustments for groupings of high income Member States Table 4: Comparing the group based approach to targets set following the 50/50 proposal Table 5: Impact on the build-up of a surplus or deficit in sectors covered by the current ESD over the period 2021-2030 of different starting points for target trajectory

Table 6: Impact on the build-up of a surplus or deficit in the ESR over the period 2021-2030 of a combination of starting points for target trajectory Table 7: Development of surplus and deficit and potential to buy and sell AEAs Table 8: Impact of starting point options on Member State surplus or deficit over the period 2021-2030 using the EUCO30 projection Table 9: Impact of an additional buffer under option S1 recognising that for some Member States Annual Emission Allocations increase up to 2020 Table 10: Access to the one-off flexibility, assessing who has a considerable gap over the period after target adjustment in 2030, using the EUCO30 projection Table 11: Options for limits on access for the one-off flexibility from ETS for eligible Member States 65 Table 12: Impact on the build-up of a surplus or deficit in the sectors in the current ESD over the period 2021-2030 of different options for limits to access to the one-off flexibility Table 13: Impact of the one-off flexibility for those that have a considerable gap over the period, using the EUCO30 projection Table 14: Estimated size of one-off flexibility expressed as share of auctioning volumes over period 2021-2030 with maximum use of one-off flexibility Table 15: Development of Member States with a deficit and potential demand for AEAs, taking into account different options for starting point and one-off flexibility Table 16: Distribution of LULUCF credit limit on the basis of the share of agriculture non-CO2 in the ESD Table 17: Use of LULUCF credits by high income Member States, impact on distribution of use depending on choice of flexibilities using the EUCO30 projection Table 18: Member State impacts of Combinations 1 and 2 Table 19: Member State impacts of Combinations 1 and 3 Table 20: Impacts of combination 2 on AEA transfer demand Table 21: EU wide impacts of combination 2 on overall scarcity Table 22: Synopsis of Member State responses to question 1 on flexibility options Table 23: Synopsis of Member States responses to question 2 on compliance: Table 24: Synopsis of private stakeholder responses on the ESD scope Table 25 Gross Domestic Product at market prices in euro per capita

Table 26: Impact of starting point options on Member State surplus or deficit over the period 2021-2030 using the EUCO27 projection Table 27: Access to the one-off flexibility, assessing which MS has a considerable gap over the period after target adjustment in 2030, using the EUCO27 projection Table 28: Impact of the one-off flexibility for those Member States that have a considerable gap over the period, using the EUCO27 projection Table 29: Use of LULUCF credits by high income Member States, impact on distribution of use depending on choice of flexibilities using the EUCO27 projection Table 30: Member State impacts of Combination 2 (T2, O2, L2) with EUCO27 projection Table 31: Member State impacts of Combination 3 (T3, O3, L2), with EUCO27 projection Table 32: Member State impacts of Combination 2 (T2, O2, L2) with EUCO30 projection Table 33: Member State impacts of Combination 3 (T3, O3, L2), with EUCO30 projection Table 34: Stylised examples of interactions of the one-off flexibility and the function of the Market Stability Reserve 1.What is the problem and why is it a problem? 1.1.Policy context The Paris Agreement of December 2015 under the United Nations Framework Convention on Climate Change (UNFCCC) is a historically significant landmark agreement that covers almost all of the world's emissions. It has set the goal of holding the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels and aims to limit the increase to 1.5°C in order to reduce significantly the risks and impacts of climate change. To achieve this, all Parties are to undertake and communicate ambitious efforts as nationally determined contributions to the global response to climate change. Developed country Parties should continue taking the lead by undertaking economy-wide absolute emission reduction targets. In line with scientific findings reported by the International Panel on Climate Change (IPCC) in the fourth Assessment Report, the EU's objective, in the context of necessary reductions by developed countries as a group, is to reduce GHG emissions by 80-95% by 2050 compared to 1990. The Commission in its 2050 Low Carbon Economy Roadmap proposed concrete milestones to ensure the EU is on track to reduce these emissions by at least 80% domestically by 2050, with milestones of 40% and 60% reductions in 2030 and 2040. In preparation of Paris, the EU and its Member States submitted a domestic 2030 target of at least 40% GHG emission reductions compared to 1990 as its Intended Nationally Determined Contribution under the UNFCCC. For 2020, the EU had agreed in 2007 on an economy-wide and binding target of at least 20% GHG emission reductions, as well as a binding renewables target of 20% and an indicative target of 20% energy savings. The EU is expected to meet its 2020 target. Total GHG emissions (excluding LULUCF) in the EU 28 fell by 23% over the period 1990-2014, while the overall economy grew by 46%. The main policy architecture to implement the binding EU climate targets is comprised of the EU Emissions Trading System (ETS), which includes a cap for the EU-wide GHG emissions of the sectors covered, and a set of legally binding country specific targets for the emissions of sectors not covered by the EU ETS in the so-called Effort Sharing Decision (ESD). Emissions and removals from land use, land-use change and forestry (LULUCF) are currently neither included in the ESD, nor in the ETS. With regard to post-2020 binding targets, the Commission proposed in its January 2014 Commission Communication on a 2030 climate and energy framework a set of targets for the year 2030. This included an impact assessment that examined in detail the interaction of targets and policy instruments on greenhouse gases, renewable energy and energy efficiency, respectively. Taking this into account and in line with the EU’s long term climate objective the Commission proposed to reduce domestically GHG emissions by at least 40%, to be delivered collectively by the EU in the most cost-effective manner possible, with the reductions in the ETS and non-ETS sectors amounting to 43% and 30% by 2030 compared to 2005, respectively. The impact assessment accompanying the 2030 framework proposal also assessed in detail the cost and benefits of the set of targets. In relation to the 40% greenhouse gas reduction it for instance concluded that a domestic 40% reduction of GHG emissions, the additional energy system costs compared to the Reference scenario of adapting the energy system would be contained to 0.15–0.54% compared to GDP in 2030, compared to the Reference scenario. It also concluded that such costs are not a reduction of GDP compared to what would otherwise be the case, but reflect the increased costs for all final consumers (industry, consumers, transport users) arising from changed investment patterns and related fuel savings to receive the required energy services. These need to increase investments upfront, followed with reduced costs over time, of course would benefit of an enabling framework that fosters innovation and investments. Elements of such an enabling framework were proposed in the form of modernisation and innovation funds under the proposed revised ETS directive and by other policies that foster innovation and investment in the EU.

After the endorsement of the European Parliament, the October 2014 European Council (hereafter referred to as European Council) confirmed these climate targets, including the split between efforts in the ETS and non-ETS sectors. It asked for setting corresponding national reduction targets for the non-ETS sectors and for the LULUCF sector to be included into the 2030 greenhouse gas mitigation framework. It also agreed a renewable energy target of at least 27%, binding at the EU level, an at least 27% indicative energy savings target, that will be reviewed having in mind an EU level of 30% and a 15% interconnection target. It gave further guidance on key elements for a 2030 Climate and Energy Policy Framework . In March 2016, the European Council reaffirmed after Paris its earlier conclusions and invited the Commission to rapidly present all the remaining relevant proposals to this end so as to swiftly engage the legislative process. Continuing an ambitious climate policy is an integral part of the Energy Union with a forward looking climate change policy. The aim is an Energy Union as a sustainable, low-carbon and climate-friendly economy. The Commission has started the next steps towards implementing these targets. In 2015 it presented a legislative proposal to amend the ETS for the period after 2020. This impact assessment focusses on the implementation of the 2030 framework for the sectors outside the ETS as covered in the current ESD, i.e. the proposed Regulation on binding annual greenhouse gas emission reductions by Member States from 2021 to 2030 for a resilient Energy Union and to meet commitments under the Paris Agreement (referred to in this document in short as Effort Sharing Regulation, ESR). It is further accompanied by an impact assessment that focuses on the integration of LULUCF into the 2030 Climate and Energy Framework. It is coherent with the impact assessment that is being prepared for the revision of energy efficiency targets under the Energy Efficiency Directive for the 2030 horizon and uses central policy scenarios also used in the analytical work underpinning the Communication on the decarbonisation of transport and other impact assessments for policy initiatives prepared in 2016 under the Energy Union such as the revision of the Renewable Energy Directive. These central policy scenarios are not abstract policy scenarios but reflect the current EU policy design, modelling among others ambitious energy efficiency policies relevant for the non-ETS sectors. 1.2.The Effort Sharing Decision 1.2.1.Background The objective of the Effort Sharing Decision (ESD) is to reduce GHG emissions in the EU by 10% by 2020 compared to 2005 by setting national targets and to promote reductions of GHG emissions within its scope in a fair and cost-effective manner. The current ESD entered into force in June 2009. It covers all GHG emissions excluding those from sectors covered in the ETS and excluding emissions and removals from LULUCF. The ESD covers mainly emissions in the transport, buildings, agriculture, small industry and waste sectors. These sectors accounted for more than 55% of total EU GHG emissions in 2013. The ESD does not set specific emission targets for these individual sectors covered by the ESD, but leaves it to Member States to choose where and how to achieve the necessary reductions. National targets for 2020 are set for Member States according to economic capacity on the basis of their relative wealth (measured by 2005 Gross Domestic Product per capita). They range from a 20% emissions reduction by 2020 (from 2005 levels) for the richest Member States to a 20% increase for the least wealthy one (See Figure 1). Source: Decision 406/2009/EC The ESD not only sets 2020 targets, but also defines a linear trajectory of corresponding binding emission limits (annual emission allocations, AEAs) for each year from 2013 to 2020. Progress towards the 2020 targets is ensured through annual reporting obligations and compliance checks. Member States are responsible for implementing policies and measures to meet their obligations under the ESD and are supported by a number of EU measures, some of which also are expected to help achieving the EU’s 2020 renewable energy and energy efficiency targets. These supporting EU policies are important to stimulate emission reductions in the sectors under the ESD, but also here there are often important elements of subsidiarity when implementing these policies, for instance in sectors such as transport, buildings and agriculture. In order to provide for flexibility for Member States in implementing their commitments and as a means to enhance the overall cost-effectiveness of reaching the EU-wide 2020 target, the ESD provides a range of flexibility instruments. These concern Member States’ possibilities to manage their own AEAs within the compliance period (“inter-temporal” flexibility) and engage in transfers of AEAs among each other (“inter-Member State“ flexibility). Should a Member State’s GHG emissions exceed its AEAs for a given year, then it can borrow 5% of its AEAs from the next year or buy AEAs from other Member States or use international project credits in order to meet its annual limits. Should a Member State reduce its emissions by more than needed, thus overachieving its target for a given year, it can keep the surplus AEAs for later use within the commitment period or transfer it to other Member States. For more details of the existing flexibility instruments, see annex 8.10. The ESD has an annual reporting and compliance cycle consisting of Member States reporting their GHG emissions, emissions inventory reviews to validate the emissions and compliance checks (i.e., comparing the actual emission of Member States with their annual emission allocations for a given year). If a Member State's emissions exceed its annual emission allocation, even after accounting for flexibility instruments, they will be subject to certain penalties and have to take corrective measures. 1.2.2.Progress made and lessons learnt The ESD is still in an early stage: the compliance check for the first two years of the compliance period (2013-2014) is due in 2016. However, thanks to the existing annual reporting of emissions it is possible to discern the main emission trends in Member States and on EU level. Emission reductions have so far been much deeper than expected in 2007 when the European Council agreed on the overall EU climate targets for 2020 and the Commission performed the impact assessment of the Climate and Energy Package. According to the business as usual scenario in that assessment, EU-wide ESD emissions were expected to increase by 2.4% between 2005 and 2020. Even for 2020 it was not projected that ESD emissions would be at the level of the -10% target given that the use of international credits was permitted in the period 2013-2020. Instead, total 2013 emissions covered by the ESD at EU level were 9.7% lower than the 2005 emissions, basically reaching the EU target for 2020. In 2014 EU emissions covered by the ESD further decreased to a level 12.9% below 2005 levels, already overachieving the target. Preliminary estimates indicate that all Member States appear to be meeting their annual emission limits for the years 2013 and 2014. This means that the EU is on track to meet its ESD target in 2020 and that all Member States have contributed to the reduction in GHG emissions. The achieved emission reduction represents a large improvement in performance relative to the business-as-usual scenario when the 2020 targets were first agreed. Emission reductions between 2005 and 2013 were achieved in all sectors, ranging from -3 % in agriculture to -25 % in the waste sector. See also Figure 2 below. In this period there was also a convergence of GHG emission intensities across Member States, both per capita and per GDP.

Source: EEA Emissions per Member State in sectors under the ESD have also decreased significantly since 2005 (see Figure 3 ). As shown in Figure 39 presented in annex 8.11 in practically all Member States estimated ESD emissions were below their annual limit in 2014. Overachievements were typically larger in those countries that were allowed to increase emissions compared to 2005. Countries that experienced a particularly severe economic recession (e.g., Greece, Portugal and Spain) also had emissions significantly below their 2014 limits. According to Member State projections submitted in 2015, ESD emissions are expected to keep decreasing until 2020 ( Figure 3 ), continuously being below target at the EU level. 24 Member States are projected to meet their national targets domestically, while four Member States are expected to need additional measures or use flexibility instruments within the ESD to reach their targets. Source: EEA (2015) Trends and projections in Europe 2015, updated with March 2016 emission inventory figures. Article 14 of the ESD requires the European Commission to evaluate the implementation of the ESD by 31 October 2016. The evaluation was undertaken in 2015 to allow for the results to be reflected in this impact assessment. The ESD is still in the early stages of implementation. Nevertheless, it seems clear from the evidence gathered so far that ESD targets have been effective in stimulating new national policies and measures promoting effective reductions of GHG emissions within the ESD scope. Most emission reductions have come from technological changes and policies which have resulted in increased uptake of less carbon-intensive technologies. Overall the achievement of the targets has thus clearly happened faster than expected when developing the 2020 climate and energy framework in 2007 and 2008. Effects on the ESD GHG emissions have been reinforced by the fact that the ESD was launched together with a number of other EU climate and energy policies as part of the 2020 package, in particular on energy efficiency and renewable energy. For several of the ESD sectors, including buildings, transport, agriculture and waste, a significant part of the emissions reductions to date can be attributed to factors that are influenced by policy interventions related to the 2020 package. Overall it seems clear that policies implemented in the field of climate and energy have contributed significantly to the take-up of clean technologies. A decomposition analysis carried out for the 2005-2012 period covered CO2 emissions from fossil fuel combustion, which account for about 80 % of total GHG emissions, in both ETS and ESD sectors. The results provide insights why CO2 emissions decreased overall by 11.5 % between 2005 and 2012. Technological changes had the most significant effect on driving down emissions, leading to an 18.5 % decrease and by far outweighing the contribution of the shift between economic sectors. The policies implemented in the field of climate and energy contributed significantly to the take-up of less carbon-intensive technologies, including renewable energy. Growth in economic activity (GDP) caused a 6.8 % increase in emissions. Structural changes in the economy caused a small increase in emissions, by 1.7 %. In other words the shift between economic sectors (at constant GDP and CO2 intensity in every economic sector) only had a relatively small effect on emissions. The analysis concluded that technological changes contributed most to drive down emissions, by far outweighing the contribution of the shift within and between economic sectors, and by far overcompensating GDP related emission drivers in times of economic crisis. Based on the evaluation and comments from stakeholders in Member States, a number of lessons can be learned from the implementation of the ESD so far. The ESD was recognised by Member State stakeholders as having an important role in supporting wider policy developments, for example improving coordination on GHG mitigation across the ESD sectors and between national and regional or local governments. Stakeholders highlighted that another important outcome of the ESD to date has been the improvement in the quality of the emissions data and projections relating to ESD sectors at a national level, which has helped improving policy preparation. The annual reporting of emissions, combined with biennial requirements for reporting of policies and measures, and projections, keep Member State better informed about the progress not only of GHG emissions but also of climate and energy policies. The reporting obligations also give them and other EU stakeholders a tool to compare their performance with that of other countries in the EU. The evaluation of the ESD showed an apparent acceleration in the implementation of national policies in the ESD sectors in most years starting from 2007, when the European Council agreed on the overall EU climate targets for 2020. Without the ESD, actions to mitigate emissions in the ESD sectors at Member States level may not have been taken, or may have been taken at a slower pace. Annual emission limits with strict rules on reporting and monitoring thus have contributed to Member States efforts to reduce their emissions in sectors under the ESD, but it is difficult to quantify the effects. So far, no Member State has used any of the flexibility instruments provided in the ESD as all countries appear to be meeting their annual emission limits for the first two years of the compliance period. In the future it can be expected that flexibility instruments, such as trade with other Member States, will be used by some Member States that are projected to emit above their limits by 2020. Although the flexibility instruments under the ESD are untested they remain widely supported and were further endorsed by Member States in the stakeholder consultation. The ESD was found to have resulted in limited additional administrative burden on Member State level, although there may be opportunities for reducing administrative costs at EU level, for example by simplified or less frequent compliance controls. 1.3.What is the problem that should be addressed? The general problem is that with current targets implemented by 2020 and existing policies, GHG emissions in ESD sectors are not expected to sufficiently decrease by 2030 to achieve the EU's domestic contribution to the Paris Agreement (see Figure 4 below). In the EU Reference scenario 2016, reflecting current trends and implementation of adopted policies, emissions covered by the ESD are projected to decrease by around 16% in 2020 and 24% in 2030 compared to 2005.

Achieving such reduction levels in practice will be facilitated by ongoing trends e.g. towards the circular economy and towards sustainable mobility. In view of reported emissions for 2013, with already a reduction of -13% in the ESD compared to 2005, projecting a 16% reduction by 2020 seems well in line with observed trends. See box below on main assumptions underlying the 2030 projection results. The EU Reference scenario 2016 projects EU and Member States energy, transport and GHG emission-related developments up to 2050, given current global and EU market trends and adopted EU and Member States' energy, transport, climate and related relevant policies. It has been developed building on an economic modelling framework including as core models PRIMES, GAINS and GLOBIOM-G4M and as supporting models GEM-E3, PROMETHEUS and CAPRI. Member States were consulted for its development through a specific Reference scenario expert group. The projections are based on a set of assumptions, including on population growth, macroeconomic and oil price developments, technology improvements and policies. The population projections draw on the European Population Projections (EUROPOP 2013) by Eurostat. The EU28 population is expected to grow by 0.2% per year during 2010-2030, a similar trend as assumed for the Reference scenario 2013. GDP projections mirror the joint work of DG ECFIN and the Economic Policy Committee, presented in the 2015 Ageing Report. The average EU GDP growth rate is projected to remain relatively low at 1.2% per year for 2010-2020. In the medium to long term, higher expected growth rates (1.4% per year for 2020-2030) are taking account of the growth potential of countries with relatively low GDP per capita. EU28 2030 GDP levels are around 5% lower than assumed for Reference scenario 2013, taking into account the economic developments in recent years. For oil prices it starts with the current low price levels and considers a gradual adjustment process. The oil price is projected to reach 87 $/barrel in 2020 (in year 2013-prices). Beyond 2020, as a result of persistent demand growth in non-OECD countries the oil price would rise to 113 $/barrel by 2030, around 10% lower than in the Reference scenario 2013. Technology assumptions are based on extensive literature review and have been reviewed by the Joint Research Centre, with notably changes related to the power sector and battery cost developments compared to assumptions taken for Reference scenario 2013. "Adopted policies" refer to those that have been cast in legislation in the EU or in Member States (with a general cut-off date end of 2014). Therefore the binding 2020 targets are assumed to be reached in the projection. This concerns EU GHG emission reduction targets (both for the EU ETS as well as ESD sectors) as well as Renewable Energy targets, including in transport. The Reference scenario 2016 shows the continued impact also post 2020 of the full implementation of policies such as the Energy Efficiency Directive, the Energy Performance of Buildings Directive, CO2 and cars, the Landfill Directive and the recent F-gas regulation, that also impact the stock of buildings and cars and the emissions of methane and fluorinated gases post 2020. Compared with the Reference scenario 2013, while most policy assumptions are similar, the newly adopted F-gas regulation is expected to shave off in 2030 the equivalent of 2% of the effort sharing sector emissions. Furthermore there is also an impact of the new GHG emission inventory guidelines applied since last year, leading to more historic emissions in the waste sector and subsequent more reductions in the future due to waste policies. For more details and an overview of results see annex 8.4.2. Following the 2016 Reference projection, this leaves a gap of 6 percentage points to the 30% reduction in 2030, requiring cumulatively still around 1 billion ton additional reductions in the period 2021-2030. This is a marked improvement compared to the 2013 Reference scenario which projected a -20% reduction in 2030 and would still have required 1.5 billion tonnes additional reductions over the period 2021-2030 (see box above for more information on differences between the two Reference scenarios). The EU Reference scenario 2016 is the most recent, consistent projection of current trends and existing EU and national policies. Its projected 2030 trends see overall higher reductions than Member States projections. Member States themselves in aggregate see emissions only reduce by 18% in their GHG projections submitted in 2015 that look at the impact of existing measures. This would result in an aggregate gap in 2030 as large as 12 percentage points. Achieving the target would then require almost 2 billion tonnes of additional reductions over the period 2021-2030. Differences in outcomes of aggregated Member States projections with the EU Reference scenario concern mainly the post 2020 period, which is by definition more uncertain; 2020 results are of a similar order of magnitude. Main reasons are: A moderately more optimistic outlook on GDP growth in some Member States, with aggregated a 6% higher EU GDP in 2030 assumed than in EU Reference 2016, which are based on a coherent methodology across Member States used in the ECFIN Ageing Report. Non-inclusion into national with existing measures projections of some policies adopted at EU level but not yet fully implemented at national level. An example is the revised EU F-gas regulation adopted in 2014 which has not been considered yet by some Member States projections. Modelling limitations with regard to post 2020 stock turnover effects of currently adopted policies which are fully captured in the EU Reference scenario. An example is the revised Energy Performance in Buildings Directive which mainly has emission reduction effects from 2020 onwards due to the near zero emission building standard. Another example is the CO2 and cars regulation which includes a decrease of the fleet average to be achieved by all new cars to 95 g/km by 2021, of which a major effect on transport emissions will occur after 2020 with the continued turnover of the car fleet. For those national WEM projections that focus on the 2020 time frame and project post 2020 emissions through a simplified extrapolation, these post 2020 effects might not be covered.

The expected gap in EU and national projections shows that, while current ESD national targets as well as supporting climate-related EU policies appear effective to reduce emissions up to 2020 and beyond, the policy framework needs to be reinforced to ensure the achievement of the EU’s 2030 target. Source: Commission calculations based on PRIMES, GAINS, EEA 2015 The European Council agreed to address the general problem and has requested to continue the approach of the Effort Sharing Decision also after 2020, setting national targets while allowing for a number of flexibilities, but now in line with an overall reduction of 30% in the non-ETS compared to 2005 by 2030. Therefore the specific problem addressed in this impact assessment is how the current methodology of the ESD can be continued in a manner that it (1) addresses fairness concerns, (2) takes into account the need for cost-efficiency and (3) avoids problems with overall environmental integrity. When setting targets equity remains an important concern. Member States have significant differences in economic strength and investment capacity as well as in emission reduction potentials and costs. As the 2030 framework impact assessment has shown, applying cost-effectiveness as sole criterion for the distribution of efforts would lead to considerable variations in the necessary national economic effort and would imply (on average) relatively higher efforts and costs per unit of GDP for lower income Member States. The current ESD 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 instance according to the 2030 Impact Assessment, five Member States with GDP per capita above the EU average have cost-effective mitigation potentials in effort sharing sectors below 30%, the required average total non-ETS reduction, and thus would see high costs per ton reduced emissions if targets would go well beyond 30% in 2030. The European Council recognised both the need for fairness and cost efficiency in its conclusion in October 2014. (1)How to achieve a fair sharing of efforts? The European Council requested to continue the methodology to set the national reduction targets for the non-ETS based on GDP per capita differentiation, keeping them in a range from 0% to -40% compared to 2005. But it also stated that the targets for Member States with a GDP per capita above the EU average need to be relatively adjusted to reflect cost-effectiveness in a fair and balanced manner. This impact assessment will need to examine how to translate this guidance in concrete 2030 targets for the Effort Sharing Regulation (ESR). (2)How to ensure at the same time cost efficiency? In addition, flexibility should allow for overall cost-efficiency in reaching the EU’s GHG emission reduction target, while respecting environmental integrity. As in the current Effort Sharing Decision, such flexibilities are particularly important if target setting is to a significant extent based on equity considerations, which remains the case also for the post 2020 period as described above. This problem was recognised by the European Council, which called for significantly enhancing the availability and use of existing flexibilities within the non-ETS sectors in order to ensure cost-effectiveness of the collective EU effort and convergence of emissions per capita by 2030. This also reflects the fact that the 2030 EU climate target is a domestic target which means that international credits will no longer be a flexibility option for the period after 2020. Thus the perception among Member States is that the existing flexibility provisions would not be sufficient to ensure EU-wide cost-effectiveness of mitigation efforts by 2030 without some kind of enhancement. A key concern for Member States with high emission reduction costs is to get access to additional AEAs from other Member States with lower reduction costs in the period in 2021-2030. It is therefore important to examine the extent to which existing flexibilities in the ESD allow the achievement of cost-effective abatement across the EU. An important question is to what extent the existing set of rules could be enhanced without limiting Member States’ freedom of choice with respect to using the flexibilities. Another important area for ensuring cost efficiency is related to the potential administrative burden both at the level of the EU and in Member States to implement the Commission proposal. Therefore, it needs to be considered whether the current reporting and compliance system under the ESD should be changed in light of any enhanced flexibility instruments and whether the administrative burden could be further reduced. Flexibility instruments should be transparent, predictable and easy to operate. A key element would be to improve the transparency regarding Member States' willingness to engage in such transfers and at what price. Next to enhancing the existing flexibilities, the European Council also suggested to establish a new flexibility in achieving targets for Member States with national reduction targets significantly above both the EU average and their cost effective reduction potential (as well as for Member States that did not have free allocation for industrial installations in 2013), through a limited, one-off, reduction of ETS allowances, to be decided before 2020. It needs to be assessed which higher income Member States thus could be eligible to make use of this reduction of ETS allowances allowing for increased emissions in the sectors covered by the current ESD. The European Council stressed also the need to preserve predictability and environmental integrity of both the ETS and the non-ETS sectors. (3)How to maintain overall environmental integrity?

The design of the one-off flexibility and the 2030 target setting are not the only issues where maintaining environmentally integrity is key. Also binding emission limits for the period 2021 to 2030 need to be defined, in line with the approach under the current Effort Sharing Decision expressed as annual emission allocations, AEAs. The method for setting emission limit trajectories must preserve environmental integrity, i.e., it must ensure that the required 2030 emission levels are reached and that timely emission reductions take place over the whole period 2021-2030. The instrument itself does not per definition deliver this 2030 reduction. If large surpluses of unused AEAs build up early in the period 2021-2030, that are not associated with real additional emission reductions, this could lead to deviations from the target trajectory towards the end of the period and put the domestic achievement of the 2030 target at risk. Achieving the 2030 target is also important in view of enabling Member States to take necessary action in time to meet the EU’s climate objectives beyond 2030. The ESD does not foresee that any overachievements under the current period could be used for meeting national targets during the next commitment period 2021-2030, and neither do the European Council conclusions. Estimates by the EEA based on Member State projections show that the expected surplus in the period 2013-2020 is about 1.5 to 1.7 billion AEAs, amounting to much more than the total emission reductions needed over the period 2021-2030 additional to the latest Reference projection. Any transfer between the periods would remove incentives for long-term mitigation action and would seriously undermine environmental integrity notably by putting the achievement of the 2030 domestic target at risk, not requiring any real additional action after 2020. In the same manner, the cumulative impact of additional flexibilities will have to be examined carefully in relation to the total emission reductions required for meeting the 2030 target. When providing greater flexibility within the period it will also be essential to do it in a way that ensures environmental integrity. The non-availability of international credits is also important for maintaining the environmental integrity of the EU system. Sound emission reporting, monitoring and compliance checks continue to be crucial in this respect. 1.4.LULUCF policies and its integration into the 2030 framework Emissions and removals from LULUCF are currently accounted towards the Kyoto Protocol obligations of Member States applying the so-called "no debit rule". This means that internationally, the EU and each of its Member States need to ensure that GHG emissions in this sector do not result in debits, and hence additional emissions. Any increase in emissions would need to be compensated by emission reductions in other sectors. International Kyoto Protocol rules for Land Use, Land Use Change and Forestry (LULUCF) adopted in Durban have been incorporated into EU legislation by Decision 529/2013/EU ("LULUCF Decision"), and focus on setting minimum requirements for monitoring and reporting and accounting, including for cropland and grazing land management. The Kyoto Protocol regime, however, will not continue beyond 2020. Within current EU internal legislation, however, emission reductions in the LULUCF sector cannot be used to compensate for increased emissions in other sectors; emissions from LULUCF are not part of the current ESD. Striving for using cost-effective mitigation potentials also justifies considerations in this direction, i.e. to allow Member States to overachieve their target in the LULUCF sector and to use it to a certain extent to comply with their national emission limits for the sectors covered under the current ESD, so long as overall environmental integrity of the compliance framework and additionality of LULUCF actions can be ensured. The European Council encouraged the European Commission to put forward a policy proposal to include LULUCF into the EU's 2030 climate and energy framework. The European Council explicitly mentioned and linked this to "the lower mitigation potential" of the agriculture sector and requested to examine how to "optimise the sector's contribution to greenhouse gas mitigation and sequestration, including through afforestation." As a consequence, additional impacts to consider emerge from the possible implications of the integration of Agriculture and LULUCF into the 2030 non-ETS framework, including related cross-sectoral cost-efficiency considerations, notably between agriculture and land use. The question of this integration is analysed in a separate impact assessment (referred to as Impact Assessment for agriculture and LULUCF). Implications for the ESR arise once explicit policy links between both sectors are considered. 1.5.Who will be affected and how? The proposal is addressed at Member States as institutional actors. The proposed policy is to be implemented at national level and thus mostly affects their national administrations. Depending on the nature and scope of national measures implemented by Member States they will affect various stakeholders in the sectors concerned, including consumers. For an overview of stakeholder positions, see annex 8.2 with a summary of the results of the stakeholder consultation. Practical and economic consequences for businesses might arise from the implementation of such national policies but not as a direct effect or obligation of this initiative itself. Any effects on enterprises will depend on the specific measures chosen on national level. With respect to businesses in general and SMEs in particular there are no direct reporting obligations for SMEs or other enterprises under the current ESD and the proposal would not change this situation (see also annex 8.3). 2.Why should the EU act? Climate change is a trans-boundary problem which cannot be solved by national or local action alone. Coordination of climate action both at global and European level is therefore necessary and EU action is justified on grounds of subsidiarity. Since 1992 the EU has worked together to develop joint solutions and drive forward a global agreement to fight climate change. Articles 191 to 193 of the TFEU confirm and further specify EU competencies in the area of climate change. Ahead of the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), parties to the UNFCCC presented their intended nationally determined contributions (INDCs) to the Paris Agreement of December 2015. The EU and its Member States communicated their INDC on 6 March 2015, which provides for the commitment to a target of at least -40% domestic GHG reductions below 1990 levels. The Paris Agreement of December 2015 foresees that Parties, including regional economic integration organizations and their member States, may ‘act jointly’ (Article 4, paragraphs 16 to 18). As under the Kyoto Protocol, the EU and its Member States intend to participate in the Paris Agreement by acting jointly. The current 2020 GHG targets and existing Member State policies would not lead to the necessary 2030 emission reductions. Few Member States have set post 2020 GHG emission targets and no Member State has specified a 2030 target for sectors under the current ESD. Also equity issues cannot be sufficiently addressed if Member States act alone. However, the role of Member State action will remain crucial and 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 2020. The initiative sets binding national targets, but leaves it to Member States to decide how to achieve them, fully respecting the principle of subsidiarity. Co-ordinated EU action is therefore needed to achieve the EU-wide 30% non-ETS GHG reductions for 2030 endorsed by the European Council, in particular to ensure a cost-effective 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 signalled in their INDCs the intention to join the EU's effort sharing. 3.What should be achieved? 3.1.General objective The general objective is to contribute to achieving the Paris Agreement climate goal of holding the increase in the global average temperature increase to well below 2 degrees Celsius above pre-industrial levels in order to reduce significantly the risks and impacts of climate change. In line with scientific findings reported by the International Panel on Climate Change, the EU's long term climate objective is to reduce GHG emissions by 80-95% in 2050 compared to 1990, in the context of necessary reductions by developed countries as a group. The Commission has proposed that the EU prepares for a domestic reduction of 80% by 2050. A GHG target of at least 40% domestic reductions in 2030 compared to 1990 as agreed by the European Council ensures that the EU is on the cost-effective path of a corresponding transition to a sustainable and competitive low carbon economy. 3.2.Specific objective

The specific policy objective is to achieve a 30% reduction in GHG emissions in the non-ETS sectors compared to 2005 in way that is fair, taking into account different economic capacities of Member States, cost-efficient, taking into account differences in cost-effective mitigation potentials between Member States, providing predictability and certainty for Member States and investors and increasing flexibilities to ensure cost efficiency, and that ensures environmental integrity by promoting timely and sufficient action to ensure that the EU 2030 GHG reduction target is achieved. 3.3.Operational objective The operational objective is to design appropriate means to achieve an overall fair, cost-effective and environmentally sound outcome by appropriately: Defining national emission reduction targets for Member States for 2030; defining corresponding target trajectories for the period 2021-30; defining the modalities of a limited one-off flexibility between ETS and non-ETS; integrating LULUCF in the 2030 framework contributing to the 30% non-ETS target; enhancing the availability and use of existing domestic flexibility instruments within the ESR; ensuring appropriate compliance mechanisms. An appropriate combination of these elements allows that the three specific objectives can be achieved and potential tensions between them can be mitigated. 3.4.Consistency with other policies and the Charter for fundamental rights A legal proposal for continuing an EU effort sharing mechanism until 2030 in order to ensure achieving the binding EU climate target is an integral part of the 2030 Climate and Energy Framework as well as the Commission framework strategy for a resilient Energy Union with a forward looking climate change policy. In particular, it contributes to delivering the Energy Union's fourth dimension to decarbonise the economy. As outlined in the 2030 framework impact assessment, the policy aim has been to set climate and energy targets up to 2030, which are consistent and mutually reinforcing. Therefore it is important to ensure that the methodology to assess the policy proposal implementing the non-ETS targets and related flexibilities looks at interactions with other EU-wide targets and policies on renewables and energy efficiency under development. Therefore this impact assessment complements the analysis conducted in the 2014 impact assessments supporting the 2030 climate and energy framework based on a set of consistent new scenarios, building upon the 2016 Reference. These new scenarios have been jointly developed in preparation of this initiative as well as other closely related initiatives in 2016 within the Energy Union Package, such as the energy efficiency package, which has a strong focus on energy efficiency in buildings, the renewable energy package, as well as the initiative on decarbonisation of the transport sector. The new policy scenarios used in all these impact assessments reflect the 2030 targets agreed by the European Council (at least -40% GHG reduction target, at least a 27% share of renewables, at least 27% with a view to 30% energy efficiency improvements, for a detailed description of the scenarios used, see sections 8.4.2 and 8.4.3). The scenarios reflect current EU policy design when modelling the achievement of different sets of GHG, EE and RES targets. In doing so they provide for a coherent analysis of the energy efficiency targets, including potential energy efficiency policies, and their impact on non-ETS targets at Member State level and the potential need and availability of related flexibilities in the ESR, and thus corresponding impact on fairness. The assessment of the merits of different efficiency targets and policies will take place in their respective impacts assessments. But by using these scenarios in both impact assessments, it allows to assess to what extent different levels of energy efficiency ambition would impact the achievement of the non-ETS target and the distributional impacts between Member States, which is of importance for this impact assessment.

The proposal respects the fundamental rights and observes the principles recognised in the Charter of Fundamental Rights of the European Union. In particular, it contributes to the objective of a high level of environmental protection in accordance with the principle of sustainable development as laid down in Article 37. 4.What are the various options to achieve the objectives? The "no additional policy" baseline scenario is represented by the Reference Projection. With no additional policies put in place beyond 2020, the EU is not projected to achieve its -30% GHG reduction target in the non-ETS sectors. The Commission 2014 proposal for the 2030 framework for climate and energy policies was to achieve exactly this -30% reduction level in the non-ETS sectors and suggested to share this equitably among the Member States in the form of setting binding national targets. Subsequently the European Council adopted this ambition level and requested explicitly to continue until 2030 with 'the methodology to set the national reduction targets for the non-ETS sectors, with all the elements as applied in the Effort Sharing Decision for 2020'. As such from a policy perspective this impact assessment is not about assessing the need or not to go to -30% GHG reductions in the non-ETS, but about what the options regarding the targets set per Member State are and the flexibilities available to achieve this, assuming a continuation of the current ESD. Therefore the policy baseline is one that sees continuation of the ESD with all its features, but translated to the period 2021-2030, and assuming a target in 2030 equal to -30% compared to 2005. The policy options assessed build strongly on the guidance given by the European Council, foremost related to the setting of the 2030 target, the introduction of a new and limited one-off flexibility from the ETS into the ESR, the integration of LULUCF into the EU legal framework and any related flexibilities between the LULUCF sector and the ESR and the improvement of existing flexibilities. See also Figure 5 for an overview on the problem that is being addressed, the objectives of the intervention and the policy options assessed. Operational objectives and corresponding policy options assessed: Specific objectives: Set national targets and foresee flexibilities that are: Problem: -30% GHG reduction by 2030 in non-ETS sectors is not achieved under current trends and policies How can the current methodology of the ESD be continued in a manner that it (1) addresses fairness concerns, (2) takes into account the need for cost-efficiency and (3) avoids problems with overall environmental integrity? Context: politically agreed 2030 framework for climate and energy policies, including a -30% GHG reduction target for non-ETS sectors 4.1.Policy options for setting national 2030 targets Policy baseline option T1: Target setting for all Member States based on GDP per capita The baseline option is to apply the principles of the current ESD for setting the 2030 target which is to base them on GDP per capita data, but overall with an increased effort of around 20% for all compared to the 2020 targets, leading to Member States targets within a range of 0 to -40% compared to 2005, instead of the range of +20% to -20% currently for the 2020 targets. As the European Council in its conclusion in October 2014 recognised, continuing the current methodology would take into account considerations of fairness and solidarity. They also suggested using for this 2013 GDP per capita data, the latest year for which data was available at the time of the European Council made its conclusions. Policy options T2-T4: Target adjustments in the group of high income Member States However, in some high income Member States reduction potentials differ strongly from targets based on GDP per capita thus potentially resulting in very costly efforts for these Member States if targets would be achieved domestically. Within the group of high income Member States there are also clear differences, with some having more outspoken challenges than others. The European Council recognised this and asked to look at adjustments regarding the target to take this into account. These policy options thus look into adjusting targets within the group of Member States with a GDP per capita above the EU average to reflect cost-efficiency in a fair and balanced manner within this group. Adjustments within the group of high income Member States need to be balanced against each other so that the EU wide -30% reduction target is maintained. Based on assessing which high income Member States have a greater concern related to cost efficiency compared to others with targets set purely on the basis of GDP per capita, a group based approach to target adjustments is proposed. High income Member States are ranked in groups in a manner that is robust over a set of scenarios and avoids hence to base target setting on specific modelling results. Second the impact of any adjustments in targets between these groups needs to be assessed. Two options are assessed, one with only small adjustments (T2), and one with large adjustments within this group (T3). This is done in section 5.1.5. In addition, section 5.1.6 assesses an option T4 where 2030 targets for high income Member States are based for 50% on the target using GDP per capita and 50% on a target based on a cost-effective emission reduction projection. This option was suggested by Belgium and supported by five of eight high income Member States that participated in the public consultation. 4.2.Policy options for setting the starting point for target trajectories

The European Council concluded that the existing methodology under the ESD for target setting should be continued. This includes defining a linear trajectory to the 2030 target. This will also require setting a starting point that allows calculating an annual target for each year in the period 2021 – 2030. Under the current ESD, the starting point for the 2013-2020 target trajectory has been defined in 2012 before the compliance period started. It uses the most recent inventory available, which in 2012 meant data up to 2010. It uses the available last 3 inventory years (2008, 2009 and 2010) to smooth out any ad hoc variability, for instance due to exceptional weather patterns. However, the starting points are defined differently depending if a Member State is allowed to increase emissions or not compared to 2005. With the shift to a 2030 target where all Member States see a reduction of emissions (with a range from 0 to -40%), a continuation of this differentiated baseline option loses its purpose and all should receive the same approach to set the starting point of the 2020. The European Council guidance is less specific on this issue. Section 5.2 assesses the impact of a continuation of the approach similar to the current methodology for Member States which by 2020 need to reduce emissions compared to 2005. For all Member States the target trajectory would be defined in the same way. As starting point the most recent available emissions by 2020 would be used, i.e. 2016-2018 emissions. This level would be applied in 2020 to define a linear trajectory up to the 2030 target. This section will also provide a sensitivity analysis on alternative approaches as requested by a number of stakeholders and Member States. 4.3.Policy options for a one-off flexibility between ETS and non-ETS Policy baseline option O1: No flexibility from the ETS towards the ESR Currently there is no flexibility to use emission reductions under the ETS for compliance in the non-ETS. But the European Council concluded to establish a new flexibility mechanism for Member States with national emission reduction targets significantly above both the EU average target and their cost effective reduction potential, as well as for Member States that did not have free allocation for industrial installations in 2013, to facilitate the achievement of their ESR targets. These allowances are transferred from the auctioning amounts of the ETS of a Member States and can be used for compliance purposes in the ESR by that Member State. The guidance from the European Council makes it clear that predictability for the carbon market and environmental integrity of both the ETS and the ESR must be preserved in the establishment of such a mechanism. The new flexibility mechanism that is foreseen is a limited, one-off reduction in ETS allowances to be decided before 2020. Also many stakeholders confirmed that the one-off flexibility mechanism should not compromise the functioning of the ETS as well as the environmental integrity of the ESR and the ETS. Taking this into account, certain design parameters for such a mechanism are defined from the outset: One crucial aspect to ensure predictability for the carbon market is certainty about the volume of allowances concerned. This can be ensured by requiring that the choice to use the mechanism is irreversible and for the volume to be determined at a date that is fixed in advance of the trading period concerned, i.e. before 2021. Therefore, this is assumed to be the case for all options. Another aspect that can be of importance is clarity about the timing of the transfer of these allowances and when they can be used for compliance in the ESR. Two design parameters are analysed in detail in section 5.3: Eligibility: which Member States can use this one-off mechanism Limit of access: maximum amount of ETS allowances which each eligible Member State can transfer to the ESR. These two choices determine the maximum volume of allowances to be transferred from the ETS to the ESR through the one-off flexibility. Related to eligibility, the European Council has given clear guidance. Section 5.3 first assesses who has a target that is significantly above EU average target and significantly above the cost effective reduction potential. Subsequently it assesses the impact of two options for a limit of access: Policy options O2: For Member States eligible a small amount of allowances is available for the one-off flexibility. Policy options O3: For Member States eligible a large amount of allowances is available for the one-off flexibility. 4.4.Options to include a limited LULUCF flexibility into the Effort Sharing

At present, credits generated in the LULUCF sector cannot be used in the ESD for compliance. The European Council encouraged the European Commission to put forward a policy proposal to include the LULUCF sector into the EU's 2030 climate and energy framework. The European Council explicitly mentioned and expressed concern about the lower mitigation potential of the agriculture and land use sector and the need to optimising this sector's contribution to greenhouse gas mitigation and sequestration, including through afforestation. The options for and implications of the integration of LULUCF into the 2030 non-ETS framework, and notably how they interact with the agriculture sector, are explored in the parallel impact assessment on addressing GHG emissions in agriculture and LULUCF, in the context of the 2030 climate and energy framework (Impact Assessment on agriculture and LULUCF). A policy option that came forward from that assessment is to allow a limited extent of LULUCF credits from activities with sound accounting and overall environmental integrity for compliance in the ESR, corresponding to the lower mitigation potential in the agriculture sector. The aim would be to stimulate real additional action in the land based sector, including agriculture, while respecting these conditions. The total amount coming into the ESR is to be limited over the period 2021 to 2030. Any distribution in the right to use LULUCF credits in the ESR would have to relate to the fact that the emissions in agriculture are seen as very challenging to reduce. The higher the share of agricultural non-CO2 emissions in the effort sharing sectors, the more challenging it may be to achieve a certain amount of reductions in the ESR as it is difficult to reduce emissions from agriculture. To assess this, section 5.4 looks at the impacts of distributing this maximum limit of the use of LULUCF credits looking at the following two options: Policy baseline option L1: No use of LULUCF credits for compliance; Policy option L2: Use of up to 280 million tons LULUCF credits for compliance. 4.5.Policy options for enhancing existing flexibility instruments The options presented below reflect possible solutions that were considered in the stakeholder consultation. Policy baseline option F1 It should be noted that the existing rules already provide for a high degree of flexibility. The policy baseline option for flexibility instruments is to maintain the current provisions in the Effort Sharing Decision without any changes or additional rules. As described in section 1.2, Member States can manage their own AEAs within the compliance period (“inter-temporal flexibility”) and engage in transfers of AEAs among each other (“inter-Member State flexibility“). Member States can set up their own transfer mechanisms on a voluntary basis and decide themselves how many AEAs to sell and at what price. A Member State can also fund a project in another Member State in return for AEAs on an agreed basis reflecting the emissions reductions delivered by the project. This can take place bilaterally without any EU-level mechanism to facilitate such agreements. It is also possible for Member States to establish and fund a project mechanism as part of its policy portfolio to achieve additional mitigation to deliver its own targets or to sell it in the form of AEAs to other Member States. The baseline option and other policy options need to reflect that there are certain limits to flexibility after 2020. There is no use of international credits as the EU has set a domestic target, and there should be no carry-over of any surplus AEAs from the 2013-2020 period to the 2021-2030 period as this would seriously jeopardise environmental integrity, notably the achievement of the 2030 target. It is neither foreseen under existing legislation nor in the European Council conclusions and would also erode the strong incentive to use the existing flexibility instruments in the ESD. Policy option F2: Increased permitted borrowing within the commitment period With respect to inter-temporal flexibility, full banking of any surplus within the commitment period is already allowed in the policy baseline option. Therefore the only remaining enhancement option for inter-temporal flexibility is to allow a higher level of borrowing of AEAs from subsequent years. Alternative options screened for borrowing are (i) an increase in permitted borrowing to a rate of 10% throughout the compliance period 2021-2030 and (ii) an increase in permitted borrowing to 10% from the subsequent year in 2021-2025, reduced to 5% from 2026 onwards. These options are in line with responses received in the stakeholder consultation, where many Member States wanted a higher rate of borrowing within the commitment period. Their argument was that a higher rate would make it easier to manage their emission allocations over the period and ensure compliance with their annual obligations. There are linkages with policy options for administering compliance checks described in section 4.6. Only the second alternative is retained for further assessment. The first alternative, increasing permitted borrowing to 10% for all years in the compliance period, was discarded. It would provide greater flexibility to Member States, but increases the risk for non-compliance by creating incentives to delay the introduction of new policies. It also creates a greater risk that Member States will not be able to cover any deficit created for future years either from domestic mitigation, or by securing AEAs from other countries. The following policy options concern enhancement of inter-Member State flexibility. They are listed according to the degree of EU-level interference and concern both transfers and project-based alternatives. They are not mutually exclusive. Policy option F3: Central information site Creation of a central site where all offers and requests for AEA transfers would have to be notified by Member States selling or buying AEAs. The information submitted by participating Member States could include the amount of AEAs, the requested price and other conditions requested for the transfers. Similarly, offers and expression of interest as well as information on potential projects in Member States would be notified here.

The site would be open only to Member States and would be used only for sharing this information, not for concluding actual transfers. Member States would be expected to organise their own public tenders for hosting or investing in any emission reduction projects. The site could be hosted by the European Commission or by an organisation contracted by it. The information submitted by participating Member States would include the amount of AEAs, the price and other conditions requested for the transfers. In addition to the information made available to Member States at the central site, the European Commission would annually publish all offers and requests, including price, volumes and other relevant information, to increase transparency. Policy option F4: Central market place for AEA transfers This option involves establishing a central market place for inter-Member State transfers of AEAs. The market place would enable Member States to offer AEAs for sale and submit requests to purchase allowing for full price transparency. The market place would act as a broker matching sellers with buyers. It could be hosted by a European Institution or contracted to an external organisation. The market place could also be used as a match-making facility for projects. The facility could be voluntary or mandatory for Member States that would want to engage in transfers. In the latter case, bilateral Member State transfers outside the central market place would not be allowed. Policy option F5: Mandatory auctioning This option would constitute a central initial auction at the beginning of the 2021-2030 commitment period based on a limited set-aside (e.g., 1%) of the AEAs in the first year(s) of the period . It could possibly be combined with later auctions held on a regular basis, with Member States required to contribute a share of any surplus AEAs established after compliance checks (i.e., any positive difference between their allocations for each year and their actual emissions in that year) to the auctioning pool. In the stakeholder consultation the majority of Member States and other stakeholders were open to different solutions with respect to the policy options F2 to F4. There were also different views regarding to what degree the existing flexibilities should be enhanced. For example, although Member States in general support enhancing AEA transfers, most would oppose mandatory trading . Thus, no clear preference emerged from the consultation. 4.6.Policy options for administering compliance Transparent and regular reporting and compliance checks of Member States are two fundamental elements to ensure progress towards delivering the EU long-term emission reduction commitments. Firstly, annual emissions reporting is the very basis of monitoring the European Union’s internal and international climate mitigation obligations and therefore needs to be maintained as a main provision for the non-ETS sectors. It is widely supported by Member States and other stakeholders. Another fundamental element of the ESD is that it, like the EU ETS, is based on a linear trajectory with annual limits to ensure delivery of the EU’s emission reduction targets. It is therefore assumed that annual emissions reporting would be maintained in the ESR also after 2020. Continuing with the present practice, the Commission would, every autumn, report on annual progress as part of the Annual State of the Energy Union report and the European Semester. Secondly, the current compliance cycle is based on annual compliance checks: an EU-internal GHG emission inventory review is performed by the European Commission and the European Environment Agency, based on which the actual emissions of Member States are compared with their annual emission allocations for a given year. The experience from the first two years of the annual compliance cycle under the current ESD suggests that it is difficult to complete the whole compliance cycle from the submission of emission inventories to the final compliance check in the Union Registry within the same year. In the stakeholder consultation, several Member States expressed a preference for less frequent compliance checks for the sectors under the current ESD after 2020. For these reasons the policy options will consider different ways to make the compliance checks less frequent, while maintaining annual reporting and compliance: Policy baseline option C1 The policy baseline option is to continue the system under the current ESD with annual compliance checks. Policy option C2: Biennial compliance checks A second option is to check compliance with annual AEA limits every second year, i.e. the first compliance check of reported annual emissions for the years 2021 and 2022 would be performed in 2024. Policy option C3: Compliance checks every fifth year A third option is to perform compliance checks after every 5 years, i.e. the first compliance check of reported annual emissions for the years 2021, 2022, 2023, 2024 and 2025 would be performed in 2027. 5.What are the impacts of the different policy options and who will be affected? The 2014 impact assessment for the 2030 framework for climate and energy has provided a comprehensive assessment of environmental, economic and social impacts of the 2030 targets, including at Member State level. It has also assessed impacts on competitiveness.

The following assessment focuses on the detailed design elements of the Effort Sharing policy proposal and related national binding targets and flexibilities, with as policy baseline the continuation of the ESD for the period 2021-2030 with unchanged principles and main provisions. The assessment of the policy options will in general use this policy baseline to compare the relevant advantages and disadvantages of policy options, as required by the Better Regulation Guidelines. Where relevant, also the baseline without additional policies, as represented in the Reference projection, will be taken into account. The policy options will be assessed with a view on meeting the specific objectives (see section 3.2), i.e. to ensure EU wide environmental integrity with respect to achieving the at least 40% domestic reduction target in 2030, to achieve fairness between Member States with different economic capacities as the social dimension, and to ensure EU wide cost efficiency as key economic dimension. The initiative sets targets for Member States and covers mainly the buildings, transport, agriculture and waste sectors. Impacts on competitiveness of industrial manufacturing plants and SMEs are difficult to be quantified and are not expected to be significant. Impacts on the agriculture sector are also assessed in the Impact Assessment for agriculture and LULUCF. A number of modelling scenarios are used to assess the impact of different options as described in section 4: The EU 2016 Reference scenario produced with the PRIMES and GAINS models covers recently adopted EU and national policies and overachieves on this basis the 2020 EU level ESD targets, but no additional policies. As such it represents a baseline with no new policies after 2020. In addition, where relevant reference is made to two other projections which also achieve in 2020 the EU level ESD targets but do not assume additional policies beyond 2020: Aggregated national projections "With Existing Measures", here referred to as MS WEM as included in the EEA (2015) Trends and projections Report 2015; the EU Reference scenario 2013 used for the 2030 framework impact assessment. The assessment of policy options builds foremost on a set of newly developed scenarios based on the recent 2016 Reference scenario. The two central policy scenarios reflect the 2030 targets agreed by the European Council but recognising that for energy efficiency a review will still be undertaken if the target should be set at 30% rather than 27% (referred to as EUCO27 and EUCO30): EUCO27: A scenario that achieves the at least -40% GHG reduction target (with the split ETS/non-ETS reducing by -43%/-30% in 2030 compared to 2005), a 27% share of renewables and 27% energy efficiency improvements. EUCO30: A scenario that achieves the at least -40% GHG reduction target (with the split ETS/non-ETS reducing by -43%/-30% in 2030 compared to 2005), a 27% share of renewables and an increase of the energy efficiency target to 30%. The approach followed for the definition of the scenarios is to use a combination of policy instruments including carbon pricing to reduce emissions in the ETS and non-CO2 emissions in effort sharing sectors, standards, reduction of market barriers, incentives and obligations related to energy efficiency and renewables policies in a coherent manner across Member States, taking into account the current policy framework (as developed in the Reference scenario). These policies are varied in stringency and intensity to meet the GHG, energy efficiency and renewables targets of the scenarios for 2030 but applied equally across the EU Member States. Overall this reflects a cost efficient achievement of GHG reductions in the context of different sets of EE and RES targets and existing policies. While informative about the achieved additional emission reductions in case of coherent cost efficient actions across the EU in all policy areas to achieve all targets, these scenarios outcomes cannot be attributed to the effort sharing mechanism itself, which will sets targets differently from the cost effective outcome to allow for fairness between Member States. These scenarios also achieve the long term milestone to reduce GHG emissions domestically in the EU by 80%. For more detail of incentives and policies simulated, see annex 8.4.3. In addition a scenario, referred to as WEM-EXTRA, is developed based on Member States' own projections as reported in 2015 under the Monitoring Mechanism Regulation reflecting existing policies ('With Existing Measures', referred to in this assessment as MS-WEM ). The MS-WEM projections when aggregated do not achieve the -30% ESR GHG target and thus need to be extrapolated to meet the -30% target using estimates for additional reduction potential from the PRIMES-GAINS model (see also annex 8.4.3). This scenario aims at capturing major differences in projections regarding the impact of the existing policy framework between Member States and the modelling tools used by the Commission. Finally for further check of the robustness of the differences in impacts, notably regarding the 2030 target on high income Member States, two scenarios as developed for the 2014 Impact Assessments of the 2030 framework are revisited. These scenarios are based on the old 2013 Reference scenario and can serve as robustness with regard to the impact of changes in data and changes in assumptions of existing and new policies. These scenarios can also be informative given that high income Member States have shaped up their expectations about ESR target setting, notably on how to take into account cost efficiency, based on these existing scenarios: The GHG40 scenario included in the 2030 framework impact assessment projecting the ETS/ESR split of -43%/-30% in 2030 compared to 2005 achieving only the -40% GHG target (compared to 1990), but only achieving 25% energy efficiency . The EE30 scenario included in the impact assessment supporting the Energy Efficiency communication respecting the agreed ETS/ESR split and achieving 30% energy efficiency improvements, resulting in energy efficiency being the primary tool to reduce emissions beyond the Reference to achieve the ESR target. 5.1.Assessing policy options for setting national 2030 targets 5.1.1.Calculating Effort Sharing Targets based on fairness (policy baseline option) The Effort Sharing Decision targets for 2020 were based on differentiation of efforts depending on relative GDP per capita for 2005 with GDP measured at market prices, as shown in Figure 6 . Member States with a GDP/Capita above and below the EU average GDP/Capita were allocated a corresponding target ranging from +20% to -20%. The slope of the function is steeper for Member States with a GDP/Capita below the EU average, leading to a faster decrease in ambition for lower income levels. The slope for higher income Member States is less steep and thus leads to less rapid increases in ambition for the highest income Member States, in part already limiting economic impacts and recognising different capacities for all these countries. The 2020 targets for Greece, Latvia and Slovenia were adjusted for specific Member State concerns. The results meet the overall ambition within the ESD sectors of close to -10% GHG reduction by 2020 compared to 2005.

The starting point for calculating the 2030 targets is to apply all elements of the 2020 methodology with the same differentiation in efforts depending on relative differences in GDP per capita. The lower and upper limits will have to be reduced by 20%, to 0% and -40% as the average target changes from close to -10% to -30%. Furthermore, data for GDP per capita needs to be updated from 2005 to 2013 data as well as emission inventory data. The figure below shows the 2020 ESD targets and resulting 2030 targets if the 2020 ESD methodology based on GDP per capita is applied but updated: i.e. the graph shifts lower due to increased ambition and to the right as a result of an increase in EU average GDP/Capita. Source: Commission calculations based on Eurostat and reported GHG emissions Table 1 shows the 2030 rounded non-ETS target resulting from applying the methodology. Some Member States are affected by the limitation on the range of targets between 0 and -40%. This is shown in the brackets in the right column. If there would be no limitation, DK, SE and LU would receive targets going beyond 40%, with notably LU a target as high as -61%. 2030 Target (Target if there would be no target range of 0 to -40%) LU -40% (-61%) DK -40% (-42%) SE -40% (-42%) IE -39% NL -39% AT -39% FI -39% BE -38% DE -37% FR -36% UK -36% IT -33% ES -26% CY -24% MT -19% PT -17% EL -16% SI -15% CZ -14% EE -13% SK -12% LT -9% PL -7% HR -7% HU -7% LV -6% RO -2% BG 0% (+1%)



Source: Commission calculations, data GDP per capita: Eurostat, Gross Domestic Product at market prices, nama_10_pc, as of 19 April 2016, see also annex 8.5 for overview GDP per capita data As the 2030 framework impact assessment already showed, applying cost-effectiveness as the principle for target setting would lead to higher costs per GDP for lower income Member States. Overall the distribution based on GDP per capita improves fairness towards lower income Member States. 5.1.2.Methodology for assessing policy options related to adjustment to targets within the group of higher income Member States The European Council concluded that targets for the Member States with a GDP per capita above the EU average should be relatively adjusted to reflect cost-effectiveness in a fair and balanced manner. 11 Member States fulfil the criterion of having a GDP above EU average in 2013. LU, DK, SE, IE, NL, AT, FI, BE, DE, FR, UK, referred to as high income Member States, are together responsible for around 60% of ESD GHG emissions. The economic analysis used focusses on a gap analysis between the cost effective reduction potential of high income Member States i.e. the difference between what they would reduce if the EU were to achieve its GHG target cost effectively in a context that achieves also the renewables and energy efficiency targets, and what their target would be using the policy baseline of a pure GDP per capita approach as described in section 5.1.1. For high income Member States, a target set on the basis of GDP per capita typically would mean higher reductions than their reduction potential in case of cost efficient target achievement across the EU. As a group this is no surprise, given that the GDP per capita approach is one based on fairness, and thus exactly aims at giving high income Member States a relatively more ambitious target than what they would get based on pure cost minimisation. The extent of the gap, however, varies considerably across high income Member States. The table below gives an example of the average gap for the group of high income Member States, as well as the highest and the lowest gap of the individual Member States (comparing the targets as set in Table 1 with the cost efficient reductions as projected in the scenario that achieves all agreed 2030 targets with energy efficiency at a level of 30% in 2030). On average the group is only 4 percentage points away from their target based on GDP per capita in case of cost efficient achievement (with the EUCO27 run this gap is around 5%). But one high income Member States has a gap of rather 30%, while on the other extreme, one high income Member State would actually reduce more in the cost efficient projection at EU level than its target based on GDP per capita. EU targets achieved cost-effectively MS target based on GDP per cap. Gap (as a % of 2005 emissions) EU -30% -30% 0% All High Income MS -33% -37% 4% MS with large gap -10% -40% 30% MS with smallest gap -41% -36% -5% Source: Commission calculations based on PRIMES and GAINS, EUCO30 scenario The assessment carried out focuses on the size of the gap taking into account that a fair and balanced reflection of cost-efficiency would require the differences between high income Member States gaps to reduce.

Most affected Member States seem to recognise merits in an approach based on reducing the gap between cost efficient projections and targets based on GDP per capita, either by supporting to set the 2030 target for 50% based on the target determined by GDP per capita and for 50% based on a cost-effective emission reduction projection or by indicating that limited cost efficient mitigation potential should be taken into account when reflecting cost efficiency. It needs to be assessed to what extent these differences in gap between high income Member States is robust across multiple sources of information. For this a number of relevant projections are used as described in the introduction of section 5. 5.1.3.Divergence of cost efficient projection and targets, using updated projections with various levels of energy efficiency based on the 2016 Reference Two policy scenarios reflecting the 2030 targets agreed by the European Council have been developed (EUCO27, EUCO30) based on the updated EU Reference scenario 2016 and produced with the PRIMES and GAINS models. Based on these projections, the below graph shows the gap, or basically deficit, between the projected cost efficient emission reductions at an EU level, and the target based on GDP per capita for each higher income Member State (as included in Table 1 ). Source: Commission calculations based on PRIMES and GAINS The EUCO27 scenario has an average gap of 5% for the group of high income Member States, while in the EUCO30 scenario this gap is on average 4%. 5 Member States are at levels below or around to the 5% average gap (UK, SE, DE, FI and FR), while the others have a higher gap. Two Member States stand out due to a very large gap above 20% (IE, LU). This picture does not change between the EUCO27 and EUCO30 projection. But there is sectoral variation between these projections which impacts Member States differently. The EUCO30 scenario achieves higher reductions in energy related emissions in for instance building heating and transport due to increased energy efficiency. In the EUCO30 scenario, typically sectors with non-CO2 emissions such as agriculture need to reduce less to achieve the same emission target compared to the EUCO27 scenario. Therefore the EUCO30 scenario shows typically higher reductions than the EUCO27 scenario in Member States with the highest shares of energy emissions in the ESR, resulting in a decrease in the gap for those Member States in the EUCO30 scenario compared to the EUCO27 scenario (e.g. LU, AT and BE). The opposite is the case for Member States with a low share of energy emissions in the effort sharing sectors (e.g. IE and DK). These see less reductions in the EUCO30 compared to the EUCO27 and an increase in the gap. Conclusion: There are significant differences in the size of the gap between Member States in the scenarios achieving in a coherent manner across the EU all the targets of the 2030 climate and energy framework. Having 27% or 30% energy efficiency does not materially affect the relative achieved emissions reductions between Member States in the non-ETS sectors, and thus would not change materially which high income Member States would be categorised as having more or less of a challenge with cost efficiency when targets are determined on the basis of GDP per capita. 5.1.4.Divergence of cost efficient projection and targets, using additional projections to confirm robustness All scenarios in section 5.1.3 are based on the 2016 Reference scenario. This section expands this to other projections to check robustness of the differences in gap between high income Member States, the WEM-EXTRA, GHG40 and EE30 scenarios as described in the introduction of this chapter. Also these projections all achieve the GHG targets, including the split ETS, ESR as agreed. The scenarios based on the 2013 Reference (GHG40, EE30) can serve as robustness check compared to the new scenarios with regard to the impact of changes in data and changes in assumptions of existing and new policies in the underlying Reference scenarios. These scenarios are also informative given that high income Member States have shaped up their expectations about ESR target setting around these scenarios. The WEM-EXTRA scenario based on Member States own projections aims at capturing any major differences in projections regarding the impact of the existing policy framework between Member States and the modelling tools used by the Commission No other projections were used for the robustness check . Source: Commission calculations based on PRIMES, GAINS, Eurostat and EEA 2015

Overall the three additional scenarios do not alter significantly the differentiation of groups of Member States when it comes down to the gap. Notably IE and LU consistently show the highest gaps, above 15%. The three large Member States UK, DE and FR consistently show a gap which is below or at worst around the average of the group of higher income Member States. AT, DK, BE and NL are part of the middle category having a gap above the EU average, but not as wide as LU and IE. DK, and to a lesser extent BE and the NL see a larger reduction in the WEM-EXTRA scenario. However, the Danish national WEM projections 2015 include a national target, with the resulting 'simple' extrapolation to WEM EXTRA potentially in relative terms overestimating the cost effective additional reductions. For SE and to a lesser extent FI more recent national projections as well as the EUCO projections see a significant shift compared to the older scenarios based on the 2013 Reference, resulting in a smaller gap. The GHG40 and EE30 also confirm that higher levels of energy efficiency, in line with an overall 30% GHG reduction, have some distributional impact, but not sufficient to change the ranking or grouping of Member States according to their gap. Conclusion: The following four groups of Member States can be defined: Group 1: DE, UK and FR, the group with a low gap below or around 5% across all scenarios. These Member States represent 75% of the 2005 ESD emissions of the group of higher income Member States. Group 2: SE and FI, a group with a low gap below 5% across the EUCO27, EUCO30 and WEM-EXTRA scenarios, but clearly a significantly higher gap in scenarios based on the 2013 Reference. These two Member States represent 5% of the 2005 ESD emissions of the group of higher income Member States. Group 3: A group of small rich Member States ranging above the average gap of higher income Member States and below 15% across most scenarios (AT, DK, BE, NL). These Member States represent 17% of 2005 ESD emissions of higher income Member States. Group 4: A small group with a very high gap of above 15% across all scenarios, comprising two smaller Member States (LU, IE). These two Member States only represent 3% of higher income Member State emissions and the highest ESD per capita emissions in the EU. 5.1.5.Assessment of target adjustment options based on grouping of Member States If targets based on GDP per capita would need to be adjusted, then it is logic that the Member States with a more challenging target based on cost effectiveness (e.g. Groups 3 and 4) would see a decrease in ambition compared to a target based only on GDP per capita, more outspoken for group 4 than for group 3, compensated by an increase in ambition for groups 1 and 2, with for group 2 a more prudent approach given that the robustness of classification is not consistent over all projections. This adjustment has to result in the same reduction (and thus gap) by all higher income Member States but a reduction of the variance of the individual gaps. Moreover, it is worth noting that Groups 1 and 2 represent nearly 80% of all ESD emissions of Member States with GDP above EU average. This implies that an increase of the targets for members of Group 1 with 1% allows decreasing targets for all members of Groups 3 and 4 by roughly 4%. These results lead to the following specification of further options T2 and T3 in addition to the policy baseline option (T1) which is based on the update of the GDP per capita methodology (see Table 1 ). T2 sees limited adjustments and T3 high adjustments. The adjustment starts from the targets based on GDP per capita before being constrained by the maximum range of targets from 0% to -40%, in order to continue to recognise the significant differences in income levels for some high income Member States, and thus the capacity to pay: Option T2: An upward adjustment in ambition of 1 percentage point for group 1, no adjustments for group 2 and a downward adjustment in ambition of 3 percentage points for group 3 and 9 percentage points for group 4.  Option T3: A doubling of the upward adjustment in ambition to 2 percentage point for group 1 and also an upward adjustment in ambition of 1 percentage point for group 2, and a downward adjustment in ambition of 7 percentage points for group 2 and 13 percentage points for group 3. See Table 3 for the resulting targets per Member States for the three options. In all 3 options LU would remain at the highest level, recognising it already gets a major benefit from the fact that the overall range of targets are limited to -40% (LU would receive a -61% target otherwise under option T1). Similarly SE has in all 3 options an equal target, given that targets cannot increase beyond -40%. All other high income Member states see variation in their targets. I