COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the 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
Date: 2015-07-15
Institutions: Directorate-General for Climate Action, European Commission
Subjects: EU Emissions Trading Scheme, EU investment, energy efficiency, greenhouse gas, innovation, modernisation of industry, reduction of gas emissions, tradeable emission permit

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 15.7.2015  SWD(2015) 136 final   COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  Accompanying the 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} {SWD(2015) 135 final}  
 
 
1.  PROBLEM DEFINITION 

The general problem analysis on EU climate policy targets for 2030 and the ETS was carried 
out in the Impact Assessment1 for the 2030 climate and energy framework2. In October 2014, 
the European Council agreed on the 2030 framework including a binding domestic reduction 
of at least 40% by 2030 compared to 1990, and a corresponding emission reduction target for 
the EU Emissions Trading System (ETS) of 43% compared to 2005, as well as continued free 
allocation  to  industry  and  establishing  funding  mechanisms  to  ensure  EU's  low-carbon 
transition. The problem to be addressed is how to adapt the respective provisions of the ETS 
Directive for after 2020 while further improving the system based on lessons learnt. 

1.1. Free allocation and addressing the risk of carbon leakage 

Free allowances to industry are given to address the potential risk of carbon leakage3 in the 
absence of comparable climate policy measures in other major economies. The problem to be 
addressed is how to establish future rules for free allocation to industry, to optimally allocate 
the  about  6.3  billion  free  allowances  available  based  on  the  principles  defined  by  the 
European Council. 

1.2. Low-carbon funding mechanisms 

As  part  of  the  2030  framework,  the  European  Council  agreed  to  create  three  low  carbon 
funding mechanisms. First, an Innovation Fund of 400 million allowances to support highly 
innovative, low-carbon first-of-a-kind projects in European industry and energy, building on 
the  existing  NER  300  facility.  In  addition,  some  310  million  allowances  will  be  used  for  a 
Modernisation  Fund  to  support  lower  income  EU  Member  States4  in  improving  energy 
efficiency  and  modernising  energy  systems.  Finally,  the  existing  option  for  lower  income 
Member States to give free allowances to their power sector is continued, with a limit of up to 
maximum  40%  of  their  allowances  for  auctioning  before  redistribution.  This  impact 
assessment  analyses  the  optimal  choices  for  the  design  of  these  low  carbon  funding 
mechanisms.  

1.3. Further improvements to the current set of rules 

The current rules for the EU ETS are in force since 2013 and are relatively recent, but based 
on experience, certain limited changes should be considered post-2020 for core aspects of the 
ETS (validity of allowances, the Union registry and small emitters). 

2.  OBJECTIVES 

The  general  objective  of  EU  climate  policy,  and  of  EU  ETS  as  its  key  instrument,  is  to 
contribute to limiting global average temperature increase to no more than 2 degrees Celsius 
above pre-industrial level. The specific policy objective is to refine and improve the EU ETS 
rules  post-2020,  aligning  them  with  the  2030  emission  reduction  target.  Operational 

1  Impact  Assessment  on  A  policy  framework  for  climate  and  energy  in  the  period  from  2020  up  to  2030, 
SWD(2014) 15 final. 
2 Communication from the Commission on A policy framework for climate and energy in the period from 2020 
up to 2030. 
3 An increase in greenhouse gas emissions in third countries where industry is not subject to comparable carbon 
constraints. 
4 10 Member States, with GDP per capita at market prices in 2013 below 60% of the EU average. 

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objectives for the three clusters (free allocation, low-carbon funding mechanisms and further 
improvements to the current rules) aim to address the problems as defined above. 

3.  OPTIONS AND IMPACTS 

3.1. Free allocation and addressing the risk of carbon leakage 

Several policy options were developed for each of the elements of the free allocation system 
and  for  compensation  for  indirect  costs,  following  the  guiding  principles  of  the  European 
Council conclusions.  

Benchmark  values.  There  are  various  options  how  and  how  frequently  to  update  the 
benchmark  values  (allowances  per  tonne  of  product).  The  impact  assessment  considers  the 
baseline option (update based on new data reported by operators), a single flat rate update, a 
recurrent flat rate update, an update based on new data combined with a flat rate update and a 
recurrent full data collection update.  

Production level and adjustments. The production level is multiplied with the benchmark 
value  to  determine  the  amount  of  allowances  per  installation.  There  are  various  options  on 
how many years to use for the production levels, how frequently to update these years, and 
how to deal with annual changes in production levels. The impact assessment considers the 
baseline option (production levels determined once and current rules for production changes), 
an alternative with historical production levels defined once and based on five years (2013-
17) for the entire 10-year period and another alternative with production levels for two five-
year periods (2013-17, respectively 2018-22). Significant production increases and decreases 
are addressed through same thresholds for increased and decreased production. The increased 
allocation  for  increased  production  comes  from  the  new  entrants'  reserve,  which  is  either  a 
fixed amount (baseline) or is replenished from unused allowances during the period. It can be 
funded  from  phase  4  allowances,  or  from  250  million  allowances  that  were  unallocated  in 
phase 3. 

Carbon leakage groups and criteria. Sectors deemed to be exposed to a significant risk of 
carbon  leakage  because  of  their  carbon  intensity  and  trade  receive  more  free  allowances. 
Currently,  there  is  very  limited  differentiation  among  sectors,  as  97%  are  on  the  carbon 
leakage list. The impact assessment explores options for a more targeted approach, based on 
differentiation  of  sectors  depending  on  their  degree  of  exposure  to  carbon  leakage  risk  – 
slight  modification  of  the  current  criteria;  applying  a  uniform  factor  to  all;  differentiating 
sectors into 4 groups. 

Indirect cost compensation. Indirect carbon costs are the costs of CO2 emissions related to 
producing  electricity  which  are  passed  through  to  industrial  consumers  of  electricity. 
Currently, Member States can give subsidies to certain electro-intensive industries to partially 
compensate  them  for  these  indirect  costs,  subject  to  State aid  rules.  The impact  assessment 
considers the baseline (continuing the current approach), an option establishing a mandatory 
EU-wide  compensation  scheme,  financed  from  national  auctioning  revenues  or  from  free 
allocation,  and  a  combination  of  an  EU-wide  compensation  scheme  financed  through  free 
allocation plus an optional compensation at national level.  

The  options  for  each  element  were  screened  using  operational  objectives  linked  to  the 
European  Council  conclusions,  and  the  high-scoring  ones  were  combined  into  option 
packages: 

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 

 

 

'Baseline  A'  reflects  the  unchanged  ETS  Directive,  but  does  not  correspond  to  the 
European Council conclusions and is not assessed.  
'Baseline  B'  assumes  the  current  rules  are  prolonged  to  the  next  phase  and  all 
packages are assessed compared to it.  
'Baseline Bbis' is very similar to "Baseline B" with limited adjustments to the carbon 
leakage criteria.  

  The  'Simple'  package  is  designed  to  minimise  the  administrative  burden  and 

complexity. 

  The  'Targeted'  package  is  based  on  policy  options  aimed  at  ensuring  that  the  most 
efficient  installations  do  not  face  undue  costs,  while,  at  the  same  time,  avoiding 
windfall profits.  

  The 'Simple' and 'Targeted' represent different ways to address the trade-offs between 
the  guiding  principles,  as  most  of  the  policy  options  in  the  'Targeted'  require  data 
collection. 

  The 'Limited changes' package is a combination of 'Simple' and 'Targeted' packages.  

Impacts 

Free allocation addressing the risk of carbon leakage directly impacts industrial installations 
covered by the ETS and Member State budgets. 

The  order  of  magnitude  of  the  economic  impacts  of  the  free  allocation  rules  is  about  6.3 
billion allowances, which could amount to some €150 billion5. These public resources need 
to be allocated in an optimal way and it needs to be ensured that they do not undermine the 
polluter pays principle.  

The compliance costs for sectors depend on the carbon price, the level of free allocation, and 
the emissions from production. The carbon price is not directly impacted by the rules for free 
allocation, as the total amount of allowances available (the cap) is fixed in advance. The total 
carbon costs at macro level are determined by the 40 % overall emission reduction target, and 
the specific 43% reduction target for the ETS, as  analysed in the impact assessment for the 
2030 climate and energy framework. 

No  significant  differences  have  been  identified  between  policy  option  packages  for  free 
allocation  in  terms  of  environmental  impacts  because  these  mainly  depend  on  the  overall 
emission reduction of 43% in 2030 determined by the cap.  

For social impacts, the differences between the option packages are rather small, and concern 
only district heating prices.  

Concerning the operational objectives and their link to the elements of the option packages, 
the following can be noted: 

  Regular  benchmark  updates  based  on  a  full  data  collection  ('Baseline',  'Limited 
changes'  and  'Targeted'  packages)  will  most  closely  align  the  benchmark  values  to 
technological  progress.  Updates  based  on  a  single  flat  rate  ('Simple'  package)  will 
yield  a  more  demanding  benchmark  value  for  sectors  with  below-average 
technological  capabilities 
technological 
capabilities. A more nuanced approach, for instance with an update based on multiple 

than  for  sectors  with  above-average 

5 Calculated with the allowance prices estimated in the "EU Energy, Transport and GHG emissions Trends to 
2050 – Reference scenario 2013 (http://ec.europa.eu/clima/policies/2030/docs/eu_trends_2050_en.pdf ) 

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flat  rates  (e.g.  low,  medium,  high)  and/or  complemented  with  data  collection,  could 
bring a closer alignment to achieved technological progress in different sectors. 

  A  too  close  alignment  of  free  allocation  to  the  characteristics  of  an  industry 
(technological progress, production or emission levels) may reduce the incentives to 
innovate. 

  To better target free allocation towards those installations that are best performers and 
most exposed to carbon leakage risks, the amount of free allocation has to be aligned 
with the degree of carbon leakage risk to which the sectors are exposed. The 'Baseline' 
packages fail to achieve a targeted allocation because the correction factor – that may 
increase to around 35% in 2030 – decreases free allocation across sectors irrespective 
of  their  carbon  leakage  risks.  The  option  packages  'Limited  changes'  and  'Targeted' 
better  address  the  differences  in  carbon  leakage  risk  by  classifying  sectors  into  4 
carbon leakage groups and possibly avoiding the correction factor. 

  The rules for adjustments to  production levels changes and the new entrants reserve 
can  be  improved  (as  in  'Simple',  'Limited  changes',  and  'Targeted'  option  packages), 
and thus contribute to reduce the correction factor and provide more free allowances 
for fast-growing companies. 

  A  better  targeted  allocation  system  (as  with  the  'Limited  changes'  and  'Targeted' 
packages)  will  also  reduce  the  likelihood  for  windfall  profits,  while  a  fully  targeted 
allocation system comes at the cost of excessive administrative complexity. 

  A more harmonised compensation of indirect carbon costs – funded by the EU ETS 
auction  revenues  for  Member  States  –  offers  higher  protection  for  electro-intensive 
industries, but at the cost of auction revenues cannot be used for other purposes, e.g. 
to support renewable electricity generation that may reduce carbon costs further in the 
long term . 

Given the advantages and disadvantages of the different packages, a combination could also 
be considered, for example certain measures of the 'Simple' package that perform well with 
regard  to  economic  incentives  and  administrative  simplicity  –  e.g.  benchmark  values  based 
on  (multiple)  flat  rate(s)  and  closer  alignment  to  production  data  –combined  with  carbon 
leakage  rules  (from  the  'Limited  changes'  and  'Targeted'  packages)  to  better  target  free 
allowances towards those sectors that are most exposed to carbon leakage rules. However, the 
policy  choice  ultimately  depends  on  what  emphasis  decision-makers  put  on  the  different 
objectives. 

3.1. Low Carbon Funding Mechanisms 

For  the  Innovation  fund,  changes  to  the  current  NER  300  rules  are  considered  for  the 
screening of projects and the risk sharing approach, in particular for industry projects.  

For the screening of the projects, the current framework is based on an eligibility assessment 
for  innovative  potential  and  technical  and  economic  viability  and  a  selection  based  on  cost 
per  unit  performance  ranking.  This  could  be  maintained  or  changed  for  industry  by  adding 
criteria on replicability and ranking of projects based on innovation. 

Potential  changes  to  the  way  financial  support  is  provided  are  to  increase  the  maximum 
funding  rate and to  tie part  of the support to earlier stages in the project's lifecycle such  as 
milestones  during  the  construction  phase.  A  more  far-reaching  change  is  to  replace  the 
current  non-reimbursable  performance-based  grant  by  a  financial  instrument  such  as  a 

5 

 
 
 
guarantee  or  equity  participation.  Based  on  these  aspects,  two  options  packages  are 
considered:  

  Option  1  -  changes  to  the  current  rules  with  a  more  tailored  approach  for  industry 
projects  and  increasing  the  funding  rate.  The  impacts  of  a  funding  rate  increase  are 
considered in this impact assessment, but more extensive market testing in the context 
of the implementing legislation is needed for RES, CCS and industry. 

  Option  2  -  changes  to  the  current  rules:  support  provided  by  a  permanent  financial 

facility through a financial instrument.  

The  analysis  of  the  options  shows  several  trade-offs:  achieving  breakthrough  innovation 
while  targeting  support  for  best  use  of  limited  funds;  addressing  financial  barriers  for  low 
carbon  innovation  while  setting  up  an  efficient,  simple  management  structure.  Option  1 
would  be  effective  in  addressing  specific  financial  barriers  for  low-carbon  innovation  for 
project  sponsors.  It  could  result  in  a  lower  leverage  and  a  lower  number  of  projects  being 
supported than the continuation of current rules or Option 2, but it has the highest potential to 
address the specific barriers to support the commercialization of break-through innovation for 
CCS, RES and industry. It could deliver significant EU added value by taking into account 
replicability of industry projects. Similar outcomes could also be realised by the first-come-
first-serve selection process provided by Option 2, but this option would limit the comparison 
between  project  proposals  and  may  need  to  be  combined  with  additional  means  to  support 
highly innovative projects. 

For the Modernisation Fund, the main options considered relate to the governance structure, 
and the different roles that Member States, the European Commission and the EIB can play to 
advance the objectives of the Fund.  

Two main factors can be varied regarding the role of Member States and the Commission: the 
extent  to  which  eligibility,  selection  and  investment  guidelines  are  defined  in  the 
implementing legislation by the Commission; and the composition of the Steering Board that 
further defines the rules and guidelines.  

The Steering Board can include the beneficiary Member States, or all Member States (donors 
and beneficiaries) and the Commission. The EIB could either do only the due diligence and 
have an advisory role, or act as fund manager on behalf of the beneficiary Member States and 
the Commission. The options below reflect different combinations:   

large  discretion  and  responsibility  for 

Option  1: 
the  beneficiary  Member  States, 
Modernisation  Fund  tailored  to  specific  national  needs.  A  Steering  Board  of  beneficiary 
Member States defines eligibility criteria and projects. The implementing legislation includes 
general guidance with detailed decisions taken by the Steering Board. The Commission helps 
in administration, the EIB performs due diligence.  

Option 2: more cooperation. The investment guidelines are agreed by the Steering Board of 
all  Member  States  and  the  Commission.  The  Commission  helps  in  administration,  the  EIB 
performs due diligence. EIB has an enhanced role as fund manager and remains accountable 
to  the  Steering  Board,  assesses  individual  programmes,  projects,  and  financial  instruments, 
and monitors performance indicators.  

Option 3: beneficiary Member States identify a pipeline of projects to be funded via financial 
instruments, conforming to eligibility criteria and general principles for project selection set 
in the implementing legislation. The Commission helps in administration, the EIB performs 
due diligence. 

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The  Modernisation  Fund  is  expected  to  trigger  investments  that,  depending  on  the  type  of 
project  supported,  could  create  employment  opportunities,  lower  greenhouse  gas  emissions 
and  improve  local  air  quality.  The  three  options  are  compared  based  on  effectiveness, 
coherence,  market  distortion  and  administrative  burden  and 
trade-offs. 
"Effectiveness"  is  key  in  ensuring  the  governance  structure  contributes  towards  the  Fund 
objectives.  Option  3  has  a  simple  governance  structure,  but  may  mobilise  fewer  private 
investments.  Option  1  addresses  national  priorities,  but  may  not  fully  reflect  European 
priorities.  There  may  be  a  risk  of  internal  energy  market  distortions  and  burdensome 
fragmentation for investors resulting in lower effectiveness. Option 2 is a balanced approach 
enabling a maximum amount of private investment and taking into account both national and 
European priorities.  

there  are 

For  the  optional  free  allocation  to  promote  investments  for  modernising  the  energy 
sector, the main aspects assessed are timing, selection of investments and reporting, because 
currently  these  either  vary  between  Member  States  using  this  option,  affecting  the  volume 
and  timing  of  allowances  to  be  auctioned  or  negatively  impact  the  operational  objectives 
(transparency, simplicity and potential distortion of the energy market).  

Possible changes include replacing the current national plans with an open competition based 
on targeted performance (a tender or competitive bidding with  investments representing the 
best value for money being selected / prioritised), or publication by the Commission instead 
of reporting by Member States. An equal amount of free allocation per year could be chosen 
to  replace  the  current  approach  with  a  declining  trajectory,  affecting  the  distribution  of 
investments over the period and the supply of allowances to the market.  Finally,  consistent 
rules  on  auctioning  if  allowances  are  not  given  for  free  can  reduce  the  current  variation 
between Member States and set a clear timetable for auctioning of unused allowances. Based 
on these aspects, three options packages are considered. 

Option 1: a streamlined approach with more consistent rules and procedures, limiting delays 
for investments and reports published by the Commission. This would reduce differences in 
methodologies between Member States while keeping most of the principles.  

Option  2:  changes  focussing  on  a competitive  and  open  selection  of  investments.  An  open 
competition  reduces  the  potential  risk  of  market  distortion  for  large  investments,  compared 
based  on  value  for  money.  Smaller  investments  could  be  approved  under  a  possible  future 
general block exemption for state aid rules. Auctioning of unused allowances can be delayed 
for 1 or 2 years. 

Option  3:  greatest  level  of  standardisation  with  fixed  percentage  of  free  allocation  on  an 
annual  basis.  Approach  is  fully  predictable  for  the  market.  Selection  of  all  eligible 
investments through an open competition based on best value for money.  

There are some key trade-offs for the options considered: the streamlined approach in Option 
1 provides limited improvements to transparency and reduces the administrative burden, but 
does  not  change  the  selection  of  investments,  so  the  effectiveness  does  not  change 
significantly. Changing the trajectory of free allocation and including a competitive selection 
process  may  lead  to  a  higher  administrative  burden,  but  has  greater  potential  to  improve 
effectiveness and transparency. For all three options allowing Member States to "opt in" their 
allowances from free allocation in the Modernisation Fund could be considered, providing a 
single structure for potential investors. 

Three main inter-linkages can be identified between the low-carbon funding mechanisms: the 
need for balanced monetisation of allowances to enable a timely start while minimising the 
impact  on  the  carbon  market  (Innovation  Fund  and  the  Modernisation  Fund),  a  similarity 

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between  the  targeted  investments  in  energy  efficiency  and  energy  sector  modernisation 
underlining  the  need  to  take  into  account  potential  accumulation  (Modernisation  Fund  and 
optional  free  allocation  to  the  power  sector),  and  the  impact  of  transposition  and 
implementation  rules  for  the  beneficiary  Member  States  of  the  Modernisation  Fund  and 
optional free allocation to power. 

3.2. Further improvements to the current set of rules 

The EU ETS current architecture is relatively recent, but based on experience, certain limited 
changes should be considered post-2020. 

These can concern: 

 
 

 

the validity of allowances across ETS phases; 
the possibility  for  Member  States to exclude  certain small  installations  from the EU 
ETS and subjecting them to equivalent measures; 
the sustainable funding of the Union-wide single registry for the EU ETS. 

8