EN Official Journal of the European Union C 240/62

Opinion of the European Committee of the Regions — Cost-effective emission reductions and low-carbon investments

(2016/C 240/10)

Rapporteur: Marco DUS (IT/PES) Member of Vittorio Veneto Municipal Council, Treviso Reference document: Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments COM(2015) 337 final

I. PROPOSED AMENDMENTS

Amendment 1

Recital 6

Text proposed by the Commission CoR amendment The auctioning of allowances remains the general rule, with free allocation as the exception. Consequently, and as confirmed by the European Council, the share of allowances to be auctioned, which was 57 % over the period 2013-2020, should not be reduced. The Commission’s Impact Assessment provides details on the auction share and specifies that this 57 % share is made up of allowances auctioned on behalf of Member States, including allowances set aside for new entrants but not allocated, allowances for modernising electricity generation in some Member States and allowances which are to be auctioned at a later point in time because of their placement in the Market Stability Reserve established by Decision (EU) 2015/… of the European Parliament and of the Council. The auctioning of allowances remains the general rule, with free allocation as the exception. Consequently, and as confirmed by the European Council, the share of allowances to be auctioned, which was 57 % over the period 2013-2020 should not be reduced. To ensure that the EU ETS operates as effectively as possible, the common objective should be to continue gradually increasing the allowances to be auctioned. The Commission’s Impact Assessment provides details on the auction share and specifies that this share is made up of allowances auctioned on behalf of Member States, including allowances set aside for new entrants but not allocated, allowances for modernising electricity generation in some Member States and allowances which are to be auctioned at a later point in time because of their placement in the Market Stability Reserve established by Decision (EU) 2015/… of the European Parliament and of the Council. The number of allowances available for free allocation should correspond to the requirements of the most efficient enterprises that are at risk of carbon leakage, based on ambitious benchmarks that are also technically and economically feasible on an industrial scale.

Reason

We could be more ambitious than the text proposed in the Directive. The Committee of the Regions believes that European climate policies should always be forward-looking, always cater for cost-efficiency and carefully assess the entire value chain, given the way the various industrial sectors are closely interconnected.

Amendment 2

Recital 9

Text proposed by the Commission CoR amendment Member States should partially compensate, in accordance with state aid rules, certain installations in sectors or sub-sectors which have been determined to be exposed to a significant risk of carbon leakage because of costs related to greenhouse gas emissions passed on in electricity prices. The Protocol and accompanying decisions adopted by the Conference of the Parties in Paris need to provide for the dynamic mobilisation of climate finance, technology transfer and capacity building for eligible Parties, particularly those with least capabilities. Public sector climate finance will continue to play an important role in mobilising resources after 2020. Therefore, auction revenues should also be used for climate financing actions in vulnerable third countries, including adaptation to the impacts of climate. The amount of climate finance to be mobilised will also depend on the ambition and quality of the proposed Intended Nationally Determined Contributions (INDCs), subsequent investment plans and national adaptation planning processes. Member States should also use auction revenues to promote skill formation and reallocation of labour affected by the transition of jobs in a decarbonising economy. Member States should partially compensate, in accordance with state aid rules, certain installations in sectors or sub-sectors which have been determined to be exposed to a significant risk of carbon leakage because of costs related to greenhouse gas emissions passed on in electricity prices. In order to avoid distortions in competition between businesses in the various Member States, it must be mandatory to regulate the compensatory funds issued to each business homogenously across the whole EU. The Protocol and accompanying decisions adopted by the Conference of the Parties in Paris need to provide for the dynamic mobilisation of climate finance, technology transfer and capacity building for eligible Parties, particularly those with least capabilities. Public sector climate finance will continue to play an important role in mobilising resources after 2020. Therefore, auction revenues should also be used for climate financing actions in vulnerable third countries, including adaptation to the impacts of climate. The amount of climate finance to be mobilised will also depend on the ambition and quality of the proposed Intended Nationally Determined Contributions (INDCs), subsequent investment plans and national adaptation planning processes. Each Member State should set a minimum percentage threshold of at least 20 % of auction revenues to be managed directly by the local and regional authorities, for climate mitigation, for example in relation to hydrogeological risks, which these authorities are increasingly required to manage, and for appropriate adaptation of electricity and thermal transmission infrastructure to the growing possibilities of producing energy from renewable sources . It should also be possible to use revenues from emissions trading in the Member States to prevent local and regional climate risks and protect against and adapt to the effects of climate change. Member States should also use auction revenues to promote skill formation and reallocation of labour affected by the transition of jobs in a decarbonising economy.

Reason

The role played by local and regional authorities in these policies should be enhanced rather than undervalued. The Committee of the Regions proposes that Member States provide for a share of revenue from auctioning emission allowances to be managed directly by local and regional authorities for the purposes of climate change mitigation, especially in relation to hydrogeological hazards, which local and regional authorities are increasingly called on to manage in emergency situations.

Amendment 3

Recital 10

Text proposed by the Commission CoR amendment The main long-term incentive from this Directive for the capture and storage of CO2 (CCS), new renewable energy technologies and breakthrough innovation in low-carbon technologies and processes is the carbon price signal it creates and that allowances will not need to be surrendered for CO2 emissions which are permanently stored or avoided. In addition, to supplement the resources already being used to accelerate demonstration of commercial CCS facilities and innovative renewable energy technologies, EU ETS allowances should be used to provide guaranteed rewards for deployment of CCS facilities, new renewable energy technologies and industrial innovation in low-carbon technologies and processes in the Union for CO2 stored or avoided on a sufficient scale, provided an agreement on knowledge sharing is in place. The majority of this support should be dependent on verified avoidance of greenhouse gas emissions, while some support may be given when pre-determined milestones are reached taking into account the technology deployed. The maximum percentage of project costs to be supported may vary by category of project. The main long-term incentive from this Directive for the capture and storage of CO2 ( all types of CCS), new renewable energy technologies, energy efficiency and breakthrough innovation in low-carbon technologies and processes (such as the capture and utilisation of CO2 — CCU) is the carbon price signal it creates and that allowances will not need to be surrendered for CO2 emissions which are permanently stored or avoided. In addition, to supplement the resources already being used to accelerate demonstration of commercial CCS facilities and innovative renewable energy technologies, EU ETS allowances should be used to provide guaranteed rewards for deployment of CCS facilities, new renewable energy technologies and industrial innovation in cost effective CCU or low-carbon technologies and processes in the Union for CO2 stored or avoided on a sufficient scale, provided an agreement on knowledge sharing is in place. The majority of this support should be dependent on verified avoidance of greenhouse gas emissions, while some support may be given when pre-determined milestones are reached taking into account the technology deployed. The maximum percentage of project costs to be supported may vary by category of project.

Reason

It would be worth making direct reference to energy efficiency and the whole field of technology relating to the capture and utilisation of CO2 (CCU) as a raw material in other industrial processes. Testing is already underway in this field, and should a sufficient level of technological maturity be reached, it would be a much better prospect than CCS. In addition, the CoR draws attention to the issue of security, especially long-term security, which these systems will have to be able to guarantee.

Amendment 4

Recital 11

Text proposed by the Commission CoR amendment A Modernisation Fund should be established from 2 % of the total EU ETS allowances, and auctioned in accordance with the rules and modalities for auctions taking place on the Common Auction Platform set out in Regulation (EC) No 1031/2010. Member States who in 2013 had a GDP per capita at market exchange rates of below 60 % below the Union average should be eligible for funding from the Modernisation Fund and derogate up to 2030 from the principle of full auctioning for electricity generation by using the option of free allocation in order to transparently promote real investments modernising their energy sector while avoiding distortions of the internal energy market. The rules for governing the Modernisation Fund should provide a coherent, comprehensive and transparent framework to ensure the most efficient implementation possible, taking into account the need for easy access by all participants. The function of the governance structure should be commensurate with the purpose of ensuring the appropriate use of the funds. That governance structure should be composed of an investment board and a management committee and due account should be taken of the expertise of the EIB in the decision-making process unless support is provided to small projects through loans from a national promotional banks or through grants via a national programme sharing the objectives of the Modernisation Fund. Investments financed from the fund should be proposed by the Member States. To ensure that the investment needs in low income Member States are adequately addressed, the distribution of funds will take into account in equal shares verified emissions and GDP criteria. The financial assistance from the Modernisation Fund could be provided through different forms. A Modernisation Fund should be established from 2 % of the total EU ETS allowances, and auctioned in accordance with the rules and modalities for auctions taking place on the Common Auction Platform set out in Regulation (EC) No 1031/2010. Member States who in 2013 had a GDP per capita at market exchange rates of below 60 % below the Union average should be eligible for funding from the Modernisation Fund and derogate up to 2030 from the principle of full auctioning for electricity generation by using the option of free allocation in order to transparently promote real investments modernising their energy sector while avoiding distortions of the internal energy market. Similarly, the Modernisation Fund should be open to NUTS 2 regions in Member States with clear internal imbalances, in order to boost the revitalisation and modernisation of the energy sector. The rules for governing the Modernisation Fund should provide a coherent, comprehensive and transparent framework to ensure the most efficient implementation possible, taking into account the need for easy access by all participants. The function of the governance structure should be commensurate with the purpose of ensuring the appropriate use of the funds. That governance structure should be composed of an investment board and a management committee and due account should be taken of the expertise of the EIB in the decision-making process unless support is provided to small projects through loans from a national promotional banks or through grants via a national programme sharing the objectives of the Modernisation Fund. Investments financed from the fund should be proposed by the Member States. To ensure that the investment needs in low income Member States are adequately addressed, the distribution of funds will take into account in equal shares verified emissions and GDP criteria. The distribution of funds will be conducted in line with the principle of subsidiarity and in respect of the right of the Member States to determine their own energy sources. The financial assistance from the Modernisation Fund could be provided through different forms.

Reason

The Committee of the Regions calls for support from the Modernisation Fund to be open to NUTS 2 regions. While supporting the principle of solidarity and the plans to continue the allocation of free allowances in order to modernise the energy sectors of Member States whose GDP per capita was below 60 % of the EU average in 2013, it calls for the value of GDP per capita of the NUTS 2 regions also to be taken into consideration in the allocation of allowances, since it would be simplistic to consider only national GDP per capita in Member States with significant regional imbalances. A Member State’s right to determine the choice between different energy sources is expressed in Article 194(2) TFEU.

Amendment 5

Recital 12

Text proposed by the Commission CoR amendment The European Council confirmed that the modalities, including transparency, of the optional free allocation to modernise the energy sector in certain Member States should be improved. Investments with a value of EUR 10 million or more should be selected by the Member State concerned through a competitive bidding process on the basis of clear and transparent rules to ensure that free allocation is used to promote real investments modernising the energy sector in line with the Energy Union objectives. Investments with a value of less than EUR 10 million should also be eligible for funding from the free allocation. The Member State concerned should select such investments based on clear and transparent criteria. The results of this selection process should be subject to public consultation. The public should be duly kept informed at the stage of the selection of investment projects as well as of their implementation. The European Council confirmed that the modalities, including transparency, of the optional free allocation to modernise the energy sector in certain Member States should be improved. Investments with a value of EUR 10 million or more should be selected by the Member State concerned through a competitive bidding process on the basis of clear and transparent rules to ensure that free allocation is used to promote real investments modernising the energy sector in line with the Energy Union objectives. Investments with a value of less than EUR 10 million should also be eligible for funding from the free allocation. The Member State concerned should select such investments based on clear and transparent criteria. The results of this selection process should be subject to public consultation which takes account, in particular, of the views of local and regional authorities . The public should be duly kept informed at the stage of the selection of investment projects as well as of their implementation.

Reason

As it believes that the role played by local and regional authorities in these policies should be enhanced rather than undervalued, the Committee of the Regions suggests making it compulsory for local and regional authorities also to be specifically consulted during public consultations on the results of the optional free allocation processes for the modernisation of the energy sector.

Amendment 6

New recital 13a

Text proposed by the Commission CoR amendment The Paris Agreement reached during COP21 requires an effort to be made by all of the parties to that agreement to ensure that it is ratified and implemented quickly and in a more ambitious way. Greater emphasis should thus be placed on all initiatives or campaigns, including those of the local and regional level or geared towards it, which can contribute to achieving the targets set for cutting greenhouse gas emissions. A tool for monitoring environmental policies and sharing best practices and projects implemented at regional and local levels (e.g. linked to the Covenant of Mayors) could help to further subsidiarity and ensure that all tiers of government shoulder their responsibilities.

Reason

The Committee of the Regions calls for the Paris Agreement to be quickly followed by formal ratification and rigorous implementation. While the EU ETS may be one of the main mechanisms for helping to cut emissions and, therefore, for achieving the targets set, it cannot be the only instrument available to the EU. In this regard, the CoR agrees that it is important for inter-sectoral and climate policies to be consistent with other EU policies (especially those implemented through the Structural Funds) and, moreover, feels that a dedicated tool at local level could encourage this and enhance the role of the CoR itself.

Amendment 7

Article 1(4)(a)

Text proposed by the Commission CoR amendment Article 10 is amended as follows: Article 10 is amended as follows: (a) three new subparagraphs are added to paragraph 1: (a) three new subparagraphs are added to paragraph 1: ‘From 2021 onwards, the share of allowances to be auctioned by Member States shall be 57 %. ‘From 2021 onwards, the share of allowances to be auctioned by Member States shall be at least 57 %. In order to ensure that the EU ETS operates as effectively as possible, a mandatory increase in the percentage of allowances to be auctioned could be envisaged only if the international situation allows this without jeopardising the competitiveness of European industry. 2 % of the total quantity of allowances between 2021 and 2030 shall be auctioned to establish a fund to improve energy efficiency and modernise the energy systems of certain Member States as set out in Article 10d of this Directive (“the Modernisation Fund”). 2 % of the total quantity of allowances between 2021 and 2030 shall be auctioned to establish a fund to improve energy efficiency and modernise the energy systems of certain Member States as set out in Article 10d of this Directive (“the Modernisation Fund”). The total remaining quantity of allowances to be auctioned by Member States shall be distributed in accordance with paragraph 2.’; The total remaining quantity of allowances to be auctioned by Member States shall be distributed in accordance with paragraph 2.’;

Reason

The Committee of the Regions believes that the percentage of allowances to be auctioned, which was 57 % in 2013-2020, should be increased gradually by establishing set timeframes to make it easier to achieve the ambitious targets we have set ourselves. Indeed, the CoR believes that ambitious targets are crucial to encouraging progress in this area and therefore welcomes the increase in the annual reduction factor to 2,2 % from 2021 onwards. Nevertheless, in order to avoid the risk of carbon leakage and preserve Europe’s competitiveness, the Committee also endorses the decision to continue with the free allocation of part of the allowances. However, these measures should be regarded as exceptional and must be revised and updated gradually as other global economies adopt similar instruments to combat emissions.

Amendment 8

Article 1(1)(5)(f)

Text proposed by the Commission CoR amendment in paragraph 8, the first, second and third subparagraphs of paragraph 8 are replaced by the following: in paragraph 8, the first, second and third subparagraphs of paragraph 8 are replaced by the following: ‘400 million allowances shall be available to support innovation in low-carbon technologies and processes in industrial sectors listed in Annex I, and to help stimulate the construction and operation of commercial demonstration projects that aim at the environmentally safe capture and geological storage (CCS) of CO2 as well as demonstration projects of innovative renewable energy technologies, in the territory of the Union. ‘400 million allowances shall be available to support innovation in low-carbon technologies and processes in industrial sectors listed in Annex I, and to help stimulate the construction and operation of commercial demonstration projects that aim at the environmentally safe and cost-effective capture and geological storage (CCS) of CO2 or the capture and utilisation of CO2 in industrial processes (CCU) as well as demonstration projects of innovative renewable energy and energy efficiency technologies, in the territory of the Union. The allowances shall be made available for innovation in low-carbon industrial technologies and processes and support for demonstration projects for the development of a wide range of CCS and innovative renewable energy technologies that are not yet commercially viable in geographically balanced locations. In order to promote innovative projects, up to 60 % of the relevant costs of projects may be supported, out of which up to 40 % may not be dependent on verified avoidance of greenhouse gas emissions provided that pre-determined milestones are attained taking into account the technology deployed. The allowances shall be made available for innovation in low-carbon industrial technologies and processes and support for demonstration projects for the development of a wide range of CCS and innovative renewable energy technologies that are not yet commercially viable in geographically balanced locations. In order to promote innovative projects, up to 60 % of the relevant costs of projects may be supported, out of which up to 40 % may not be dependent on verified avoidance of greenhouse gas emissions provided that pre-determined milestones are attained taking into account the technology deployed. In addition, 50 million unallocated allowances from the market stability reserve established by Decision (EU) 2015/… shall supplement any existing resources remaining under this paragraph for projects referred to above, with projects in all Member States including small-scale projects, before 2021. Projects shall be selected on the basis of objective and transparent criteria. In addition, 50 million unallocated allowances from the market stability reserve established by Decision (EU) 2015/… shall supplement any existing resources remaining under this paragraph for projects referred to above, with projects in all Member States including small-scale projects, before 2021. Projects shall be selected on the basis of objective and transparent criteria. The Commission shall be empowered to adopt a delegated act in accordance with Article 23.’; The Commission shall be empowered to adopt a delegated act in accordance with Article 23.’;

Reason

It would be worth making direct reference to energy efficiency and the whole field of technology relating to the capture and utilisation of CO2 (CCU) as a raw material in other industrial processes. Testing is already underway in this field, and should a sufficient level of technological maturity be reached, it would be a much better prospect than CCS.

Amendment 9

Article 1(6) new Article 10c point 1

Text proposed by the Commission CoR amendment 1. By derogation from Article 10a(1) to (5), Member States which had in 2013 a GDP per capita in EUR at market prices below 60 % of the Union average may give a transitional free allocation to installations for electricity production for the modernisation of the energy sector. 1. By derogation from Article 10a(1) to (5), Member States and NUTS 2 regions in Member States with clear internal imbalances which had in 2013 a GDP per capita in EUR at market prices below 60 % of the Union average may give a transitional free allocation to installations for electricity production for the modernisation of the energy sector.

Reason

The Committee of the Regions calls for support from the Modernisation Fund to be open to NUTS 2 regions. While supporting the principle of solidarity and the plans to continue the allocation of free allowances in order to modernise the energy sectors of Member States whose GDP per capita was below 60 % of the EU average in 2013, it calls for the value of GDP per capita of the NUTS 2 regions also to be taken into consideration in the allocation of allowances, since it would be simplistic to consider only national GDP per capita in Member States with significant regional imbalances.

II. POLICY RECOMMENDATIONS

THE EUROPEAN COMMITTEE OF THE REGIONS

1. stresses the importance of involving local and regional authorities in this area since they have considerable expertise thanks to their frontline role in combating climate change as they are, by their very nature, the authorities closest to the public and the first to manage the response to environmental emergencies;

2. calls on all major international stakeholders (businesses, the financial sector, governments, the United Nations, NGOs and civil society) to work together with all levels of government to provide a coordinated and effective response to environmental and climate emergencies, in line with the outcome of COP21 in Paris; takes note in this context of Communication COM(2016) 110 final ‘The Road from Paris’ which will be analysed more in depth by a future CoR opinion; regrets, however, the relative weakness of the reference to the role of a reformed ETS in implementing the Paris agreement and the lack of recognition of the regional dimension in this process;

3. welcomes the outcome of COP21 as regards the common will to work together towards an ambitious goal, and endorses the decision to have five-yearly reviews of the various targets, so that they are always adequate; underlines, however, that the opportunity was missed to address the risk of carbon leakage at global level and provide responses;

4. highlights the importance of continuously enhancing the integration of the ETS and policies to promote renewable sources of energy and energy efficiency; in this context, flags up the need to simplify and harmonise legislation in this area;

5. the EU ETS Directive is an existing EU policy instrument under EU environmental law. The proposed amending Directive does not raise any issue regarding its compliance with the principle of subsidiarity, because tackling climate change and its effects is clearly a trans-boundary issue and therefore the objectives of this Directive cannot be sufficiently achieved by the Member States, but better at EU level. The proposed amending Directive does also not go beyond what is necessary in form or content in order to achieve the objective of implementing the EU’s greenhouse gas emission reduction target for 2030 in a cost-effective manner and thus complies with the principle of proportionality;

6. recognises the Europe 2020 goals as priorities and argues that they are certainly compatible with the objective of preserving a strong, competitive and state-of-the-art European industry, for which rules are not perceived as a punitive mechanism, but as incentives for greater efficiency and modernisation. It therefore asks the European Commission to reflect also on the concept of the ‘carbon footprint’ of products and to consider how to promote more sustainable consumption;

7. highlights the importance of tackling the imbalance between supply and demand on the allowances market, helping to guarantee that the price of CO2 emissions is more strongly influenced by medium- and long-term emissions reductions and encouraging investments in low-carbon technologies. Also points out that, as the market stability reserve aims to make the supply of allowances auctioned in the periods straddling two trading periods more flexible, the amendments planned by the proposal for a directive should help to avoid major variations in the number of allowances auctioned and guarantee that these allowances are distributed fairly each year;

8. welcomes the Commission’s proposal to update the current legislation on the EU ETS, and the choice of a directive as legislative instrument;

9. highlights the observations made by the European Court of Auditors, to the effect that there are ‘significant weaknesses’ in the implementation of the EU ETS, and makes recommendations with a view to improving the integrity and implementation of the system, incorporating the notion of industrial efficiency to ensure that the EU economy is fully competitive;

10. points out, as already highlighted in several previous opinions (1), that one of the problems encountered so far in implementing the EU ETS is the price of carbon, which is often considered inefficient. In this respect, the CoR believes that the EU’s aim should be to foster proper pricing at international level and prevent fluctuations purely due to speculation;

11. points out that the directive establishing the EU ETS is one part of a more comprehensive system of measures and must not preclude the possibility for individual Member States also to introduce a carbon tax, aimed at fostering innovation by creating competitive advantages, as has already been done in Norway and Sweden, for example;

12. supports the principle that all sectors of the economy, including those that are not covered by the EU ETS, must contribute to achieving emission reductions, thereby increasing environmental sustainability while, at the same time, ensuring social sustainability. Therefore, encourages the Member States to step up their efforts in sectors not covered by the EU ETS, given that they contribute to more than 50 % of emissions. To this end, suggests that consideration be given to revising the subsidies provided for in the various sectors, in order to spur the market towards innovative, efficient solutions, and to extending the number of sectors covered by the ETS, for example including emissions from the (maritime and land) transport sector and the construction sector;

13. strongly recommends that the reform of the system aim at EU-wide harmonisation of the mechanisms compensating for the indirect costs incurred by industry (in order to avoid distortions of the internal market due to regional competition) and that the system reward the best performers;

14. hopes that the adoption of an emissions trading system by China from 2017 (2) will also encourage other players on the world stage, speeding up convergence towards a zero-carbon economy and leading to phasing-out of the system of free allocations of allowances. However, various forms of support and incentives to switch from fossil energy production to renewable energies should first be considered as alternatives to free allocation;

15. welcomes the intention to improve existing legislation by bolstering transparency through more frequently updated, robust and verified data. Thus requests that the technically and economically realistic benchmarks are updated before the trading period and are underpinned by sound industrial data;

16. considers it essential for the allocation of public sector climate financing to continue beyond 2020 and hopes that this funding will already begin to play an increasingly central role in the EU’s financial framework as from the mid-term review of the main European funding programmes, in particular Horizon 2020;

17. recommends using the leverage afforded by European foreign and trade policies (with particular reference to free trade agreements) to speed up convergence of non-EU countries towards the EU ETS, by promoting an international framework conducive to reaching broader aims;

18. calls for the extension of the EU ETS to aviation emissions to be tackled as soon as possible in order to promote continuous emission reductions, including through technological advances that make European carriers more globally competitive and leaders in sustainability.

Brussels, 7 April 2016. The President of the European Committee of the Regions Markku MARKKULA

(1) ENVE-V-047 A policy framework for climate and energy in the period from 2020 to 2030 and ENVE-V-038 Green Paper on framing 2030 climate and energy policy.

(2) As announced by the Chinese president, Xi Jinping, on 30 September 2015, during his visit to Washington.