COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251(2) of the EC Treaty concerning the Common Position of the Council on the adoption of a Directive of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC

2001/0245 (COD)

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251(2) of the EC Treaty concerning the Common Position of the Council on the adoption of a Directive of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC

1. PROCEDURE The Proposal COM(2001)581 final [1] was transmitted to the European Parliament and the Council on 23 October 2001 in accordance with the co-decision procedure pursuant to Article 175(1) of the EC Treaty. The Committee of Regions gave its opinion on 14 March 2002 [2]. The Economic and Social Committee gave its opinion on 29 May 2002 [3]. The European Parliament gave its opinion at the first reading in session on 10 October 2002. Following the opinion of the European Parliament and pursuant to Article 250(2) of the EC Treaty, the Commission amended its Proposal by COM(2002)680 final [4] and transmitted this to the European Parliament and the Council on 27 November 2002.

[1] OJ C 75 E, 26.03.2002, p. 33.

[2] OJ C 192, 12.08.2002, p.59.

[3] OJ C 221, 17.09.2002, p.27.

[4] Not yet published in the Official Journal

The Council reached unanimous political agreement on a Common Position on 9 December 2002. The Council adopted the Common Position formally on 18 March 2003.

2. PURPOSE OF THE DIRECTIVE

The general objective of the proposed Directive is to create a scheme for greenhouse gas emission allowance trading within the Community by establishing an EU framework and ensuring an EU-wide market for emission allowances. Such an instrument is a cornerstone in the Commission's strategy for reaching the Kyoto target in the most cost-effective way. Emissions trading will reduce the cost of emission reductions by ensuring that these reductions are made where they are least costly. At the same time, emissions trading is environmentally effective by achieving a pre-determined emission reduction from the activities covered. The proposal ensures the proper functioning of the internal market and avoids unacceptable distortions of competition.

The Directive is particularly important to ensure that legal commitments to reduce greenhouse gas emissions pursuant to the Kyoto Protocol, which was ratified by the European Community [5] and its Member States on 31 May 2002, are fulfilled more cost-effectively.

[5] Council Decision 2002/358/EC of 25 April 2002 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder, OJ L 130, 15.05.2002, p.1.

3. COMMISSION COMMENTS

3.1. General comments

The Commission accepted totally, in part or in principle 18 of the 73 amendments proposed by the European Parliament in the first reading and consequently amended its Proposal [6]. All these amendments have been incorporated in the Common Position, which the Council agreed upon unanimously on 9 December 2002, using identical or similar wording. In addition, the Common Position includes five amendments not accepted by the Commission in its amended proposal, relating to the temporary exclusion of certain installations under certain conditions until the end of 2007 (amendment 50), the method of allocation (amendment 102), the limitation of comitology under Article 22 (amendment 49) and the inclusion of additional sectors and gases (amendments 16 and 17).

[6] COM(2002)680.

The Commission accepted many of the Parliament's amendments that increased transparency, and full reasoning in respect of each amendment is given in sections 3.1 and 3.2 of the amended Proposal [7].

[7] COM(2002)680.

The Commission welcomes the adoption of the Common Position on 18 March 2003 as likely to accelerate adoption of the proposal whose principal aims are safeguarded in the Common Position, and thus supports the Common Position as it stands.

3.2. Detailed comments

3.2.1. Parliamentary amendments accepted by the Commission and incorporated in full or in part in the common position

The following amendments, which have been accepted the Commission, are listed in the order of their inclusion in the Common Position.

Concerning recitals: the first sentence of amendment 10 says that policies and measures must be implemented across all sectors of the economy and not only the industrial and energy sectors. It makes explicit a belief that other sectors should contribute to reducing greenhouse gas emissions. This sentence has been accepted by the Commission and is included in the Common Position.

Concerning recitals: amendment 13 states that the EU's climate change strategy "should be built on a balance between the emission allowance trading scheme and other types of Community, domestic and international action". This amendment has been accepted by the Commission and is included in the Common Position.

Amendment 15 (Article 1) states that the present Directive "aims to contribute towards" the EU and its Member States fulfilling their commitments under the Kyoto Protocol with the least possible adverse impact on economic development and employment. This amendment has been accepted by the Commission at the end of existing recital 5 that refers to the Kyoto Protocol's targets, with the replacement of "EU" by "European Community" and the replacement of "least possible diminution of" by "minimum adverse effect on". In the Common Position, the wording "least possible diminution of" proposed by the European Parliament has been re-instated.

Concerning transparency: amendment 35 requires that the system "for the transfer, surrender and cancellation of allowances must ensure transparency as regards the ownership of allowances at all times and as regards the transactions performed between companies inside and outside the Member States". This amendment has been accepted by the Commission through the addition of the wording "be accessible to the public and shall..." to the second sentence of Article 19(2). In the Common Position, this amendment has been included through the replacement of "to provide confidentiality as appropriate" by "to provide for public access and confidentiality as appropriate", thereby enshrining the principle of public access. Detailed arrangements for public access will be laid down in accordance with the international decisions on registries that ensure transparency as regards the ownership of allowances.

Concerning reporting by operators: amendment 39 (Article 14, paragraph 3) changes the word "at" to "three months after" so as to clarify that reporting emissions during a calendar year cannot be made at the exact end of the year (00h00, 1 January). This amendment has been accepted in part by the Commission by replacing the word "at" by the word "after", as it is not necessary to specify "three months", as by 30 April the reports have to be verified and corresponding allowances surrendered (see Article 12(3)). This amendment as incorporated in the Commission's amended proposal is included in the Common Position.

Concerning penalties: amendment 40 (Article 16, paragraph 2) would confine "naming and shaming" to companies who have not surrendered sufficient allowances pursuant to this Directive. This has been accepted by the Commission and is included in the Common Position.

Amendment 41 (Article 16, paragraph 3) deletes the provision that the penalty shall be twice the average market price if higher than EUR100. This has been accepted by the Commission and is included in the Common Position.

Amendment 42 (Article 16, paragraph 4) deletes the provision that in the period 2005-2007 the penalty shall be twice the average market price if higher than EUR50. This has been accepted by the Commission and is included in the Common Position.

Concerning reporting by Member States: amendment 43 provides that Member States shall report on the way in which penalties and the purchase of additional allowances are treated for tax purposes. This amendment has been accepted in principle and in part by the Commission, and inserted into Article 21 on reporting by Member States through the wording "and on the fiscal treatment of allowances". It is all aspects of the fiscal treatment (including capital gains and losses on allowances bought and sold) that would be of possible interest. This amendment is accepted in the Common Position, with the addition of "if any" to accommodate the possibility of there being no fiscal treatment.

Concerning transparency: amendment 46 (Article 17) refers to the forthcoming Directive on access to environmental information. This amendment has been accepted by the Commission and is included in the Common Position by the addition of the words "Article 3(3) and Article 4 of Directive 2003/4/EC".

Concerning the links with emissions trading schemes in third countries: amendments 51 and 103 (Article 25, paragraph 1) say that agreements on the basis of the Kyoto Protocol may only be made with Parties that have ratified the Kyoto Protocol. Agreements must be concluded with the applicant countries insofar as it is not provided by the accession negotiations. This amendment has been accepted by the Commission in principle and in part by replacing "third parties" by "Parties listed in Annex B of the Kyoto Protocol that have ratified that Protocol". The part of the amendment referring to agreements with applicant countries has not been accepted, as emissions trading in the applicant countries is expected to take place through transposition of this scheme, and it would be inappropriate to decide now that a link to any other pre-accession national scheme that has yet to be established "must" be made. The Common Position accepts that links should only be established with Annex B Parties to the Kyoto Protocol and goes further in the direction of the second part of the European Parliament's amendment by stating that "agreements "should be concluded with third countries listed in Annex B to the Kyoto Protocol which have ratified the Protocol", rather than "may be concluded". This establishes a presumption in favour of links being established. Furthermore, a new recital (17) has been introduced which emphasises that linking the Community scheme to emission trading schemes in third countries will increase the cost-effectiveness of achieving the Community emission reduction target.

Concerning review: Amendment 55 inserts that the review should be based on experience during the 3-year period starting in 2005. The Commission accepted that it will make a report, by including the word "shall" in Article 30, paragraph 2, which is acceptable because the Commission's right of initiative to make appropriate proposals is preserved by the wording "proposals as appropriate". This amendment, as incorporated in the Commission's amended proposal, has been accepted in the Common Position.

Concerning elements for review: amendment 56 specifies that the review should examine the relationship between the EU emissions trading scheme and international emissions trading that will start in 2008. This amendment has been accepted by the Commission and is included in the Common Position as Article 30, paragraph 2, point (b).

Amendment 57 inserts "further harmonisation of the" method of allocation, as opposed to "the harmonised method...". This amendment has been accepted by the Commission and included in the Common Position as Article 30, paragraph 2, point (c). It is particularly relevant in the light of the Common Position deciding now on the method of allocation for the period from 2008-2012 by granting a limited degree of national flexibility to issue allowances against payment, because further harmonisation is already explicitly foreseen.

Amendment 58 adds an additional element for review to include the possible amendments to adapt the scheme in the light of EU enlargement. This amendment has been accepted by the Commission and is included in the Common Position as Article 30, paragraph 2, point (i).

Concerning transparency: Amendment 73 requires that national allocation plans shall list installations included in the scope of the directive "and of those installations' emissions permits" [understood as intended to mean that the initial allocation of allowances to each installation shall be published]. This amendment serves to improve transparency, and has been accepted in principle and in part by the Commission through the replacement of "and those installations' emissions permits" with the words "with the quantities of allowances allocated to each". This amendment as incorporated in the Commission's amended proposal is incorporated in the Common Position as Annex III, point 10 with the addition of "intended to be", which clarifies that National Allocation Plan states how allowances are to be allocated in advance of the decision on allocation.

Amendment 74 (Annex IV, Monitoring of emissions of other greenhouse gases) would require that standardised methods for monitoring the emissions of other greenhouse gases than CO2 "shall be developed in collaboration with all stakeholders" and agreed in accordance with the comitology procedure. This amendment has been accepted in part by the Commission, through including the proposed text "shall be developed in collaboration with all stakeholders", while maintaining the word "used" in the original text, followed by the insertion of a comma. This amendment as incorporated in the Commission's amended proposal is incorporated in the Common Position.

3.2.2. Amendments accepted by the Commission, but not incorporated in the common position

All of the amendments that were accepted by the Commission form part of the Common Position.

3.2.3. Parliamentary amendments not accepted by the Commission and incorporated by the Council in the common position

Concerning the method of allocation: Amendment 102 provides for 15% auctioning in both the 2005-2007 and 2008-2012 periods, and states that revenues shall be recycled. The Commission did not accept this amendment because it opposed any auctioning in the first period and wished to take experience into account before deciding on the method of allocation for the second. This amendment has now been incorporated in the Common Position in principle and in part, in that "for the five-year period beginning 1 January 2008, Member States shall allocate at least 90% of the allowances free of charge" (Article 10). In addition, Article 30, paragraph 2, point (c) of the Common Position provides for the review by 30 June 2006 to consider "further harmonisation of the method of allocation". A statement was made for the minutes by the Council and the Commission of their understanding "that any revenues arising from any allocation for the five year period beginning 1 January 2008 shall accrue to the benefit of the allocating Member State".

Concerning extension of the scheme: Amendment 16 provides for additional sectors to be included by Member States provided that such inclusion does not conflict with Articles 87 and 88 of the Treaty. The Commission did not accept this amendment because unilateral "opt-in" of additional activities could distort competition and undermine the environmental integrity of the emissions trading system, depending on the ability to monitor emissions from different sources. This amendment has now been incorporated in the Common Position with changes. These are, firstly, for additional sectors to be included where "all relevant criteria, in particular effects on the internal market, potential distortions of competition, the environmental integrity of the scheme and reliability of the planned monitoring and reporting system" have been taken into account and monitoring of emissions can be done with sufficient accuracy. Secondly, as from 2005 unilateral inclusion will apply to installations below the capacity limits set in Annex I, and whose emissions will therefore be similar to installations which are covered by the scheme at its beginning, while emissions from other installations may be included as from 2008. Thirdly, when sectors have been unilaterally included, the next Commission review will consider whether the Directive "should be amended to cover these emissions in a harmonised way throughout the Community". Furthermore, a new recital (14) has been introduced which emphasises that the inclusion of additional installations in the Community scheme should be in accordance with the provisions laid down in the Directive.

Concerning the accurate monitoring of greenhouse gases: Amendment 17 extends the scope of emissions trading to cover all greenhouse gases covered by the Kyoto Protocol provided that the data with regard to a particular reference year is "satisfactory" and that "accepted methods on measurement, monitoring and calculation" are developed by the Commission in collaboration with all stakeholders and agreed in comitology. The Commission did not accept this amendment because it is inappropriate to extend the scope of the Directive in principle and then to limit the practical application of this extension until an indeterminately long process has been completed and a decision made by comitology. This amendment has now been incorporated in the Common Position by allowing Member States from 2008 to apply emissions trading to emissions of greenhouse gases other than carbon dioxide (see amendment 16 above) and have those emissions included in the emissions trading scheme, where "the monitoring and reporting of these emissions can be done with sufficient accuracy". Furthermore, where guidelines for monitoring and reporting these emissions have been developed "in collaboration with all relevant stakeholders" (Annex IV), the next review by the Commission will consider harmonising coverage of these emissions throughout the Community.

Concerning temporary exclusions from the scheme: Amendment 50 allows Member States to apply to exclude until 2007 certain installations if they are subject to equivalent national measures, monitor their emissions and be subject to comparable penalties. The Commission did not accept this amendment because the exclusion of installations will reduce the economic efficiency of the instrument and pose a greater risk of distortion of the internal market. This amendment has now been incorporated in the Common Position with changes. These are, firstly, for the Commission to decide on temporary exclusions through the committee procedure rather than by itself, in consequence of which the European Parliament will be informed in advance of any proposed decision in accordance with the relevant inter-institutional agreement [8]. Secondly, the Common Position allows "certain installations and activities" to be temporarily excluded and applies a more stringent test for such exclusion by requiring penalties to be "at least equivalent" rather than "comparable". Thirdly, the Common Position requires it to be "ensured that there will be no distortion of the internal market".

[8] Agreement between the European Parliament and the Commission on procedures for implementing Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission. OJ L 256 of 10.10.2000, p. 19.

Concerning amendments to Annex III: The Common Position amends Article 22 of the Commission proposal in order to provide that amendment to the allocation criteria in Annex III in respect of periods after 2008-2012 shall be made through co-decision by the European Parliament and the Council. In this way, amendment 49 is accepted in part by limiting the use of comitology to the period 2008-2012 (in respect of which there is insufficient time for any necessary amendment to be made through co-decision, because national allocation plans for this period will be published by June 2006, eighteen months before the beginning of the period).

3.2.4. Additional changes made by the Council to the amended Proposal

Concerning banking of assigned amount between 2007 and 2008: Article 13(2) of the Commission proposal on the validity of allowances and their cancellation and re-issue ("banking") is unchanged in the Common Position. Recital (8) of the Common Position clarifies that Member States may choose to only allow banking from the 2005-2007 period into the 2008-2012 period in respect of emissions reductions made on their national territory. This is because Member States have limited quantities of assigned amount under the Kyoto Protocol, and as from 2008 transfers of allowances will involve corresponding transfers of assigned amount which is not the case during the period 2005-2007.

Concerning adjustments of assigned amount units: Recital (9) of the Common Position clarifies that, from 2008, transfers of allowances between Member States will involve corresponding adjustments of assigned amount units under the Kyoto Protocol. This is already stated in section 3 of the Explanatory Memorandum to the Commission's proposal COM(2001)581, and will be implemented through the rules on registries.

Concerning national trading schemes: Recital (15) of the Common Position clarifies that the Directive does not prevent Member States from maintaining or establishing national trading schemes in respect of emissions not included in the Community emissions trading scheme.

Concerning Member States participating in international emissions trading: Recital (16) of the Common Position clarifies that the Directive does not affect Member States' own participation in international emissions trading as Parties to the Kyoto Protocol outside the scope of the Directive.

Concerning taxation: - Recital (22) has been amended in the Common Position to state that "where activities are covered by the Community greenhouse gas emission allowances trading scheme, Member States may consider the implications of regulatory, fiscal or other policies that pursue the same objectives". A new recital (23) has been added that clarifies that taxation can be seen as an instrument of policy to reduce greenhouse gas emissions which may therefore justify temporary exclusion of activities from the scheme. These amendments are in the spirit of the last sentence of the European Parliament's amendment 9, which states that "greenhouse gas emission allowance trading and energy taxation should be seen as complementary instruments".

Concerning the definition of "installation": Article 3(e) of the Common Position defines "installation" in exactly the same terms as the Integrated Pollution Prevention and Control (IPPC) Directive 96/61/EC, through the addition of "and any other directly associated activities which have a technical connection with the activities carried out on that site and which could have an effect on emissions and pollution". This applies the emissions trading scheme to directly associated activities to those activities listed in Annex I to the Directive, and promotes consistency between the emissions trading scheme and the IPPC Directive.

Concerning the definition of "new entrant": Article 3(h) of the Common Position defines a "new entrant" as being an installation which obtains its greenhouse gas emissions permit, or an update thereof, subsequent to notification to the Commission of a national allocation plan. This means that an installation that changes its nature or functioning or is extended in such a way that its greenhouse gas emissions permit needs updating will be treated the same as an installation which begins operating subsequent to notification to the Commission of a national allocation plan.

Concerning National Allocation Plans: The Common Position amends Article 9(1) in order to require the Commission to "develop guidance on the implementation of the criteria listed in Annex III" by 31 December 2003. This guidance is not intended to be legally binding but will assist the Member States in developing their National Allocation Plans.

Concerning timing: The Common Position amends Article 12(3), 13(2) and (3) and 16(4) by substituting "30 April" for 30 March, in order to give operators an extra month to surrender allowances to the competent authority in respect of their emissions during the previous year.

Concerning penalties: The Common Position amends Article 16(4) in order to reduce the excess emissions penalty from EUR50 to EUR40 during the period 2005-2007. The requirement for the excess emissions to be made up for in the following year is maintained, which protects the environmental integrity of the emissions trading scheme.

Concerning amendment of the IPPC Directive: Article 26 of the Common Position includes a second paragraph stating that Member States may choose not to impose requirements relating to energy efficiency under the IPPC Directive in respect of units emitting carbon dioxide which are covered by the scheme. A similar amendment has been introduced to recital (19) on the IPPC Directive. A new third sub-paragraph to Article 26 makes clear, consequential to the introduction of a provision on temporary exclusion of installations as proposed by the European Parliament, that installations that are temporarily excluded from the Directive are subject to the full requirements of the IPPC Directive.

Concerning Pooling (Article 28): The Common Position includes a new Article that enables Member States to allow operators of installations carrying out a particular activity listed in Annex I to apply to pool their allowances. Operators wanting to form a pool shall nominate a trustee to be issued the allowances that would be issued to them, to be responsible for surrendering allowances on their behalf, and to be responsible for penalties for breach of requirements to surrender allowances. Applications to form a pool which do not fulfil the requirements of the Directive may be rejected by the Commission. In the event that a trustee fails to comply with penalties, operators in a pool shall be individually responsible for their installation's emissions.

Concerning force majeure (Article 29): The Common Position includes a new Article on force majeure circumstances. In the period 2005-2007 only, where a Member State can demonstrate circumstances of force majeure that justify the issue of additional allowances, it can make an application to the Commission for authorisation to issue further allowances in respect of certain installations. Any such allowances are non-transferable, and so can only be used by an operator towards meet his own commitments under the scheme.

Concerning the Kyoto Protocol's project based mechanisms (Recital (18) and Article 30(3)): The Common Position includes a recital emphasising that recognition of credits from project-based mechanisms will increase the cost-effectiveness of achieving global reductions of greenhouse gas emissions and will be provided for a Directive on linking project-based mechanisms to the Community emissions trading scheme. It also includes a new paragraph (3) in Article 30 stating that linking the Community emissions trading scheme with the project-based mechanisms is important and desirable, and will be provided for by a proposal by the Commission which should apply in parallel with the Community emissions trading scheme in 2005. The European Parliament and the Council acting in accordance with Article 175(1) will decide the content of this Directive. Statements were made for the minutes by the Commission, confirming "its intention to propose, by the first half of 2003, a Directive for linking Project-based mechanisms including Joint Implementation (JI) and the Clean Development Mechanism (CDM) with the Community greenhouse emission trading scheme", and by the Council, confirming "its intention to work towards a swift adoption of the forthcoming Directive in order for it to apply in parallel with the Community greenhouse gas emissions trading scheme in 2005".

Concerning Annex III: The Common Position amends Annex III to state, in criterion (1), that the total quantity of allowances shall be consistent with "national energy policies ... and ... the national climate change programme". Criterion (2) is clarified by stating that consistency must be ensured with "Member States' contributions on the Community's commitments" under the Kyoto Protocol. Criterion (3) is broadened to cover the potential, and not just the technical potential, of activities to reduce greenhouse gas emissions. Furthermore, it is added that "Member States may base their distribution of allowances on average emissions of greenhouse gases by product in each activity and achievable progress in each activity". Criterion (4) is shortened by requiring consistency with other EC legislative and policy instruments without citing examples. Criterion (5) refers directly to "the requirements of the Treaty, in particular Articles 87 and 88 thereof" rather than to allocation not being more than is likely to be needed. In criterion (7), it is clarified that the "plan may accommodate early action". A new criterion (8) is added, for the national allocation plan to include "information on the manner in which clean technology, including energy efficient technologies, are taken into account". Finally, a new criterion (11) clarifies that the plan may contain information on how competition from countries/entities outside the EU will be taken into account.

4. CONCLUSION

The Common Position incorporates many of the amendments proposed by the European Parliament at its first reading. In particular, reviews will take place by 31 December 2004 and 30 June 2006 to see if emissions of other greenhouse gases can be sufficiently accurately monitored and the scope of the scheme can be extended. As from 2008 Member States will be able to unilaterally opt-in emissions of other gases, following which a review will consider harmonising the scheme through co-decision. The scope of the emissions trading scheme includes energy, heat and steam production of installations above 20MW, while Member States can extend the coverage of the scheme as from 2005 to lower thresholds. For the five-year period beginning in 2008, the provision for "pooling" would enable there to be an easier transition between existing instruments, such as long-term negotiated agreements, and emissions trading.

The Commission observes that the Common Position's requirement for Member States during the period 2008-2012 to allocate at least 90% of allowances free of charge gives businesses and Member States greater certainty of what to expect in the future. It notes also that, depending on the use of revenues by Member States, auctioning may bring about extra costs for enterprises and that Member States may use different allocation methods under the relevant provisions during the period 2008-2012. Further harmonisation of the method of allocation will be included in the review to take place by 30 June 2006. The Commission's initial proposal was for the method of allocation to be specified based on experience gained during the allocation of allowances for the period 2005-2007, and it considers that the final Directive should not depart further from this than the Common Position.

On the basis of the Commission's forthcoming proposal on the Kyoto Protocol's project-based mechanisms, the European Parliament will decide through co-decision on the modalities for their inclusion in the emissions trading scheme. Furthermore, the Common Position accepts the European Parliament's position that the EC emissions trading scheme should only be linked to schemes in third countries that have ratified the Kyoto Protocol.

The EU ratified the Kyoto Protocol on 31 May 2002, and is committed to putting in place policies to reduce its greenhouse gas emissions cost-effectively. Emissions trading will reduce emissions cost-effectively, and the Community will greatly benefit from experience of greenhouse gas emissions trading from 2005. The Commission is to adopt monitoring guidelines by 30 September 2003 and guidance on allocation criteria by 31 December 2003, while the Member States are to adopt implementing legislation by 31 December 2003 and prepare their national allocation plans by 31 March 2004. Acceding Countries are to do this at latest by the date of their accession. Prompt finalisation of the emissions trading Directive is necessary in order to ensure that this timetable is respected and European leadership is maintained in the fight against climate change.

The Commission therefore supports the Common Position adopted on the 18 March 2003.