Communication from the Commission to the Council AND to the European Parliament on the assessment of national allocation plans for the allocation of greenhouse gas emission allowances in the second period of the EU Emissions Trading Scheme accompanying Commission Decisions of 29 November 2006 on the national allocation plans of Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Sweden and the United Kingdom in accordance with Directive 2003/87/EC
Date: 2006-11-29
Institutions: European Commission
Subjects: Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Sweden, United Kingdom, reduction of gas emissions, tradeable emission permit

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.11.2006 
COM(2006) 725 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND TO THE 
EUROPEAN PARLIAMENT 

on the assessment of national allocation plans for the allocation of greenhouse gas 
emission allowances in the second period of the EU Emissions Trading Scheme 

accompanying Commission Decisions of 29 November 2006 on the national allocation 
plans of Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, 
Sweden and the United Kingdom in accordance with Directive 2003/87/EC 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND TO THE 
EUROPEAN PARLIAMENT 

on the assessment of national allocation plans for the allocation of greenhouse gas 
emission allowances in the second period of the EU Emissions Trading Scheme 

accompanying Commission Decisions of 29 November 2006 on the national allocation 
plans of Germany, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, Slovakia, 
Sweden and the United Kingdom in accordance with Directive 2003/87/EC 

1. 

INTRODUCTION 

Combating  climate  change  is  a  key  objective  of  the  European  Union.  The  EU  Emissions 
Trading  Scheme  (EU  ETS),  established  by  Directive  2003/87/EC,  is  the  EU's  central 
instrument for achieving its Kyoto Protocol targets during the period 2008 to 2012 in a cost-
effective  manner.  The  EU  ETS  will  continue  to  be  central  to  the  EU's  efforts  to  achieve 
greater greenhouse gas emission reductions over the medium to long-term. 

To  date,  the  first  phase  of  the  EU  ETS  running  from  2005  to  2007  has  delivered  valuable 
lessons. These lessons are informing the review process1, which is aimed at strengthening the 
scheme by looking at its functioning and its scope, in particular expanding it to other sectors 
and gases, beyond the second trading period, running from 2008 to 2012. However, the first 
set of independently verified emissions reports for the year 2005 was of particular importance. 
This indicated that aggregate 2005 emissions, at just over 2 billion tonnes, were significantly 
below the annual average allocation for the first period of close to 2.2 billion tonnes2. 

The  first  period  was  always  intended  to  be  the  learning  phase.  At  the  same  time  the  latest 
report3 by the European Environment Agency underlines the immediate need for more effort 
to  be  undertaken  in  a  number  of  Member  States  in  order  to  respect  Europe's  commitments 
under  the  Kyoto  Protocol.  Hence,  if  more  allowances  were  to  be  issued  by  Member  States 
than  the  likely  quantity  of  actual  emissions  in  2008  to  2012  from  the  installations  covered, 
meeting  the  Kyoto  commitments  would  be  severely  compromised  and  little  or  no 
environmental benefit would be provided by the EU ETS. The development and deployment 
of existing and new clean technologies would stall, and the evolution of a dynamic and liquid 
global market would be seriously undermined. 

Therefore,  the  Commission  assesses  the  second  period  plans  in  a  manner  which  ensures  a 
correct  and  consistent  application  of  the  criteria  in  the  Directive  and  sufficient  scarcity  of 
allowances  in  the  EU  ETS,  thereby  in  turn  ensuring  that  emissions  reductions  are  delivered 
and that the emerging carbon market is strengthened. This will allow the EU ETS to unfold its 
full environmental and economic potential in terms of environmental and economic benefits. 

1 
2 

3 

COM(2006) 676 – Building a Global Carbon Market. 
This figure includes allowances allocated to new entrant reserves and expected to be brought into the 
EU-wide allowance market by means of auctioning. 
Greenhouse  gas  emission  trends  and  projections  in  Europe  2006,  EEA  Report  No  9/2006.  See 
http://reports.eea.europa.eu/eea_report_2006_9/en/eea_report_9_2006.pdf 

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This Communication sets out the Commission’s approach to the assessment of second period 
plans and is accompanied by a first package of decisions addressed to 10 Member States.  

2. 

ASSESSMENT OF NATIONAL ALLOCATION PLANS 

For each trading period, each Member State is obliged to notify a national allocation plan to 
the Commission. The Directive requires the Commission to assess each plan according to the 
same criteria set out in Annex III4 to and Article 10 of the Directive. The Commission adopts 
a separate decision within three months of a complete plan being notified5. 

By  29  November  2006,  19  Member  States  had  notified  a  national  allocation  plan  to  the 
Commission.  Of  these,  10  were  sufficiently  complete  to  allow  the  Commission  to  take  a 
decision  on  their  compatibility  with  the  Directive.  These  plans  represent  about  half  of  the 
overall quantity of allowances allocated in the first trading period. On 12 October 2006, the 
Commission launched infringement proceedings on all outstanding plans. It will continue to 
exert legal pressure so as to ensure that outstanding plans are notified as soon as possible. 

The  Commission  has  placed  particular  emphasis  on  assessing  the  second  period  plans  in  a 
consistent,  fair  and  transparent  manner.  In  so  doing,  the  Commission  has  identified  several 
issues that have been scrutinised in detail for compatibility with the Annex III criteria. These 
fall under the following main headings: 

– 

– 

– 

– 

setting  a  cap  consistent  with  each  Member  State’s  Kyoto  Protocol 
commitment, emissions development and reduction potential, 

ex-post adjustments,  

consistency  with  supplementarity  obligations  (Joint  Implementation/Clean 
Development Mechanism project credit limit), 

other  issues  specific  to  individual  plans  with  a  view  to  avoiding  undue 
distortions of competition and of the internal market. 

Each  of  these  issues  is  explained  in  greater  detail  in  the  following  sections.  These  sections 
reflect the common elements of the Commission's assessment incorporated into the decisions 
and constitute additional motivations of the latter. 

Table  1  summarises  the  Commission's  assessment,  indicating  where  criteria  have  been 
contravened. 

2.1. 

Caps  consistent  with  the  Kyoto  commitments,  emissions  development  and 
reduction potential 

The total quantity of allowances (cap) has to be assessed in accordance with criteria (1), (2) 
and (3), respectively on meeting the relevant Kyoto commitment, emissions development and 
reduction potential, in Annex III to Directive 2003/87/EC. At the same time undue distortions 

4 
5 

See Annex 1. 
Where  necessary,  the  Commission  requests  further  information  from  the  Member  State  before 
concluding its assessment. 

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of  competition  and  of  the  internal  market  must  be  avoided.  Annex  III  mandates  the 
Commission as a general principle to ensure a strict application of all criteria6. 

The  Commission's  assessment  is  based  upon  the  best  information  that  is  available.  The 
emissions data is of high quality and has been verified independently. In addition to this data, 
robust  figures  are  used  on  expected  economic  growth  and  carbon  intensity  improvements. 
These are two key factors which are important for respecting the EU's Kyoto commitments in 
the  period  2008  to  2012.  The  Commission  is  also  taking  into  account  verified  and 
substantiated additional emissions that come under the coverage of the EU ETS in the second 
period plan, once a Member State has included additional combustion installations in sectors 
which  were  not  included  in  the  first  period  plan.  The  Commission  is  assessing  in  particular 
the independent verification of these additional emissions.  

When  using  verified  emissions  data  for  the  first  year  of  operation  of  the  EU  ETS,  the 
Commission has paid attention as to whether the first year of operation was a representative 
year  and  a  justified  reference  point  for  the  assessment.  While  no  total  greenhouse  gas 
emissions figures are available at this stage to compare 2005 total greenhouse gas emissions 
figures with averages over recent years, Eurostat7 has reported energy consumption in the EU-
25 as having been stable between 2004 and 2005 (1 637,6 million tonnes of oil equivalent in 
2004 versus 1 627,2 million tonnes of oil equivalent in 2005). For the years prior to 2005, and 
therefore  before  the  introduction  of  the  EU  ETS,  no  comparable  figures  for  installations 
covered  by  the  scheme  are  available  systematically  due  to  the  absence  of  independent 
verification on the basis of the Directive. 

The  Commission  considers  that  in  each  year  there  are  several  factors  at  play,  including 
weather patterns, which influence emissions from EU ETS installations and which generally 
balance  each  other  out  in  their  effects  on  total  annual  emissions.  Where  appropriate,  the 
Commission  examines  the  availability  and  quality  of  other  data  concerning  emissions  and 
energy use prior to 2005. In general, the Commission does not have indications that a clear 
majority  of  exceptional  circumstances  manifestly  pointed  in  one  direction  in  2005.  It 
considers  therefore  that  2005  verified  emissions  figures  can,  as  a  rule,  be  regarded  as 
representative. In case there are exceptional circumstances, however, the Commission closely 
examines to what extent it is justified to adjust independently verified emissions for 2005 by 
an appropriate correction factor. 

In  order  to  assess  whether  criteria  (2)  on  emissions  development  and  (3)  on  reduction 
potential  are  respected,  the  Commission  has  taken  into  account  expected  economic  growth 
and carbon intensity developments between 2005 and 20108. In order to ensure a consistent 
assessment  of  all  plans  the  Commission  is  applying  economic  growth9  and  carbon  intensity 

6 

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8 
9 

The  total  quantity  of  allowances  to  be  allocated  shall  not be  more  than  is  likely  to  be  needed  for  the 
strict application of the criteria of this Annex. (See second sentence in criterion 1). 
Statistical aspects of the EU energy economy in 2005, Eurostat, Environment and Energy, 13/2006. 
2010 is chosen as the average year of the 2008 to 2012 period. 
The economic growth trend developments for the first set of assessed plans are listed in Annex 2. The 
economic growth data reflect the latest Commission forecasts for the years 2006, 2007 and 2008. See 
http://ec.europa.eu/economy_finance/publications/european_economy/2006/ee506en.pdf 

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trends  based  on  a  single  and  coherent  methodology  and  set  of  assumptions  as  presented  in 
"European Energy and Transport Trends to 2030 – update 2005"10.  

For the assessment of criterion (3) on the potential to reduce greenhouse gas emissions it is 
important to reflect the fact that the EU ETS introduced an allowance price as of 2005 which 
will positively affect carbon intensity trend developments.  

The strong commitments by the EU and Member States to combat climate change provide a 
clear  and  sustained  signal  to  ETS  installations  that  there  is  an  economic  cost  to  emitting 
greenhouse gases, which will become even more important in the future. This reinforces long-
term economic incentives to reduce emissions. In consequence, carbon intensity will improve 
over time at least at a rate as indicated in the "low carbon constraint / no CCS"-case11. 

The  Commission  considers  that  this  level  of  carbon  intensity  improvement  does  not 
appropriately reflect most likely future trends because it does not take account of all relevant 
factors. In addition to the economic incentives created by the EU ETS, operators will be likely 
to  increasingly  invest  in  energy  efficient  technologies  in  order  to  lower  their  fuel  and 
electricity costs. Moreover, they will increasingly be encouraged by Member States' policies 
and  measures  as  well  as  public  opinion  to  accelerate  efforts  with  regard  to  innovation  in 
energy saving production methods and thus take effective action against climate change. At 
EU  level,  the  Energy  Efficiency  Action  Plan12  as  well  as  collective  efforts  to  reduce 
dependency  on  energy  imports  will  further  spur  efforts  to  achieve  better  energy  efficiency 
levels,  reducing in general also  carbon intensity. Therefore, in order to appropriately reflect 
reality, the Commission considers it necessary to base the assessment under criterion (3) on a 
rate of carbon intensity improvement exceeding the "low carbon constraint" case by 0.5% per 
annum, which is equivalent to 2.5% during the five-year period from 2005 to 2010. 

In practical terms the Commission is assessing the compatibility of a plan against criteria (2) 
and (3) based on the following formula: 

Maximum allowed annual average cap = (CIVE * GTD * CITD) + ADD 

Where:  

CIVE = corrected independently verified emissions for 2005 

GTD = growth trend development 2005 to 2010 

CITD = carbon intensity trend development 2005 to 2010 

ADD  =  additional  emissions  covered  by  an  extended  scope  of  combustion 
installations13 

10

11 

12 
13 

http://ec.europa.eu/dgs/energy_transport/figures/trends_2030_update_2005/energy_transport_t

rends_2030_update_2005_en.pdf  
This scenario was prepared as an input to the review of Directive 2001/81/EC (the National Emissions 
Ceilings Directive). It uses an identical methodology and set of assumptions to "European Energy and 
Transport Trends to 2030 – update 2005" but contains expected carbon intensity improvements on the 
basis  of  an  allowance  price  of  12  Euro 
in  2020.  See 
http://ec.europa.eu/environment/air/baseline.htm. 
Action Plan on Energy Efficiency: Realising the Potential - COM(2006) 545. 
See paragraph 36 of COM(2005) 703. 

to  20  Euro 

increasing 

in  2010 

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CIVE = IVE + AWIVE + EOPT 

Where:  

IVE = independently verified emissions for 2005 

AWIVE = annual average allocation to installations without an independently 
verified emissions report 

EOPT = emissions for 2005 of installations opted out14 

In  assessing  consistency  of  a  plan  with  the  Kyoto  commitment  against  criterion  (1),  the 
Commission has taken into account: 

– 

– 

– 

– 

the progress towards the Kyoto commitment and, if relevant, the remaining gap 
to be closed; 

the reliance on and state of preparation and implementation of measures for the 
government purchase of Kyoto units; 

the  reliance  on  and  state  of  preparation  and  implementation  of  measures  in 
non-trading sectors; 

the robustness of projections for the transport sector15 underlying the national 
allocation plan. 

Progress to Kyoto and remaining gap 

Based on the progress report the starting point for the assessment of criterion (1) on the Kyoto 
commitment is the progress the Member State has made and the remaining gap to be closed in 
2008  to  2012  in  relation  to  the  2004  total  greenhouse  gas  emissions,  as  reported  in  the 
progress  report.  As  stated  in  its  further  guidance  on  national  allocation  plans16,  the 
Commission considers it necessary for a Member State with a gap to close to use the second 
period allocation plan to achieve at least a fair proportion of the outstanding effort, i.e. a part 
reflecting the share of EU ETS installations in total greenhouse gas emissions. 

Intended government purchase of Kyoto units 

In  accordance  with  the  two  guidance  documents17  the  Commission  assesses  whether  the 
intended  government  purchase  of  Kyoto  units  is  sufficiently  substantiated,  basing  its 
assessment on the elements listed in Annex 5 of the further guidance. 

The  Commission  finds  that  the  intended  government  purchase  of  Kyoto  units  is  only 
sufficiently substantiated where a Member State has an operational programme in place, has 

14 

15 

16 

17 

Where  no  emissions  figures  of  sufficient  quality  are  available  the  assessment  is  based  on  the  annual 
average allocation the installations opted out would have received. 
EU carbon dioxide emissions in the transport sector have grown significantly over the last decade and 
reduction measures in the transport sector take considerable time for the intended effects to be achieved. 
For the second guidance document, see Commission Communication on further guidance on allocation 
plans for the 2008 to 2012 trading period of the EU Emission Trading Scheme - COM(2005) 703. 
For the first guidance document, see Commission Communication on guidance to assist Member States 
in the implementation of the criteria listed in Annex III to Directive 2003/87/EC - COM(2003) 830. 

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signed contracts or initiated carbon purchase tenders, and has committed more than a minor 
share of necessary budgetary resources.  

Where  a  Member  State  with  a  remaining  gap  to  close  between  its  actual  emissions  and 
allowed  emissions  according  to  the  Kyoto  target  does  not  substantiate  or  insufficiently 
substantiates the intended government purchase of Kyoto units this contravenes criterion (1) 
and as a consequence the intended total quantity of allowances is reduced proportionally. To 
determine the required reduction, the proportion of overall emissions that the trading scheme 
represents  is  relevant  in  comparison  with  emissions  from  sources  not  covered  by  the 
Directive. 

In practical terms the Commission determines the required reduction based on the following 
formula: 

Required annual average reduction = (UNSUB GP) * TSS 

Where: 

UNSUB  GP = unsubstantiated annual average intended government purchase 
of Kyoto units 

TSS = trading sector share 

TSS = CIVE / GHG 

Where:  

GHG = total greenhouse gas emissions in 200418 

Degree of reliance on and substantiation of other policies and measures 

In  accordance  with  the  further  guidance  document  the  Commission  assesses  the  degree  of 
reliance on other policies and measures. Where this degree is significant it closely examines 
whether  the  intended  implementation  of  other  policies  and  measures  is  sufficiently 
substantiated, basing its assessment on the elements listed in Annex 6 of the further guidance. 

The Commission finds a policy and measure is substantiated in particular where the intended 
reduction potential is demonstrated to be realistic and achievable in the period 2008 to 2012, 
where  there  are  sufficient  assurances  that  the  policy  or  measure  will  be  implemented 
following  the  Commission  decision  on  the  national  allocation  plan,  and  where  it  is 
demonstrated  that  the  measure  would  not  have  significant  overlapping  effects  to  reduce 
emissions in installations covered by the EU ETS.  

Where  a  Member  State  with  a  remaining  gap  to  close  between  its  actual  emissions  and 
allowed  emissions  according  to  the  Kyoto  target  does  not  substantiate  or  insufficiently 
substantiates  another  policy  or  measure  this  contravenes  criterion  (1)  and  as  a  consequence 
the intended total quantity of allowances is reduced proportionally. To determine the required 
reduction, the proportion of overall emissions that the trading scheme represents is relevant in 
comparison with emissions from sources not covered by the Directive. 

In practical terms the Commission determines the required reduction based on the following 
formula: 

18 

As  indicated  in  the  Progress  Report  COM(2006)  658,  27.10.2006,  Table  1  in  the  Annex  SEC(2006) 
1412, 27.10.2006. 

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Required annual average reduction = (UNSUB PM) * TSS 

Where:  

UNSUB PM = unsubstantiated policy or measure 

Projections of carbon dioxide emissions in the transport sector 

Carbon  dioxide  emissions  in  the  transport  sector  have  grown  significantly  and  reduction 
measures in the transport sector take considerable time for the intended effects to be achieved. 
For the assessment of criterion (1) it is therefore vital to examine the robustness of expected 
trends in transport sector carbon dioxide emissions. 

The  Commission  has  compared  the  trend  in  transport  sector  carbon  dioxide  emissions  as 
presented by the Member State in the national allocation plan with the trend development in 
the "European Energy and Transport Trends to 2030 – update 2005". 

Where  a  Member  State  with  a  remaining  gap  to  close  between  its  actual  emissions  and 
allowed  emissions  according  to  the  Kyoto  target  and  the  trend  development  assumed  in  its 
national allocation plan is substantially below the one in the "European Energy and Transport 
Trends to 2030 – update 2005" the Commission finds the plan contravenes criterion (1) and as 
a  consequence  the  intended  total  quantity  of  allowances  is  reduced  proportionally.  To 
determine the required reduction, the proportion of overall emissions that the trading scheme 
represents  is  relevant  in  comparison  with  emissions  from  sources  not  covered  by  the 
Directive. 

In practical terms the Commission determines the required reduction based on the following 
formula: 

Required annual average reduction = [TRANS EM * (ETT - NAPT)] * TSS 

Where:  

TRANS EM = transport carbon dioxide emissions in 2005 

ETT  =  trend  development  2005  to  2010  in  the  "European  Energy  and 
Transport Trends to 2030 – update 2005" 

NAPT = trend development 2005 to 2010 in the national allocation plan 

2.2. 

Ex-post adjustments 

The Directive foresees in Article 11 and Annex III, criterion (10), that a Member State has to 
decide up-front (before the trading period starts) the absolute quantity of allowances allocated 
in  total  and  to  each  installation’s  operator.  This  decision  may  not  be  re-visited  and  no 
allowances  may  be  re-allocated  by  means  of  adding  to  or  subtracting  from  the  quantity 
determined for each operator on the basis of a government decision or a pre-determined rule.  

Such  ex-post  adjustments  contradict  the  essential  concept  of  a  "cap-and-trade"  system  as 
conceived  by  the  Directive.  Each  installation  is  allocated  a  certain  amount  of  allowances  in 
the decision referred to in Article 11(2) of the Directive, whose value it can freely dispose of 
with a view to taking optimal economic decisions. Three major alternatives exist, which are 
equally  legitimate:  investing  in  emissions  reductions  and  selling  freed  allowances,  reducing 
production  volume  and  selling  freed  allowances,  or  maintaining/expanding  production 
volume while buying additional allowances needed. 

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The Commission considers that there is no administrative need or any other justification for 
ex-post adjustments. Member States are required to use the best data available when deciding 
on allocations up-front. As a matter of fact, the use of prognoses always requires to a certain 
degree an ex-ante estimation of emissions the actual volume thereof may eventually deviate in 
reality. But this is an inherent feature of any "cap-and-trade" scheme and can thus certainly 
not justify a retroactive change to the allocation already decided upon up-front. Moreover, the 
reasons  for  such  a  deviation  cannot  be  reliably  identified  and  may  well  be  the  result  of 
emissions reductions due to real investments having been carried out by operators in line with 
the economic incentives created by the scheme. 

As in the first period the Commission Decisions allow modifications to be made to intended 
allocations  in  the  plan  in  respect  of  improvement  in  data  quality  at  any  time  before  the 
decision on allocation under Article 11(2) is taken. 

Only  in  the  following  cases  are  adjustments  allowed  following  the  final  national  allocation 
decision: 

–  where an installation is closed during the period, that Member States determine that there 

is no longer an operator to whom allowances will be issued; and 

–  where allocation takes place to new entrants from the reserve, that has been fixed upfront, 
that  the  exact  allocation  to  each  new  entrant  will  be  decided  upon  after  the  decision  on 
allocation under Article 11(2) is taken.  

The  Commission  rejects  any  other  adjustments  as  contravening  criterion  (10)  in  accordance 
with the assessment of first period plans. 

2.3. 

Consistency with supplementary obligations (JI/CDM limit) 

In  addition  to  domestic  action  by  Member  States  to  reduce  their  greenhouse  gas  emissions, 
the  Kyoto  Protocol  allows  Member  States  to  invest  in  Joint  Implementation  (JI)  and  Clean 
Development  Mechanism  (CDM)  projects  in  other  countries  and  use  credits  from  these  for 
compliance purposes towards part of their emission reduction commitments. Member States 
are  required  to  ensure  that  the  use  of  the  Kyoto  flexible  mechanisms  is  supplemental  to 
domestic  action,  with  a  view  to  narrowing  per  capita  differences  in  emissions  between 
developed and developing countries19. 

On top of this use by Member States, the Directive allows operators of EU ETS installations 
to  use  JI  and  CDM  credits  towards  fulfilling  a  proportion  of  their  commitments  under  the 
Directive.  This  proportion  must  be  consistent  with  Member  State  commitments  to 
supplementarity and has to be fixed in the national allocation plan.  

Therefore, the Commission has to assess whether the limit is consistent with Member States' 
commitments to supplementarity. The supplementary obligations comprise both government 
purchase  as  well  as  private  sector  use  of  JI  and  CDM  credits,  while  the  Commission's 
assessment under the Directive is limited to private sector use. 

19 

Decision 2/CMP.1 of the Conference of the Parties serving as the Meeting of the Parties to the Kyoto 
Protocol "Principles, nature and scope of the mechanisms pursuant to Articles 6, 12 and 17 of the Kyoto 
Protocol" of December 2005, FCCC/KP/CMP/2005/8/Add. 1, p. 4. 

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The Commission takes the following approach to assessing the compatibility of the proposed 
JI/CDM limits against Annex III to the Directive: 

The  level  of  effort  to  reduce  greenhouse  gases  a  Member  State  is  required  to  undertake  is 
determined by assessing the amount of reduction it is required to undertake in relation to  

–  base year emissions,  

–  greenhouse gas emissions in 2004, 

–  and projected emissions in 201020. 

In the next step, half of the figure representing the highest effort is calculated. This figure is 
considered  to  be  the  maximum  overall  amount  of  JI/CDM  credits  that  a  Member  State  can 
make use of in addition to domestic action, while respecting its commitments to ensure that 
the use of the Kyoto mechanisms is supplemental to domestic action. 

In  respect  of  Member  States  which  do  not  intend  to  purchase  any  Kyoto  units  with 
government  funds,  a  Member  State  may  allow  its  operators  covered  by  the  Community 
scheme  to  make  use  of  CDM/JI  credits  to  the  full  amount  of  this  limit.  This  limit  is  to  be 
understood  as  a  percentage  figure  specified  as  a  share  of  the  approved  cap  for  the  trading 
sector.  If  Member  States  allowed  a  higher  level  of  usage,  criterion  (12)  is  considered  to  be 
violated. 

In  respect  of  Member  States  which  intend  to  purchase  Kyoto  units  with  government  funds, 
these  purchases  are  taken  into  account.  The  amount  of  JI/CDM  credits  that  can  be  used  by 
installations in the Community scheme in that Member State is reduced by the annual average 
amount of intended or substantiated government purchases. 

Where  assessment  in  accordance  with  these  approaches  would  result  in  a  situation  that  EU 
ETS installations in that Member State would only be able to use JI/CDM credits up to a level 
of less than 10%, the Commission considers that as a minimum threshold installations should 
be  allowed  to  use  JI/CDM  credits  up  to  a  level  of  10%.  This  reflects  a  reasonable  balance 
between  domestic  reductions  and  giving  operators  of  installations  an  incentive  to  invest  in 
projects in developing countries. 

In practical terms the Commission assesses consistency with supplementary obligations based 
on the following formulae: 

A = base year emissions – emissions allowed under Kyoto target 

B = greenhouse gas emissions in 2004 – emissions allowed under Kyoto target 

C = projected emissions in 2010 – emissions allowed under Kyoto target 

D = 50 % of Max (A, B, C) – annual average government purchase of Kyoto units 

Maximum allowed limit (in %) = (D / annual average cap) or 10 % 

20 

All  figures  are  based  on  the  Commission's  2006  Progress  Report,  tables  1  and  2  in  the  Annex 
SEC(2006) 1412, 27.10.2006. 

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2.4. 

Issues specific to individual plans 

Allocation guarantees beyond the trading period 

The  Commission  notes  that  Directive  2003/87/EC  provides  for  a  national  allocation  plan to 
cover the respective trading period. Consequently, the Commission's assessment of a plan is 
restricted to aspects related to the respective trading period. For this reason in all cases where 
allocation  plans  for  first  trading  period  (2005  to  2007)  contained  provisions,  in  particular 
related  to  allocation  guarantees21,  referring  to  the  period  after  2007  the  Commission  has 
reserved its opinion. 

The  Commission  is  assessing  for  the  first  time  the  concrete  application  of  allocation 
guarantees from  the  first  period to  the extent that they are intended to be applied in  second 
period  plans.  It  considers  that  these  guarantees  contravene  criterion  (5)  and  discriminate 
between  companies  in  such  a  way  as  to  unduly  favour  certain  undertakings  or  activities 
contrary  to  the  requirements  of  the  Treaty,  in  particular  Articles  87  and  88  thereof.  In  such 
cases  guarantees  would  result  in  a  preferential  free  allocation  of  allowances  for  benefiting 
installations  compared  to  the  degree  of  free  allocation  given  to  other  existing  installations 
under the general allocation methodology. Such favourable treatment to one group of existing 
installations  distorts  or  threatens  to  distort  competition  with  another  group  of  existing 
installations and also has cross-border effects given EU-wide trade in all sectors covered by 
Directive 2003/87/EC. 

The  Commission  considers  at  this  stage  that  any  State  aid  involved  would  likely  be  found 
incompatible with the internal market should it be assessed in accordance with Article 87 and 
88 of the Treaty. 

In  addition,  from  the  environmental  point  of  view  the  Commission  is  concerned  about 
guarantees  providing  for  a  high  degree  of  free  allocation  for  carbon-intensive  production 
modes  stretching  far  into  the  future.  Such  guarantees  may  create  incentives  to  invest  in 
carbon-intensive  production  modes  thereby  limiting  the  options  for  the  needed  further 
reductions  in  greenhouse  gas  emissions  post-2012.  At  the  same  time  any  type  of  allocation 
guarantee  beyond  2012  limits  the  scope  for  further  harmonisation  of  the  allocation 
methodology across the internal market in the context of the EU ETS review. 

Banking 

Banking22 of allowances is in principle a sound design element of an emission trading scheme 
and has to be allowed by Member States from the second trading period onwards. From the 
first to the second trading period banking was at each Member State's discretion and 23 out of 
25 Member States have decided not to allow for it. 

Discretionary banking from the first to the second trading period involves State aid, because 
the Member State would issue allowances for free where it could otherwise have sold them in 

21 

22 

An  example  of  an  allocation  guarantee  is  the  provision  that  a  new  entrant  starting  operation  in  2006 
would be guaranteed by the Member State a full and free allocation of allowances for 14 years into the 
future, i.e. until 2020, which extends into the fourth trading period under the EU ETS. 
Banking is to be understood as the possibility to carry forward unused allowances into the subsequent 
trading period in case the operator does not need the allowance to cover emissions or has not sold it in 
the market. See Article 13(2) and (3) of Directive 2003/87/EC. 

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the form of "Assigned Amount Units". At the same time banking by a Member State into the 
second trading period is only compatible with the criterion to reflect the reduction potential, if 
banked allowances are deducted from the cap found compatible with the Directive's allocation 
criteria23. 

The  Commission  takes  the  view  that  any  national  provisions  related  to  the  intended  use  of 
discretionary  banking  between  the  first  and  second  trading  periods  must  be  notified  to  the 
Commission pursuant to Article 88(3) of the Treaty. The Commission at this stage considers 
that any issuance of banked allowances in the second trading period which is not based on an 
environmental counterpart by beneficiaries in terms of proven real emission reductions during 
the first trading period could constitute  State  aid which  would  likely be found incompatible 
with  the  internal  market  should  it  be  assessed  in  accordance  with  Article  87  and  88  of  the 
Treaty. 

Auctioning 

Directive 2003/87/EC allows the auctioning or sale of up to 10% of the allowances allocated 
by the Member State in the second trading period. 

As  noted  by  the  High-Level  Group  on  Competitiveness,  Energy  and  the  Environment24 
insufficient  maturity  of  energy  markets  is  alleged  to  have  led  to  insufficient  competitive 
pressure to reduce the pass-through of the value of allowances in electricity prices and hence 
to  so-called  windfall  profits  for  electricity  producers.  The  Group  has  furthermore 
recommended  that  Member  States  consider  differentiated  allocation  between  sectors  in  the 
second  allocation  period  of  the  EU  ETS,  with  a  view  to  taking  into  account  the  external 
aspects of competitiveness.  

Several Member States intend to increase the share of auctioning in combination with a more 
demanding  allocation  to  power  generators.  In  some  Member  States  auctioning  is  still  under 
consideration.  Therefore,  the  decisions  on  second  period  plans  allow  Member  States  to 
increase  the  share  of  auctioning  within  the  limits  defined  in  Article  10  of  Directive 
2003/87/EC following the Commission's assessment but prior to the final national allocation 
decision under Article 11(2). 

Furthermore, the Commission considers that the participation in any auction should be open 
without restrictions to all persons in the Community. 

Combustion installations 

Where  a  Member  State  does  not  apply  the  scope  of  combustion  installations  in  accordance 
with  paragraph  36  of  the  further  guidance,  as  clarified  by  the  "co-ordinated  definitions"  of 
additional  combustion  installations  contained  in  the  minutes  of  the  Climate  Change 
Committee of 31 May 2006, the Commission rejects the plan as contravening criterion (10). 

Where  a  Member  State  proposes  to  allocate  additional  allowances  in  respect  of  additional 
emissions of such combustion installations, which have not been included in the first period 
plan, the Commission examines whether the intended allocation to these installations has been 

23 
24 

See criterion 3 of Annex III to the Directive.  
See http://ec.europa.eu/enterprise/environment/hlg/doc_06/first_report_02_06_06.pdf  

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12 

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determined  in  accordance  with  the  general  methodologies  stated  in  the  national  allocation 
plan and on the basis of substantiated and verified emission figures.  

If the calculation of the allocation for these additional emissions in application of the general 
methodology and on the basis of substantiated and verified emission figures were to result in 
a lower amount of allowances, the Commission requires the cap indicated in the Commission 
Decision to be reduced by an amount reflecting this difference.  

3. 

CONCLUSIONS 

A successful EU ETS is of vital importance to sustaining the EU's credibility in relation to the 
post-2012 climate regime. At the same time greater use of the EU ETS is crucial to respecting 
the EU's Kyoto commitments during the period 2008 to 2012. A number of national allocation 
plans  proposed  to  the  Commission  would  not  only  endanger  the  achievement  of  Europe's 
Kyoto  commitments,  but  would  at  the  same  time  create  undue  distortions  in  the  internal 
market. 

With the objective and transparent assessment of the second period plans, as presented in this 
Communication, the Commission is safeguarding the achievement of the Kyoto commitments 
and a successful and growing carbon market into the future. 

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Table 1: Overview of contravened criteria25 

Germany 

Greece 

Ireland 

Latvia 

Lithuania 

Luxembourg 

Malta 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

(1) Kyoto target 

(2) Emissions development 

(3) Reduction potential 

(4) Other legislation 

(5) Non-discrimination 

(6) New entrants 

(7) Early action 

(8) Clean technologies 

(9) Public consultation 

(10)  List  of 
with quantity for each one 

installations 

(11) Outside competition 

(12) JI/CDM limit 

Article 10 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

25 

EN 

In  line  with  the  principle  established  in  the  second  sentence  of  criterion  (1)  the  plans  of  Latvia,  Lithuania,  Luxembourg,  Malta,  the  Slovak  Republic  and  Sweden  also 
contravene Annex III, criterion (1), for the absence of a strict application of all criteria. 

14 

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Table 1 continued: Overview of contravened criteria 

Slovak 
Republic 

Sweden 

United 
Kingdom 

X 

X 

X 

X 

(1) Kyoto target 

(2) Emissions development 

(3) Reduction potential 

(4) Other legislation 

(5) Non-discrimination 

(6) New entrants 

(7) Early action 

(8) Clean technologies 

(9) Public consultation 

(10)  List  of 
with quantity for each one 

installations 

(11) Outside competition 

(12) JI/CDM limit 

Article 10 

X 

X 

X 

X 

X 

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ANNEX 1 
Criteria for national allocation plans listed in Annex III of Directive 2003/87/EC 

1.  The  total  quantity  of  allowances  to  be  allocated  for  the  relevant  period  shall  be 
consistent  with  the  Member  State's  obligation  to  limit  its  emissions  pursuant  to 
Decision 2002/358/EC and the Kyoto Protocol, taking into account, on the one hand, 
the  proportion  of  overall  emissions  that  these  allowances  represent  in  comparison 
with  emissions  from  sources  not  covered  by  this  Directive  and,  on  the  other  hand, 
national  energy  policies,  and  should  be  consistent  with  the  national  climate  change 
programme. The total quantity of allowances to be allocated shall not be more than is 
likely  to  be  needed  for  the  strict  application  of  the  criteria  of  this  Annex.  Prior  to 
2008,  the  quantity  shall  be  consistent  with  a  path  towards  achieving  or  over-
achieving  each  Member  State's  target  under  Decision  2002/358/EC  and  the  Kyoto 
Protocol. 

2.  The  total  quantity  of  allowances  to  be  allocated  shall  be  consistent  with 
assessments  of  actual  and  projected  progress  towards  fulfilling  the  Member  States' 
contributions  to  the  Community's  commitments  made  pursuant  to  Decision 
93/389/EEC. 

3.  Quantities  of  allowances  to  be  allocated  shall  be  consistent  with  the  potential, 
including the technological potential, of activities covered by this scheme to reduce 
emissions.  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. 

4.  The  plan  shall  be  consistent  with  other  Community  legislative  and  policy 
instruments. Account should be taken of unavoidable increases in emissions resulting 
from new legislative requirements. 

5. The plan shall not discriminate between companies or sectors in such a way as to 
unduly favour certain undertakings or activities in accordance with the requirements 
of the Treaty, in particular Articles 87 and 88 thereof. 

6. The plan shall contain information on the manner in  which new entrants will  be 
able to begin participating in the Community scheme in the Member State concerned.

7.  The  plan  may  accommodate  early  action  and  shall  contain  information  on  the 
manner  in  which  early  action  is  taken  into  account.  Benchmarks  derived  from 
reference documents concerning the best available technologies may be employed by 
Member States in developing their National Allocation Plans, and these benchmarks 
can incorporate an element of accommodating early action. 

8.  The  plan  shall  contain  information  on  the  manner  in  which  clean  technology, 
including energy efficient technologies, are taken into account. 

9. The plan shall include provisions for comments to be expressed by the public, and 
contain information on the arrangements by which due account will be taken of these 
comments before a decision on the allocation of allowances is taken. 

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16 

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10. The plan shall contain a list of the installations covered by this Directive with the 
quantities of allowances intended to be allocated to each. 

11.  The  plan  may  contain  information  on  the  manner  in  which  the  existence  of 
competition from countries or entities outside the Union will be taken into account. 

12. The plan shall specify the maximum amount of CERs and ERUs which may be 
used by operators in the Community scheme as a percentage of the allocation of the 
allowances to each installation. The percentage shall be consistent with the Member 
State’s supplementarity obligations under the Kyoto Protocol and decisions adopted 
pursuant to the UNFCCC or the Kyoto Protocol. 

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ANNEX 2 
Economic growth trend developments 2005 to 2010 

Member State 

Growth from 2005 to 2010 

Germany 

Greece 

Ireland 

Latvia 

Lithuania 

Luxembourg 

Malta 

Slovak Republic 

Sweden 

UK 

9.6 % 

19.9 % 

27.2 % 

50.0 % 

37.4 % 

27.2 % 

11.9 % 

32.4 % 

16.6 % 

14.3 % 

Source: DG TREN "Energy and Transport Trends to 2030 - Update 2005" and DG ECFIN 
Economic forecasts autumn 2006. 

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18 

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