REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Report on the functioning of the European carbon market
Date: 2017-11-23
Institutions: Directorate-General for Climate Action, European Commission
Subjects: EU Emissions Trading Scheme, EU emission allowance, EU environmental policy, air transport, carbon, environmental monitoring, greenhouse gas, market supervision, reduction of gas emissions, tradeable emission permit

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.11.2017  COM(2017) 693 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Report on the functioning of the European carbon market  
 
 
Table of Contents 

List of acronyms and abbreviations ........................................................................................... 3 

1. 

INTRODUCTION .............................................................................................................. 5 

2.  EU ETS INFRASTRUCTURE .......................................................................................... 7 

2.1.  Coverage of activities, installations and aircraft operators ............................................. 7 

2.2.  Union Registry and the European Union Transaction Log (EUTL) ............................... 9 

3.  FUNCTIONING OF THE CARBON MARKET IN 2016 .............................................. 10 

3.1.  Supply: allowances put in circulation ....................................................................... 10 

3.1.1.  Cap ..................................................................................................................... 10 

3.1.2. 

Issued allowances ............................................................................................... 12 

3.1.3. 

International credits ........................................................................................... 21 

3.2.  Demand: allowances taken out of circulation ........................................................... 23 

3.3.  Balancing supply and demand ................................................................................... 23 

4.  AVIATION ....................................................................................................................... 27 

5.  MARKET OVERSIGHT .................................................................................................. 29 

5.1.  The legal nature and fiscal treatment of emission allowances .................................. 30 

6.  MONITORING, REPORTING AND VERIFICATION OF EMISSIONS ..................... 31 

7.  OVERVIEW OF ADMINISTRATIVE ARRANGEMENTS .......................................... 34 

8.  COMPLIANCE AND ENFORCEMENT ........................................................................ 35 

9.  CONCLUSIONS AND OUTLOOK ................................................................................ 37 

ANNEX.................................................................................................................................... 38 

2 

 
 
 
 
 
 
 
List of acronyms and abbreviations 

AVR 

CA 

CCS 

Accreditation and Verification Regulation 

Competent Authority 

Carbon Capture and Storage 

CDM   

Clean Development Mechanism 

CERs   

Certified Emission Reductions 

CORSIA 

Carbon Offsetting and Reduction Scheme for International Aviation 

EA 

EEA 

EEX 

EIB 

European Cooperation for Accreditation 

European Economic Area 

European Energy Exchange 

European Investment Bank 

ERUs   

Emission Reduction Units 

EU ETS 

European Union Emissions Trading System 

EUTL   

European Union Transaction Log 

GHG    

Greenhouse Gas 

ICAO   

International Civil Aviation Organization 

ICE 

JI 

ICE Future Europe 

Joint Implementation 

MAR   

Market Abuse Regulation 

MiFID2 

Directive on Markets in Financial Instruments 

MRR 

Monitoring and Reporting Regulation 

MRV   

Monitoring, Reporting, and Verification 

MRVA 

Monitoring, Reporting, Verification and Accreditation 

MSR     

Market Stability Reserve 

NAB 

NER 

National Accreditation Body 

New Entrants Reserve 

3 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PFCs 

RES 

Perfluorocarbons 

Renewable Energy Sources 

TNAC  

Total Number of Allowances in Circulation 

4 

 
 
 
 
1.  INTRODUCTION 

The EU Emissions Trading System (EU ETS) has been the cornerstone of the EU's strategy 
for  reducing  greenhouse  gas  (GHG)  emissions  from  industry  and  the  power  sector  since 
2005.  It  contributes  significantly  to  the  achievement  of  the  EU's  target  of  cutting  GHG 
emissions by 20% from 1990 levels by 2020. While the EU is on track to surpass this target1, 
cutting GHG emissions by at least 40% by 2030 – as foreseen in the EU's 2030 climate and 
energy policy framework – would require continued progress2. The 2030 domestic target will 
be  delivered  collectively  by  the  EU,  with  reductions  in  both  the  ETS  and  the  non-ETS 
sectors. However, a well-functioning, reformed EU ETS will constitute the main mechanism 
to achieve this target, by facilitating a decrease of 43% of GHG emissions compared to 2005 
levels in the sectors covered by the system. 

To  enable  the  EU  ETS  to  accomplish  this  goal,  in  July  2015  the  Commission  presented  a 
legislative  proposal3  to  reform  the  EU  ETS  for  its  fourth  trading  period  (2021-  2030).  A 
political  agreement  was  reached  on  the  proposal  in  early  November  2017  following  an 
extensive process of trilogues4.  

This  Report  on  the  functioning  of  the  European  carbon  market  is  presented  in  accordance 
with  the  requirements  of  Articles  10(5)  and  21(2)  of  Directive  2003/87/EC5  (EU  ETS 
Directive). As stipulated by the Directive, the objective of the report is to provide a regular 
snapshot of developments in the European carbon market on an annual basis.  

Table 1: Carbon market reports published in previous years6 

Reference 

Period covered 

Political context 

COM(2012) 652 

2008-2011 

COM(2015) 576 

COM(2017) 48 

2013-2014 

2015 

Assess the need for regulatory 
action in view of a growing 
surplus in emission allowances 
1st State of the Energy Union 
report 
2nd State of the Energy Union 
report 

The  present  report  covers  the  year  2016,  but  also  presents  certain  initiatives  proposed  or 
agreed in 2017. Compared to the previous report, it contains a new chapter on indirect carbon 
cost compensation schemes, as well as information on the Market Stability Reserve surplus 

1 In 2015, EU GHG emissions were already 22% below 1990 levels. 
2 According to national projections, emissions will further decrease until 2020, but additional policies will need 
to be implemented to achieve the 2030 target. 
3 COM (2015) 337, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52015PC0337 
4 Trilogues are informal tripartite meetings attended by representatives of the European Parliament, the Council 
of the EU and the Commission. 
5 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a 
scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 
96/61/EC, OJ L 275, 25.10.2003, p. 32. 
6 Reports published in previous years can be found here: https://ec.europa.eu/clima/policies/ets_en#tab-0-1 

5 

 
 
 
                                                            
indicator published for the first time in May 2017.  Unless otherwise indicated, data used for 
this report were the ones publicly available and at the disposal of the Commission by 30 June 
2017. 

General and descriptive information on different aspects of the EU ETS is included in boxes 
throughout the report.  

6 

 
 
 
2.  EU ETS INFRASTRUCTURE 

2.1. Coverage of activities, installations and aircraft operators 

The EU ETS operates in the 31 countries of the European Economic Area (EEA). It limits 
emissions  from  nearly  11,000  power  plants  and  manufacturing  installations  as  well  as 
slightly over 500 aircraft operators flying between EEA's airports.  It covers around 45% 
of the EU's GHG emissions. 

As of Phase 3 (2013-2020)*, the sectors with stationary installations regulated by the EU 
ETS  are  energy  intensive  industries,  including  power  stations  and  other  combustion 
plants  with  >20MW  thermal  rated  input  (except  hazardous  or  municipal  waste 
installations), oil refineries, coke ovens, iron and steel, cement clinker, glass, lime, bricks, 
ceramics,  pulp,  paper  and  board,  aluminium,  petrochemicals,  ammonia,  nitric,  adipic, 
glyoxal and glyoxylic acid production, CO2 capture, transport in pipelines and geological 
storage of CO2.  

The aviation scope of the EU ETS was limited to flights within the EEA until the end of 
2016,  pending  the  adoption  of  a  global  approach  by  the  International  Civil  Aviation 
Organization (ICAO). In October 2016, the ICAO agreed on a resolution on the Carbon 
Offsetting and Reduction Scheme for International Aviation (CORSIA), to start in 2021. 
In  light  of  this  outcome,  the  Commission  proposed  to  continue  the  intra-EEA  approach 
beyond 2016 (see Section 4).  

The EU ETS covers carbon dioxide (CO2) emissions, nitrous oxide (N2O) emissions from 
all  nitric,  adipic,  glyoxylic  acid  and  glyoxal  production,  and  perfluorocarbons  (PFC) 
emissions  from  aluminium  production.  Even  though  participation  in  the  EU  ETS  is 
mandatory, in some sectors only installations above a certain size are included. Moreover, 
participating countries can exclude small installations from the system if measures are in 
place  that  will  cut  their  emissions  by  an  amount  equivalent  to  the  amount  of  emissions 
which  would  have  been  cut  had  the  installations  been  included  in  the  EU  ETS.  
Participating countries may also add more sectors and GHGs to the EU ETS. 

* Information on Phases 1 and 2 of the EU ETS can be found here: https://ec.europa.eu/clima/policies/ets/pre2013_en 

According to the Article 21 reports submitted by participating countries7 in 2017, there were 
a total of 10 790 permitted installations in 2016 compared to approximately 10 950 in 2015 
and approximately 11 200 the year before.  

7 For the reference to Article 21 reports, "participating countries" or simply "countries" include the 28 EU 
Member States plus EEA countries (Iceland, Norway and Liechtenstein). 

7 

 
 
 
 
                                                            
 
As was the case in previous years, the fuels combusted within the EU ETS in 2016 remained 
overwhelmingly fossil.  However, 29 countries also reported biomass use (compared to 27 in 
2015) in connection with 2 079 installations (19% of all installations). Only two countries (LI 
and MT) did not report any use of biomass8. Emissions from biomass in 2016 amounted to 
approximately  141  million  tonnes  CO2  (8%  of  EU  ETS  reported  emissions),  compared  to 
approximately  125  million  tonnes  CO2  in  2015  (some  7%  of  EU  ETS  reported  emissions). 
The  same  two  countries  as  last  year  (DE  and  SE)  reported  a  small  use  of  biofuel  for  three 
aircraft operators (compared to four in 2015).9  

Within the installation categories based on annual emissions10, the data for 2016 shows that, 
as  in  previous  years,  approximately  72%  of  installations  are  category  A,  nearly  21%  are 
category  B  and  slightly  over  7%  are  category  C.  Over  6  202  installations  were  reported  as 
'installations with low emissions' (57.5% of the total).  

EU  ETS  installations  involving  combustion  activities  can  be  found  in  all  participating 
countries,  while  oil  refining,  steel  production,  cement,  lime,  glass,  ceramics  and  pulp  and 
paper  production  can  be  found  in  the  majority  of  them.  Regarding  EU  ETS  activities 
additionally  listed  for  non-CO2  emissions,  permits  are  reported  as  issued  for  primary 
aluminium and perfluorocarbons (PFCs) in 13 countries (DE, ES, FR, GR, IS, IT, NL, NO, 
RO, SE, SI, SK, UK), while for nitric acid production and N2O permits are reported as issued 
in  21  countries  (the  exceptions  being  CY,  DK,  EE,  IE,  IS,  LI,  LU,  LV,  MT,  and  SI).  The 
other  N2O  sectors  –  adipic  acid  production  and  glyoxal  and  glyoxylic  acid  production  are 
reported  in  three  (DE,  FR,  IT)  and  two  (DE,  FR)  countries,  respectively.  The  same  two 
countries (FR and NO) as last year declared CO2 capture and storage activities. 

Eight countries (DE, ES, FR, HR, IS, IT, SI, UK) have made use of the possibility to exclude 
small emitters from the EU ETS in line with Article 27 of the EU ETS Directive. As in 2015, 
emissions excluded for 2016 amounted to about 4 million tonnes CO2 (some 0.22% of total 
verified emissions). 

According to Article 21 submissions in 2017, so far seven countries (BE, DK, FR, HR, HU, 
LI,  LT)  have  taken  advantage  of  the  provision  offered  by  Article  13  of  Commission 
Regulation (EU) No 601/2012 ("the Monitoring and Reporting Regulation") to allow use of 
simplified monitoring plans in low risk cases for stationary installations. Only Denmark has 
joined since 2015. In  the case of aircraft operators  with low emissions, four countries have 
reported use of this provision (BE, FI, IS and PL), with Belgium joining since 2015.   

8 Biomass emissions are zero-rated in the EU ETS, i.e. emissions have to be reported but no allowances have to 
be surrendered for them. 
9 Article 21 reported emissions concerning use of biofuel amounted to less than 0.04% of the overall emissions 
of the aircraft operator involved.  
10 See Commission Regulation (EU) No 601/2012 of 21 June 2012 on the monitoring and reporting of GHG 
emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council, OJ L 181, 
12.7.2012, p. 30, where category C installations emit more than 500 000 tonnes CO2e per year, category B 
installations emit between 500000 and 50000 tonnes CO2e per year, and category A installations emit less than 
50000 tonnes CO2e per year. Furthermore, 'installations with low emissions' are a sub-set within category A 
installations which emit less than 25000 tonnes CO2e per year. 

8 

 
 
                                                            
Regarding the coverage of aircraft operators, 503 aircraft operators in 2016 were reported to 
have a monitoring plan (compared to 524 reported for 2015, and 611 for 2014). This suggests 
that the number of aircraft operators within the EU ETS is stabilising. Nearly 60% (300) of 
the reported operators were commercial while the other 40% (203) were non-commercial.11 A 
total  of  249  (nearly  50%)  qualified  as  small  emitters  (compared  to  274  (52%)  in  2015  and 
329 (54%) in 2014).  

2.2. Union Registry and the European Union Transaction Log (EUTL) 

The  Union  Registry  and  the  European  Union  Transaction  Log  (EUTL)  track  the 
ownership  of  general  and  aviation  allowances  and  the  transactions  involving  them  by 
recording the amounts owned on its accounts and the transactions between accounts. They 
are operated and maintained by the Commission, whereas national registry administrators 
in  the  31  participating  countries  remain  the  point  of  contact  for  the  representatives  of 
around 15 000 accounts (companies or natural persons).  

While  the  Union  Registry  holds  accounts  for  stationary  installations  and  for  aircraft 
operators, the EUTL automatically checks, records and authorises all transactions between 
accounts,  thus  ensuring  that  all  transfers  comply  with  EU  ETS  rules.  They  thus  offer 
European emitters, traders and the 31 national authorities the means to carry out their EU 
ETS  activities:  allocating  free  allowances  to  the  stationary  and  aviation  operators, 
recording  emissions,  allowing  emitters,  professional  traders  and  physical  persons  to 
execute  completed  trades  by  transferring  allowances  between  accounts,  and  allowing 
emitters to cover their emissions by surrendering allowances.  

*Decision No 406/2009/EC of the European Parliament and of the Council of 23 April 2009 on the effort of Member 
States  to  reduce  their  greenhouse  gas  emissions  to  meet  the  Community’s  greenhouse  gas  emission  reduction 
commitments up to 2020, OJ L 140, 5.6.2009, p. 136.  

In  2016,  the  Union  Registry  continued  to  provide  reliable  services  to  European  emitters 
(stationary installations and aviation operators), traders, and national authorities.  

Several  technical  and  usability  improvements  were  introduced  in  the  registry.  The 
enhancements  concern  features  of  user  handling,  accounts,  and  transactions,  as  well  as  the 
authentication system, which was substantially improved and became EU Login. 

In the summer of 2017, the Commission launched a survey on the user interface of the Union 
Registry, asking users to provide their views on the current functioning of the interface. The 
goal was to further improve the user experience of the registry. 

11 An example of a commercial aircraft operator would be a passenger airline providing services to the general 
public. An example of a non-commercial aircraft operator would be a privately owned aircraft. 

9 

 
 
 
 
 
                                                            
 
 
3.  FUNCTIONING OF THE CARBON MARKET IN 2016  

This chapter provides information on the supply and demand side of the EU ETS. The supply 
side  section  includes  information  on  the  cap,  free  allocation,  the  NER300  programme, 
auctioning,  the  derogation  from  full  auctioning  for  the  power  sector,  as  well  as  the  use  of 
international credits. As a new element, this year's report also contains a chapter on indirect 
carbon cost compensation schemes. 

On the demand side, information is provided on the number of verified emissions and on the 
methods  of  balancing  the  supply  and  demand  of  allowances,  such  as  the  Market  Stability 
Reserve (MSR). 

3.1. Supply: allowances put in circulation  

3.1.1.  Cap 

The cap is the absolute quantity of GHGs which may be emitted in the system to ensure the 
emission reduction target is met and that it corresponds to the number of allowances put in 
circulation over a trading period. In Phase 3, a common EU-wide cap is applied, replacing 
the previous system of national caps.  

The  2013  cap  for  emissions  from  stationary  installations  was  set  at  2  084  301  856 
allowances.  This  cap  decreases  each  year  by  a  linear  reduction  factor  of  1.74%  of  the 
average total quantity of allowances issued annually in 2008-2012, thus ensuring that the 
number  of  allowances  that  can  be  used  by  stationary  installations  will  be  21%  lower  in 
2020 than in 2005. 

The  aviation  sector  cap  was  originally  set  at  210  349  264  aviation  allowances  per  year, 
which  is  5%  below  the  average  annual  level  of  aviation  emissions  in  2004-2006.  It 
increased  by  116  524  aviation  allowances  on  1  January  2014  to  accommodate  Croatia 
joining the EU ETS. This  cap  was  meant to  reflect the 2008 legislation* which included 
aviation in the EU ETS and stated that all flights from, to and within the EEA would be 
included  in  the  EU  ETS.  However,  the  scope  of  the  EU  ETS  was  temporarily  limited  to 
flights  within  the  EEA  between  2013  and  2016  to  support  the  development  of  a  global 
measure by the ICAO. Therefore, the number of aviation allowances put into circulation in 
2013-2016 has  been  significantly  lower  than the  original  cap.  In  light of  the  progress  on 
the global measure in October 2016, the Commission has proposed to continue the current 
approach beyond 2016 (see section 4). 

*  Directive  2008/101/EC  of  the  European  Parliament  and  of  the  Council  of  19  November  2008,amending  Directive 
2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the 
Community 

10 

 
 
 
 
 
 
 
 
 
Table 2 shows the figures for the cap for stationary installations and the number of aviation 
allowances put annually into circulation12 for each year during Phase 3 of the EU ETS. 

Table 2: EU ETS cap 2013-2020 

Year 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

Annual cap (installations) 

Annual  aviation allowances put into 
circulation13 

2 084 301 856 

2 046 037 610 

2 007 773 364 

32 455 312 

41 681 025 

48 543 026 

1 969 509 118 

38 034 475 

1 931 244 873 

37 833 81914 

1 892 980 627 

1 854 716 381 

1 816 452 135 

12 The number of aviation allowances put into circulation since 2013 is the result of a bottom-up approach 
starting from free allocation (determined on the basis of activity-based benchmarks for operators' activity within 
the EEA). The number of allowances auctioned is then derived based on the fact that free allocation (including a 
special reserve for later distribution to fast-growing aircraft operators and new entrants) should be 85% of the 
total and auctioning should be 15%. 
13 The number of aviation allowances put into circulation for 2017, 2018, 2019 and 2020 will depend on the 
outcome of the Commission's legislative proposal (see section 4).  
14 The included auctioning numbers are from August 2017 (see section 4). 

11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
3.1.2.  Issued allowances 

3.1.2.1. 

Free allocation  

Although in Phase 3 auctioning is the default method for allocating emission allowances to 
companies participating in the EU ETS, a significant amount of allowances continue to be 
allocated for free until 2020 and beyond. The following principles apply: 

  Electricity production no longer receives any free allowances; 
  Allowances are distributed for free according to EU-wide harmonised rules; 
  Free  allocation  is  based  on  performance  benchmarks  to  strengthen  the  incentives  for 

GHG emission reductions and reward the most efficient installations; 

  An EU-wide New Entrants' Reserve (NER) has been established, equivalent to 5% of 

the total amount of allowances for Phase 3. 

Free allocation is provided to industrial installations to address the potential risk of carbon 
leakage  (a  situation  where  companies  transfer  production  to  third  countries  with  laxer 
constraints on GHG emissions for reasons of costs related to EU climate policies, which 
may  lead  potentially  to an  increase in  their  total  emissions).  The  sectors  and  sub-sectors 
deemed  to  be  exposed  to  a  significant  risk  of  carbon  leakage  are  placed  on  a  carbon 
leakage list*, which currently covers the period 2015-2019. 

* The current carbon leakage list can be found here: http://eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX:32014D0746 

Over Phase 3, 39% of the total quantity of allowances available will be allocated for free to 
industry and electricity-generating installations for the heat they produce. This share will be 
further increased due to allocations to new entrants until 2020. It is not possible to determine 
how much of the NER will be used in future years. However, the Commission's 2015 Impact 
Assessment15 indicated that in line with trends, it was expected that no more than 2% of the 
cap  would  additionally  be  allocated  for  free  from  NER.  Therefore,  over  Phase  3,  the  free 
allocation is expected to be around 41%  of the total  amount.  Further, some 2%  of the total 
cap  is  used to  fund the deployment of innovative low-carbon technologies via the NER300 
programme16. Therefore, the auction share in Phase 3 amounts to 57%. 

New installations and installations significantly increasing capacity are eligible for additional 
free  allocation  from  the  NER  in  Phase  3.  The  initial  NER,  after  deducting  300  million 
allowances  for  the  NER300  programme,  held  480.2  million  allowances.  139.9  million 
allowances  have  been  reserved  for  654  installations  for  the  entirety  of  Phase  317.  The 
remaining NER, which amounts to 340.3 million allowances, can be distributed in the future. 
However,  it  is  expected  that  a  significant  number  of  these  allowances  will  remain 
unallocated.  

15 SWD(2015) 135 final, https://ec.europa.eu/clima/sites/clima/files/ets/revision/docs/impact_assessment_en.pdf 
16 NER300 is a funding programme for innovative low-carbon energy demonstration projects funded from the 
monetisation of 300 million emission allowances from the NER (see section 3.1.2.2.). 
17 The numbers presented are from July 2017: 
https://ec.europa.eu/clima/sites/clima/files/ets/allowances/docs/170711_status_table_ner.pdf 

12 

 
 
 
                                                            
Until  June  2017,  allocation  has  been  reduced  by  around  301.9  million  allowances  due  to 
installations  that  have  closed  or  reduced  their  production  or  their  production  capacity 
compared to the one initially used to calculate Phase 3 allocation. 

Table 3: The number of allowances (in millions) allocated to the industry for free in from 2013 
to 201718 

Free allocation19  
(EU28+EEA EFTA states)  

Allocation from the new 
entrants reserve (greenfield 
investments and capacity 
increases)  

Free allowances remaining 
unallocated due to closures or 
changes in production or 
production capacity 

2013 

2014 

2015 

2016 

2017 

903.0 

874.8 

847.6 

821.3 

796.2 

11.2 

14.6 

17.3 

18.3 

17.6 

40.2 

58.6 

69.9 

65.5 

67.5 

As  the  demand  for  free  allocation  exceeded  the  amount  available,  the  allocation  for  all 
installations  under  the  EU  ETS  has  been  reduced  by  the  same  percentage  through  the 
application  of  a  "cross-sectoral  correction  factor"  (in  accordance  with  the  ETS  Directive). 
The correction factor was calculated as a reduction in free allocation of approximately 6% in 
2013, increasing annually until reaching approximately 18% in 2020.  

On 28 April 2016, the European Court of Justice20 invalidated as of 1 March 2017 the cross-
sectoral  correction  factor  values  established  in  Commission  Decision  2013/448/EU  (see 
Appendix  5  to  the  Annex).  Consequently,  the  Commission  revised  the  values  set  in  that 
Decision21 on 24 January 2017 to bring them in conformity with the judgment of the Court of 
Justice. 

18 The figures include notifications received until July 2017 and may be subject to large changes due to later 
notifications by Member States. 
19 Initial amount, before application of the reductions mentioned below in the table.  
20 Judgment of the Court  of Justice of 28 April 2016 in Joined Cases C-191/14, C-192/14, C-295/14, C-389/14 
and C-391/14 to C-393/14 Borealis Polyolefine GmbH and Others v Bundesminister für Land- und 
Forstwirtschaft, Umwelt und Wasserwirtschaft and Others, EU:C:2016:311. 
21 Commission Decision 2017/126/EU, OJ L 19, 25.1.2017, p. 93. 

13 

 
 
 
 
                                                            
3.1.2.2.  NER 300 programme 

The  NER300  is  a  large-scale  funding  programme  for  innovative  low-carbon  energy 
demonstration projects. It is aimed at demonstrating environmentally safe carbon capture 
and storage (CCS) and innovative renewable energy (RES) technologies on a commercial 
scale within the EU.  

The NER 300 is funded from the monetisation of 300 million emission allowances from 
the  NER  set  up  for  Phase  3  of  the  EU  ETS.    The  funds  from  the  monetisation  were 
awarded to projects selected through two rounds of calls for proposals in December 2012 
and July 2014.  

As a result of the two calls for proposals, 38 RES projects and 1 CCS project were awarded 
in  total,  covering  20  EU  Member  States  and  amounting  to  €2.1  billion.  Of  them,  four  are 
already  operational:  bioenergy  project  BEST  in  Italy,  bioenergy  project  Verbiostraw  in 
Germany, Windpark Blaiken in Sweden, and, as of 1 July 2017, the Veja Mate offshore wind 
farm in the German North Sea.  

Thirteen  projects  in  total  have  so  far  reached  their  final  investment  decision,  while  four 
projects have been cancelled. The Commission proposed re-investing the unspent funds from 
the  cancelled  projects,  which  amount  to  at  least  €  436  million,  in  existing  financial 
instruments,  i.e.  the  InnovFin  Energy  Demo  Projects  (EDP)  and  the  Connecting  Europe 
Facility debt instrument, both managed by the European Investment Bank (EIB). To this end, 
in  May  2017  Member  States  approved  in  the  Climate  Change  Committee  a  relevant 
amendment22 to the NER 300 Decision23.  

Table 4: NER 300 projects awarded under the first and second calls for proposals24 

1st Call for proposals  

2nd Call for proposals 

Projects in planning 

Projects final investment 
decision reached 

Projects in operation 

Projects withdrawn 

Total 

1 

11 

4 

4 

20 

17 

2 

0 

0 

19 

22 https://ec.europa.eu/clima/sites/clima/files/lowcarbon/ner300/docs/2017_draft_amendment_post_ccc_en.pdf 
23 Commission Decision 2010/670/EU, OJ L 290, 6.11.2010, p. 39 
24 In line with Commission Decision 2010/670/EU, projects awarded under the first call must reach final 
investment decision by the end of 2016, while projects awarded under the second call must do so by the end of 
June 2018. 

14 

 
 
 
 
 
 
                                                            
 
 
The publication of further NER 300 calls for proposals is not foreseen. The Commission is 
now focusing on the implementation25 of the projects selected for funding, and the swift re-
investment of unspent funds. 

3.1.2.3.  Compensation of indirect carbon costs 

As explained in section 3.1.2.1, energy-intensive industries deemed to be exposed to risk 
of  carbon  leakage  are  eligible  for  free  allowances  to  cover  their  direct  carbon  costs.  In 
addition,  EU  Member  States  may  grant  state  aid  to  compensate  some  electro-intensive 
industries for indirect carbon costs, i.e. increases in electricity prices, passed through by 
power generators due to the EU ETS.  

To  ensure  harmonized  application  of  indirect  carbon  cost  compensation  across  Member 
States, and minimize competition distortions in the internal market, the Commission has 
adopted  the  EU  ETS  State  Aid  Guidelines*  for  the  period  2013-2020.  The  Guidelines 
determine, inter alia, eligible sectors and maximum amounts for compensation of indirect 
carbon costs. The state aid granted for this purpose is partial and declining over time**, 
therefore  retaining  the  incentives  for  electricity  efficiency  and  the  transition  to  ‘green’ 
electricity, in line with the EU ETS objectives.  

*  Guidelines  on  certain  State  aid  measures  in  the  context  of  the  greenhouse  gas  emission  allowances  trading  scheme 
post 2012,OJ C158, 05.06.2012, p.4 

** The maximum share of eligible costs declines from 85% for the period 2013-2015, to 75 % for the period 2019-2020. 

To  date,  the  Commission  has  approved  10  state  aid  schemes  for  compensation  of  indirect 
carbon costs. Table 5 presents a summary of the indirect carbon costs compensation schemes 
approved since 2013.  

Table  5:  Indirect  carbon  cost  compensation  schemes  approved  within  the  framework  of  the 
2012 ETS Guidelines26 

Member State 

UK 
DE 
BE 
NL 

Approved ceiling of the indirect 
carbon cost  compensation 
schemes /(annual average 
approved ceiling) in millions  
£ 11327/ (13 - 50) 
€ 75628/ ( 203 - 350) 
€  11329/ ( 38) 
€  15630/(78) 

Duration of 
the scheme 

2013 - 2020 
2013 - 2020 
2013 - 2020 
2013 - 2020 

Member States' auction 
revenue 2016 (excluding 
aviation allowances) in 
millions 
€ 419 
€ 846 
€ 107 
€ 142  

25 An interactive map following project implementation can be found here: https://setis.ec.europa.eu/NER300 
26  The  non-confidential  versions  of  all  decisions  can  be  found  on  the  website  of  DG  Competition: 
http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=3 

27 Estimated budget is for 2013-2015 
28 Estimated budget is for 2013-2015 
29 Maximum estimated total budget dependent on estimates of carbon price 

15 

 
 
 
 
                                                            
 
EL 
LT 
SK 
FR 
FI 

ES 

€  16031/(40) 
€ 13.1 / (1-3) 
€ 250/ (35) 
€ 364/ (61) 
€ 149/ (30) 
€ 5/ (1-3) 
€ 106 /(6-25) 

2013 - 2020 
2014 - 2020 
2014 - 2020 
2015 - 2020 
2016 - 2020 
2013 - 2015 
2016 -2020 

€ 147 
€ 21 
€ 65 
€ 231 
€  71  
€ 365 

3.1.2.4. 

Auctioning of allowances 

As of Phase 3 of the EU ETS, auctioning via the primary market is the default mode for 
allocating allowances. More than half of the allowances  are to  be auctioned during this 
phase,  with  the  proportion  continually  growing  throughout  the  trading  period.  Auctions 
are  governed  by  the  Auctioning  Regulation*  which  specifies  the  timing,  administration 
and  other  aspects  of  how  auctions  should  take  place  to  ensure  an  open,  transparent, 
harmonised and non-discriminatory process. 

* Commission Regulation (EU) No 1031/2010 of 12 November 2010 on the timing, administration and other aspects of 
auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and of 
the Council establishing a scheme for greenhouse gas emission allowances trading within the Community, OJ L 302, 
18.11.2010, p.1. 

The auctions over the reporting period took place through the following auction platforms: 

  European Energy Exchange AG ('EEX'), auctioning as the common auction platform 
for 25 Member States participating in a joint procurement procedure, and for Poland 
which opted-out from the joint procurement procedure but has not appointed its own 
auction  platform  yet.  As  of  5  September  2016,  EEX  is  conducting  auctions  as  the 
second common auction platform appointed on 13 July 2016;  

  EEX, auctioning for Germany as an 'opt-out' auction platform; 

 

ICE Future Europe ('ICE'), auctioning for the UK as an 'opt-out' auction platform. 

Iceland, Liechtenstein and Norway have not started to auction allowances yet. 

In 2016, EEX, auctioning on behalf of 27 Member States (25 Member States cooperating on 
a  common  auction  platform,  Germany,  and  Poland)  auctioned  89%  of  the  total  auctioned 
amount, while ICE auctioned 11% of the total amount on behalf of the UK. 

On  4  May  2017,  auction  number  1000  performed  across  platforms  under  the  Auctioning 
Regulation was held. The number of auctions reached 1036 by 30 June 2017.  

Table 6 provides an overview of the volumes of allowances auctioned by EEX and ICE up to 
30 June 2017, including the early auctions32 of general allowances. The volumes of general 

30 Estimated budget for 2014-2015 
31 Estimated budget for 2015-2018 

16 

 
 
  
 
 
                                                                                                                                                                                         
 
 
allowances  have  been  determined  taking  into  account  Decision  1359/2013/EU  to  backload 
900 million allowances from 2014, 2015 and 2016. The volumes of aviation allowances have 
been determined taking into account the temporary derogations for the aviation sector set out 
in Decision No 377/2013/EU and Regulation (EU) No 421/2014.  

Table 6: Total volume of Phase 3 allowances auctioned in 2012-2017 

Year 

2012 

2013 

2014 

2015 

2016 

2017 (up to 1 April)33  

General allowances  

Aviation allowances  

89 701 500 

808 146 500 

528 399 500 

632 725 500 

715 289 500 

241 935 000 

2 500 000 

0  

9 278 000 

16 390 500 

5 997 500 

0 

The  auctions  were  generally  conducted  smoothly  and  the  auction  clearing  prices  were 
generally  in  line  with  the  secondary  market  prices,  without  the  occurrence  of  significant 
problems or incidents. Due to the transition between the transitional auction platform and its 
successor common auction platform, no auctions for the 25 participating Member States were 
conducted for about a week in August 2016.  

The  auction  on  25  May  2016  conducted  by  EEX  for  Poland  and  the  one  on  14  December 
2016  conducted  by  ICE  for  the  UK  were  cancelled  in  line  with  the  provisions  of  the 
Auctioning Regulation. In the case of the Polish auction this was due to the reserve price not 
being met, while for the UK one the total bid volume fell short of the auctioned volume. With 
these, a total of five auctions have been cancelled out of the more than a thousand held under 
the  Auctioning  Regulation  since  late  2012.  An  overview  of  the  auction  clearing  prices, 
number of participants and cover ratio for general allowances auctions from 2013 to 30 June 
2017 is provided in Appendix 2 to the Annex.  

The auction platforms publish detailed results of each auction on dedicated websites. Further 
information  on  the  performance  of  the  auctions,  including  on  the  participation,  cover  ratio 
and prices, can be found in the Member States' reports published by the Commission34. 

32 Early auctions of allowances of Phase 3 were performed in 2012 in view of the widespread commercial 
practice in the electricity sector of selling power on a forward basis and purchasing the required inputs 
(including allowances) when they sell their output. 
33 In addition, between 1 April and 30 June 2017, 244 388 000 general allowances were auctioned. In 
accordance with the 2017 published auction calendars, another 452 064 000 general allowances are foreseen to 
be auctioned between July and December 2017. 
34 Such reports are available at the Commission’s dedicated website at 
http://ec.europa.eu/clima/policies/ets/auctioning/documentation_en.htm 

17 

 
 
 
 
 
                                                                                                                                                                                         
The  total  revenues  generated  from  the  auctions  between  2012  and  30  June  2017  exceeded 
€18.4 billion (in 2016 alone, the generated total revenues were €3.79 billion). The EU ETS 
Directive  provides  that  at  least  50%  of  auction  revenues,  including  all  revenues  generated 
from  allowances  distributed  for  the  purposes  of  solidarity  and  growth,  should  be  used  by 
Member  States  for  climate  and  energy  related  purposes.  In  2016,  the  auctioning  of  ETS 
allowances generated EUR 3.79 billion of revenues for the Member States. According to the 
information  submitted  to  the  Commission,  Member  States  spent  or  planned  to  spend 
approximately  80%  of  these  revenues  for  specified  climate  and  energy  related  purposes  in 
201635, however there are variations among them36. 

3.1.2.5.  Derogation from full auctioning for the power sector 

A derogation from the general rule of auctioning has been provided in Article 10c of the 
EU ETS Directive to support investments in the modernisation of the electricity sector in 
certain EU Member States. Eight out of ten eligible Member States* make use of this 
derogation and allocate to electricity generators a number of allowances for free provided 
corresponding investments are carried out.  

The free allowances under Article 10c are deducted from the quantity that the respective 
Member State would otherwise auction. Depending on the national rules for the 
implementation of the derogation, electricity generators can receive free allowances of an 
equivalent value to the investments they carry out from their National Investment Plans, 
or to payments made into a national fund through which such investments are financed. 

*Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland and Romania are 
eligible for the derogation. Malta and Latvia decided not to make use of it. 

The number of allowances allocated for free to electricity generators in 2016 is indicated in 
Table  1,  Appendix  1  to  the  Annex,  while  the  maximum  number  of  allowances  per  year  is 
indicated in Table 2 of Appendix 1. 

The total value of reported investment support during the years 2009 to 2016 is around € 11 
billion.  About  80%  of  this  was  dedicated  to  upgrading  and  retrofitting infrastructure,  while 
the  rest  of  the  investments  were  in  clean  technologies  or  diversification  of  supply.  Some 
examples  of  investments  include  the  reduction  of  energy  consumption  for  electricity 
production in Lithuania, the replacement of insulation on existing steam distribution lines in 
the Czech Republic, and the construction of a cogeneration unit fuelled mainly by natural gas 
in Bulgaria. 

35 Please see Article 10(3) of the EU ETS Directive. 
36 An analysis of the use of auction revenues by Member States is available here: 
https://ec.europa.eu/clima/sites/clima/files/ets/auctioning/docs/auction_revenues_report_2017_en.pdf 

18 

 
 
 
 
 
                                                            
 
 
Any  allowances  which  are  not  given  for  free  are  auctioned.  Figure  1  shows  the  number  of 
allowances  that  have  been  requested  by  the  eligible  Member  States  during  the  years  2013-
2016. 

Figure 1: Allowances allocated for free pursuant to Article 10c 

Figure 2 shows, for 10c allowances, the extent to which they have been allocated, auctioned 
or  remain  unused.  For  example,  82  million  unused  allowances  have  been  deducted  from 
Poland's share of allowances auctioned between 2013 and 2016, but have not yet been given 
for free or added to the auctions.  

Figure 2: Distribution of allowances (allocated, auctioned, unused remaining)  

19 

 
 
 
 
 
 
 
Allocated 
allowances 
Auctioned 
allowances 
Unused remaining 
allowances 

Table  7  shows  the  number  of  unused  allowances  deducted  for  the  years  until  2016  which 
have  been  auctioned  in  the  period  2013-2016,  as  well  as  the  number  of  remaining  unused 
allowances. 

Table 7: Treatment of unused 10c allowances 2013-2016 

Member State 

Number of unused 10c allowances  
auctioned (in million) 

Number of remaining unused 
allowances37 (in million) 

BG 

CY 

CZ 

EE 

HU 

LT 

PL 

RO 

Total 

6,9 

0,0 

0,1 

0,2 

0 

0,3 

0,0 

8,8 

16,3 

0,0 

0,0 

0,2 

0,3 

0,9 

0,6 

82,8 

6,6 

90,5 

37 Includes volumes from the 2017 auction calendar. 

20 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
 
 
 
3.1.3.  International credits 

Participants in the EU ETS can use international credits from the Kyoto Protocol's Clean 
Development Mechanism (CDM) and Joint Implementation (JI) towards fulfilling part of 
their  EU  ETS  obligations  until  2020*.  These  credits  are  financial  instruments  that 
represent  a  tonne  of  CO2  removed  or  reduced  from  the  atmosphere  as  a  result  of  an 
emissions  reduction  project.  In  phase  3  credits  are  no  longer  surrendered  directly,  but 
instead may be exchanged for allowances at any time during the calendar year.  

A  number  of  qualitative  standards  apply  to  the  use  of  credits  by  EU  ETS  participants: 
credits  are  not  accepted  from  nuclear,  afforestation  and  reforestation  projects,  and  new 
projects  registered  after  2012  must  be  in  least  developed  countries.    There  are  also 
maximum  levels  of  credits  that  can  be  used  by  stationary  installations  and  aircraft 
operators**. 

* CDM and JI projects generate Kyoto carbon credits: Certified Emission Reductions (CERs) and Emission Reduction 
Units (ERUs) respectively. Commission Regulation (EU)  No 389/2013 stipulates that  ERUs issued by third countries 
which do not have legally binding quantified emission targets from 2013 to 2020 as set out within the Doha amendment 
to the Kyoto Protocol or that have not deposited an instrument of ratification relating to the amendment, should only be 
held in the Union Registry if they have been certified to relate to emission reductions verified as having taken place 
before 2013. 
**Commission Regulation (EU) No 1123/2013 of 8 November 2013 on determining international credit entitlements 
pursuant to Directive 2003/87/EC of the European Parliament and of the Council, OJ L 299, 9.11.2013, p. 32 

Although  the  exact  quantity  of international  credit  entitlements over Phases 2 and 3 (2008-
2020)  will  partially  depend  on  the  quantity  of  future  verified  emissions,  market  analysts 
estimate that it will amount to approximately 1.6 billion credits. As of 30 June 2017, the total 
number  of  international  credits  used  or  exchanged  amounts  to  1.48  billion,  accounting  for 
over 90% of the estimate for the allowed maximum.  

Figure 3 illustrates the international credits exchange. For a full overview, see Appendix 3 to 
the Annex. 

21 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 3: Summary of international credits exchange until 30 June 2017 

22 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2. Demand: allowances taken out of circulation 

In 2016, emissions of GHGs from installations participating in the EU ETS are estimated to 
have decreased by 2.9% compared to 2015 based on the information recorded in the Union 
Registry. This marks a decreasing trend in emissions since the start of Phase 3 of the system 
in 2013. 

Table 8: Verified emissions (in million tonnes CO2 equivalents) 

Year 

2011 

2012 

2013 

2014 

2015 

Verified total emissions  

1904 

1867 

1908 

1814 

1803 

2016 

1750 

Change to year x-1 

-1.8% 

-2% 

2.2% 

-4.9% 

-0.6% 

-2.9% 

Verified emissions from 
power sector  

1.185 

1.181 

1.128 

1.039 

1.031 

982 

Change to year x-1 

-0,3% 

-4,4% 

-7,9% 

-0,8% 

-4,8% 

Verified emissions from 
industrial installations  

720 

686 

780 

775 

772 

768 

Change to year x-1 

-4,6% 

13,7% 

-0,7% 

-0,4% 

-0,5% 

Real GDP growth rate EU28 

1.7% 

-0.5% 

0.2% 

1.7% 

2.2% 

1.9% 

GDP data as reported on: 
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00115  
(accessed in July 2017). Verified aviation emissions are reported separately in section 4. 

As  the  table  demonstrates,  combustion  activities  have  been  the  main  driver  in  the  verified 
emission reductions. 

The number of allowances cancelled on a voluntary basis amounts to 63 573 allowances in 
2016. In total, voluntary cancellations of 267 933 allowances have been recorded so far. 

3.3. Balancing supply and demand  

At  the  start  of  Phase  3,  the  EU  ETS  was  characterised  by  a  large  imbalance  between  the 
supply and demand of allowances, resulting in a surplus of around 2.1 billion in 2013. The 
surplus was reduced slightly in 2014 and then fell significantly to 1.78 billion allowances in 
2015 and to 1.69 billion allowances in 2016. This reflects the impact of a further reduction of 
the supply of allowances in 2016, the final year of the back-loading measure, by 200 million. 
As emissions declined by around 2,9% in 2016, lower demand partly balanced the impact of 
the reduction in supply on the surplus. 

To  address  the  structural  imbalance  between  the  supply  and  demand  of  allowances,  the 
creation  of  a  Market  Stability  Reserve  (MSR)  was  agreed  in  2015  to  render  the  auction 

23 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
supply of emission allowances more flexible. Ultimately, the back-loaded allowances will be 
transferred to the reserve, which will be operational as of January 2019. 

A  key  notion  for  the  functioning  of  the  MSR  is  the  total  number  of  allowances  in 
circulation  (TNAC).  Allowances  will  be  added  to  the  reserve,  if  the  TNAC  is  above  a 
predefined upper threshold (833 million allowances) and will be released from the reserve, 
if  the  number  is  below  a  predefined  lower  threshold  (below  400  million  allowances)*. 
Thus,  the  MSR  absorbs  or  releases  allowances  if  the  circulating  ones  are  outside  of  a 
predefined  range.  Back-loaded  and  so-called  unallocated**  allowances  will  also  be 
absorbed by the reserve. 

*Or where measures are adopted under Article 29a of the EU ETS Directive 

**Unallocated  allowances  are  allowances  not  allocated  pursuant  to  Article  10a(7)  of  the  EU  ETS  Directive,  i.e. 
allowances remaining in the new entrants' reserve, and resulting from the application of Article 10a(19) and (20), i.e. 
allowances  foreseen  for  free  allocation  to  installations  but  remaining  unallocated  because  of  (partial)  cessation  of 
operations or significant capacity reductions. De facto "unallocated" allowances stemming from  the application of the 
relevant carbon leakage factor to sectors not included in the carbon leakage list during the current period, as well as any 
allowances that are not allocated under Article 10c of the ETS Directive, are not foreseen to be placed in the Market 
Stability  Reserve  under  Article  1(3)  of  Decision  (EU)  2015/1814.  Such  allowances  are  therefore  not  covered  (please 
refer to p. 225 of the Impact Assessment (SWD(2015) 135 final) accompanying the ETS revision proposal. 

The total number of allowances in circulation relevant for determining feeds and releases in 
the MSR is calculated by the following formula: 

TNAC = Supply – (Demand38 + allowances in the MSR) 

The supply of emission allowances consists of the allowances banked from Phase 2 of the EU 
ETS (2008-2012), auctioned allowances, allowances allocated for free and the allowances in 
the  New  Entrants  Reserve  (NER);  while  the  demand  is  determined  by  the  emissions  of  the 
installations and the cancelled allowances. For more details, see Table 1 in Appendix 4 to the 
Annex. 

The  starting  point  for  determining  the  TNAC  is  the  total  number  of  allowances  remaining 
after Phase 2 which were not surrendered or cancelled.39 This 'banking total' of 1 749 540 826 
allowances40 thus represents the exact number of ETS allowances in circulation at the start of 
the third trading period of the EU ETS. 

The carbon market report allows for the consolidation of the figures for supply and demand  
which are published according to the timeline of reporting obligations stemming from the EU 

38 This also includes cancelled allowances. 
39 These allowances were replaced by Phase 3 allowances at the end of the second trading period. No other 
allowances from before the third trading period contribute to the total number of allowances in circulation. For 
the explanation on banking of the emission allowances see: 
https://ec.europa.eu/clima/policies/ets/registry_en#tab-0-2  
40 This number does not include early auctions of Phase 3 allowances taking place in 2012 but does reflect the 
use of international credits before the start of Phase 3. The total amount of international credits used since 2008 
is listed in section 3.1.3. 

24 

 
 
 
                                                            
ETS  Directive  and  its  implementing  provisions.  This  timeline,  relevant  data  and  scope  are 
outlined in Table 2, Appendix 4 to the Annex. Figure 4 shows the composition of supply and 
demand in 2016. The relevant data have also been published as part of the communication on 
the total number of allowances in circulation (TNAC) for the purposes of the MSR41 . 

Figure 4: Composition of cumulative supply and demand until the end of 2016 

Supply (cumulative, millions) 

                          Demand (cumulative, millions) 

Free allocation 

Cancellations 

International credits exchanged 

Verified emissions 

Free allocation (NER) 

Free allocation (10c) 

NER 300 monetisation by EIB 

Auctioning 

Early auctioning 

Banking 

As the MSR becomes operational in 2019, the Commission will regularly publish each year 
by mid-May the TNAC for the preceding year. In May 2017, the TNAC was published for 
the first time, corresponding to 1 693 904 897 allowances42. 

41 C(2017) 3228 final, https://ec.europa.eu/clima/sites/clima/files/ets/reform/docs/c_2017_3228_en.pdf 
42 C(2017) 3228 final, https://ec.europa.eu/clima/sites/clima/files/ets/reform/docs/c_2017_3228_en.pdf 

25 

 
 
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
                                                            
Figure 543 presents the development of the cumulative supply and demand figures for the EU 
ETS until the end of 2016. In 2013, supply was over 2 billion allowances, while demand was 
lower at around 1,9 billion allowances. In 2014, both the total supply and demand decreased 
to around 1.8 billion allowances. In 2015, supply decreased further to 1.5 billion allowances, 
while demand reduced marginally. In subsequent years, while emissions remained stable or 
reduced,  the  supply  of  allowances  was  reduced  to  a  greater  extent  as  a  result  of  the  back-
loading measure.  

As a result, the surplus grew in 2013 to over 2 billion allowances, remained stable in 2014 
and  subsequently  fell  in  2015  to  around  1.8  billion  allowances.  In  2016,  emissions  were 
reduced compared to 2015 but demand was still higher than supply. The TNAC published in 
May 2017 is thus at the lowest level since the start of the current trading period.  

Figure 5: Development of supply and demand in 2013-2016 

demand 
supply 
banking total from phase 2 
surplus 

43 These figures related to 2013 -2016, are based on the most recent data related to these years, as can be derived 
from the EUTL. This means that they can include recent data relating to 2013, 2014, 2015 and 2016. 

26 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
4.  AVIATION 

The  aviation  sector  has  been  part  of  the  EU  ETS  since  2012.  The  original  legislation 
covered all flights in  and out  of the European Economic Area  (EEA). However, the EU 
decided  to  limit  the  obligations  for  2012-2016  to  flights  within  the  EEA,  in  order  to 
support  the  development  of  a  global  measure  by  the  ICAO  for  reducing  aviation 
emissions.  

In October 2016, the ICAO Assembly agreed on a resolution on the Carbon Offsetting and 
Reduction  Scheme  for  International  Aviation  (CORSIA),  to  start  in  2021.  CORSIA  is 
conceived as a carbon offsetting scheme with the objective of stabilising emissions from 
international aviation at 2020 levels. 

EU Member States have signalled44 their intention to join the ICAO global scheme45 from the 
start provided that certain conditions are met. Pending the application of the global measure, 
the Commission has proposed46 to continue the same EU ETS approach for aviation beyond 
2016,  namely  to  keep  the  geographic  scope  as  intra-EEA.  The  proposal  also  maintains  the 
same exemptions and the same approach towards allocation for airlines, to which the linear 
reduction factor will apply as from 2021, and foresees a new review to consider ways for the 
implementation  of  CORSIA  in  EU  law  through  a  revision  of  the  EU  ETS  Directive.  A 
political agreement on the proposal was reached in October 2017. 

As  regards  developments  in  aviation  emissions  within  the  EU  ETS,  in  2016,  verified 
emissions continued to grow and amounted to 61 million tonnes of CO2, an increase of 7.9% 
compared to 2015.   

The free allocation amounted to slightly over 32.0 million allowances in 201647. The amount 
of  allowances  auctioned  between  January  and  December  2016  was  approximately  6.0 
million.  

In  2017,  pending  the  adoption  of  the  legislative  proposal  on  the  EU  ETS  for  aviation, 
allowances  were  issued  in  line  with  the  intra-EEA  scope.  The  adjusted  free  allocation 
amounted to slightly over 32.0 million allowances in 201748. In addition, nearly 1.1 million 
free  allowances  were  allocated  from  the  special  reserve  for  new  entrants  and  fast  growing 
operators. This is the first of four annual issuances, corresponding to the 2013-2020 period. 
The  amount  of  allowances  to  be  auctioned  during  2017  will  be  proportional  to  the  total 
number  of  allowances  issued.  Table  9  shows  a  summary  of  verified  emissions,  free 
allocation, and auction volumes  for the aviation sector  since the start of Phase  3 of the EU 
ETS.  

44 https://ec.europa.eu/transport/modes/air/news/2016-09-09-bratislava-declaration_en 
45 The ICAO Assembly Resolution on CORSIA can be found here: 
https://www.icao.int/Meetings/a39/Documents/Resolutions/a39_res_prov_en.pdf 
46 COM(2017)054 final, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2017:0054:FIN 
47 Data from June 2017 
48 Data from June 2017 

27 

 
 
 
                                                            
 
Table 9: Verified emissions and allocation to the aviation sector 

Year 

2013 

2014 

2015 

2016 

2017 

Verified emissions (in million 
tonnes CO2 equivalents) 

53 495 902 

54 822 754 

57 085 143 

61 124 583 

Change of verified emissions to 
year x-1 

1 326 852 

2 262 389 

4 039 440 

Free allocation  (EU28+EEA 
EFTA states) 

Free allocation from special 
reserve for new entrants and 
fast growing operators 

Volumes of allowances 
auctioned 

32 455 312 

32 403 025 

32 152 526 

32 036 975 

32 018 239 

0 

0 

0 

0 

0 

1 085 080 

9 278 000 

16 390 500 

5 997 500 

4 730 50049 

The volumes of aviation allowances auctioned over the period 2013-2015 reflect the 2013 co-
legislator's decision to "stop the clock"50 and limit climate obligations only to flights within 
the EEA, in order to support the development of a global measure by the ICAO. Compliance 
for the aviation sector was postponed and no aviation allowances were auctioned in 2012 and 
2013. The 2012 volumes were thus auctioned in 2014, while compliance took place in 2015 
for aviation emissions from 2013 and 2014. 

49 Information from August 2017, https://ec.europa.eu/clima/news/2017-auction-calendars-aviation-allowances-
published_en 
50 Decision No 377/2013/EU of the European Parliament and of the Council of 24 April 2013 derogating 
temporarily from Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading 
within the Community Text with EEA relevance, OJ L 113, 25.4.2013, p. 1. 

28 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
5.  MARKET OVERSIGHT 

A significant part of daily transactions in emission allowances is in the form of derivatives 
(futures,  forwards,  options,  swaps),  which  are  already  subject  to  EU  financial  markets 
regulation.  This  is  being  replaced  by  the  new  Financial  Market  Directive  (MiFID2* 
package), which will be applicable as of January 2018.  

Under this new directive, emission allowances will be classified as financial instruments. 
This  means  that  rules  applicable  to  traditional  financial  markets  (those  including  carbon 
derivatives  trade  on  leading  platforms  or  over-the-counter  (OTC))  will  also  apply  to  the 
spot  segment  of  the  secondary  carbon  market,  putting  emission  allowances  on  an  equal 
footing  with  the  derivatives  market  in  terms  of  transparency,  investor  protection  and 
integrity.  

Moreover,  by  virtue  of  cross-references  to  MiFID2  definitions  of  financial  instruments, 
other pieces of financial market legislation will apply. This is in particular the case for the 
Market Abuse Regulation (MAR)**, which will cover transactions and conduct involving 
emission allowances, on both primary and secondary markets. Similarly, a cross-reference 
to  MiFID2  in  the  Anti-Money  Laundering  Directive***  will  trigger  a  mandatory 
application  of  customer  due  diligence  checks  by  MiFID-licensed  carbon  traders  to  their 
clients in the secondary spot market in emission allowances. **** 

*  Directive  2014/65/EU  of  the  European  Parliament  and  of  the  Council  of  15  May  2014  on  markets  in  financial 
instruments and amending Directive 2002/92/EC and Directive 2011/61/EU  

**  Regulation  (EU)  No  596/2014  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  on  market  abuse 
(market  abuse  regulation)  and  repealing  Directive  2003/6/EC  of  the  European  Parliament  and  of  the  Council  and 
Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC 

*** Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use 
of  the  financial  system  for  the  purposes  of  money  laundering  or  terrorist  financing,  amending  Regulation  (EU)  No 
648/2012  of  the  European  Parliament  and  of  the  Council,  and  repealing  Directive  2005/60/EC  of  the  European 
Parliament and of the Council and Commission Directive 2006/70/EC  

****Due  diligence  checks  are  already  mandatory  in  the  primary  market  and  in  the  secondary  market  in  emission 
allowances' derivatives. 

MiFID2 and MAR, both adopted in 2014, envisage certain adaptations of the general regime 
to carbon market specificities (see Carbon Market Report 2015).  

Several  measures  regulating  detailed  aspects  of  the  provisions  under  MiFID251  and  MAR52 
were adopted in 2016 and 2017.  

51 https://ec.europa.eu/info/law/markets-financial-instruments-mifid-ii-directive-2014-65-eu/amending-and-
supplementary-acts/implementing-and-delegated-acts_en 
52 https://ec.europa.eu/info/law/market-abuse-regulation-eu-no-596-2014/amending-and-supplementary-
acts/implementing-and-delegated-acts_en 

29 

 
 
 
 
                                                            
5.1. The legal nature and fiscal treatment of emission allowances 

The legal and fiscal treatment of emission allowances varies across countries, since these 
two aspects are not defined in the ETS Directive. Countries are instead obliged to report 
annually  on  their  national  regimes  related  to  the  legal  nature  and  fiscal  treatment  of 
allowances  as  part  of  their  Article  21  reports.  However,  despite  non-harmonisation,  a 
mature and very liquid market has developed over the last decade. The current regulatory 
framework provides the necessary legal underpinnings for a transparent and liquid carbon 
market, whilst ensuring the market's stability and integrity. 

The  national  treatment  of  allowances  varies,  ranging  from  financial  instruments  and 
intangible assets to property rights and commodities. According to Article 21 submissions in 
2017, at least four participating countries have implemented or envisage changes to national 
legislation, mostly amendments regarding the implementation of MiDIF2. 

As regards the fiscal treatment of allowances  only three countries report that value added tax 
(VAT) applies to the issuance of emission allowances. In contrast, VAT is due on transaction 
of  emission  allowances  on  the  secondary  market  in  most  participating  countries  (all  except 
CY,  EE,  IS,  LI).  The  majority  of  countries  report  that  they  apply  the  reverse-charge 
mechanism53 on domestic transactions involving emission allowances. Emission allowances 
for  corporations  can  additionally  be  taxed  (e.g.  via  the  application  of  a  corporate  tax  or  a 
corporate income tax). Fifteen countries reported that there was no such taxation. 

As mentioned in the previous carbon market report, the Commission is currently conducting a 
study on the legal nature of EU ETS allowances. 

In a recent preliminary ruling54 of 8 March 2017, the Court of Justice refrained from defining 
the nature of allowances (see Appendix 5 to the Annex.) 

53 The reverse charge mechanism moves the responsibility for the payment of the VAT transaction from the 
seller to the buyer of a good or service and constitutes an effective safeguard against VAT fraud. 
54 Judgment of the Court of Justice of 8 March 2017 in Case C-321/15  ArcelorMittal Rodange et Schifflange 
SA v État du Grand-duché de Luxembourg, EU:C:2017:179. 

30 

 
 
 
 
                                                            
6.  MONITORING, REPORTING AND VERIFICATION OF EMISSIONS 

The  monitoring,  reporting  and  verification  (MRV)  of  GHG  emissions  must  be  robust, 
transparent,  consistent  and  accurate  for  the  EU  ETS  to  operate  effectively.  It  is 
supplemented  by  a  sound  accreditation  system  to  assure  adequate  quality  of  third-party 
verifiers. MRV requirements are harmonised in the Monitoring and Reporting Regulation 
(MRR) and the Accreditation and Verification Regulation (AVR). 

The  monitoring  system in  the EU ETS is  designed  as  a 'building  block' approach  which 
allows  a  high  degree  of  flexibility  for  operators  to  ensure  cost-efficiency,  while  at  the 
same time to achieve a high reliability of the monitored emissions data. For this purpose, 
several  monitoring  methods  ('calculation-based'  or  'measurement-based',  as  well  as  by 
exception  'fall-back  approaches')  are  allowed.  Methods  may  be  combined  for  individual 
parts  of  an  installation.  For  aircraft  operators,  only  calculation-based  approaches  are 
feasible,  with  fuel  consumption  being  the  central  parameter  to  be  determined  for  the 
flights covered by the EU ETS. The requirement for installations and aircraft operators to 
have  a  monitoring  plan  approved  by  the  competent  authority  on  the  basis  of  the  MRR 
prevents arbitrary selection of monitoring methods and temporal variations. 

With  the  AVR  for  Phase  3  and  beyond  an  EU-wide  harmonised  approach  towards  the 
accreditation of verifiers has been introduced. Verifiers who are a legal person or a legal 
entity must be accredited by a National Accreditation Body (NAB) in order to carry out 
verifications in compliance with the AVR. The new uniform accreditation system provides 
the  advantage  of  allowing  verifiers  to  operate  with  mutual  recognition  across  all 
participating countries, thereby taking full advantage of the internal market and helping to 
ensure sufficient availability overall.  

6.1 General Developments 

The Commission continues to seek improvements in the guidance and templates that it makes 
available to facilitate consistent implementation of MRR55 and AVR56 requirements. In this 
regard,  new  guidance  on  EU  ETS  inspection  has  been  drafted  to  help  coordinate  countries' 
response to a recommendation from the European Court of Auditors for them to implement a 
more  coherent  and  effective  EU  ETS  implementation  control  frameworks  inclusive  of 
inspections.   

The Commission also continues to encourage improvements in countries' implementation of 
the  EU  ETS  MRVA.  Where  relevant,  guidance  has  been  clarified  and  training  events 

55 Commission Regulation (EU) No 601/2012 of 21 June 2012 on the monitoring and reporting of greenhouse 
gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council, OJ L 181, 
12.7.2012, p. 30. 
56 Commission Regulation (EU) No 600/2012 of 21 June 2012 on the verification of greenhouse gas emission 
reports and tonne-kilometre reports and the accreditation of verifiers pursuant to Directive 2003/87/EC of the 
European Parliament and of the Council, OJ L 181, 12.7.2012, p. 1. 

31 

 
 
 
                                                            
 
arranged to address some of the main issues identified in the Action Plans produced to assist 
each country57. 

It  is  recognised  that  the  efficiency  of  the  compliance  system  has  improved  since  the  MRR 
allowed countries to make electronic reporting mandatory. Most participating countries report 
the use of templates or systems based on the minimum requirements set by the Commission. 
Fourteen  Member  States  have  reported  in  2017  that  they  use  some  form  of  automated  IT 
system for EU ETS reporting (compared to 13 in 2016 and 10 in 2015).   

As  mentioned  in  the  previous  carbon  market  report,  the  Commission  launched  DECLARE 
ETS MRVA in May 2016 – a web-based system developed to support obligations related to 
EU  ETS  monitoring  plans,  annual  emission  reports,  verification  reports  and  improvement 
reports by participating countries.  

6.2 Monitoring applied 

According to the Article 21 reports submitted in 2017, most installations use the calculation-
based methodology58. Only 150 installations (less than 1.5%) in 23 countries were reported to 
use continuous emissions measurement systems, most frequently in Germany and the Czech 
Republic. There is one more country than last year, but one less installation overall. 

Only  11  countries  reported  the  use  of  the  fall-back  approach  by  36  installations,  covering 
approximately  5.1  million  tonnes  CO2e  (compared  to  6.6  million  tonnes  CO2e  the  year 
before). The Netherlands reports a reduction in the number of installations applying fall-back 
methodology  (9  compared  to  12  last  year)  and  a  halving  of  the  affected  emissions.  Two 
installations  (one  in  the  UK  and  one  in  NL)  are  responsible  for  over  half  of  the  overall 
emissions reported in relation to fall-back methodology. 

The minimum tier defaults59 of the MRR are met by the vast majority of installations. Only 
105 category C installations (compared to 113 in the previous year and 118 the year before), 
that is 13% (compared to 14% last year) were reported to deviate for at least one parameter 
from the requirement to apply the highest tiers for the major source streams. These deviations 
are  only  allowed  where  the  operator  demonstrates  that  the  highest  tier  is  technically  not 
feasible or incurs unreasonable costs. Once these conditions no longer apply, the operator has 
to improve their monitoring system accordingly. In the 2013 reporting period, 137 category C 
installations  (16%  of  the  total)  were  reported  as  not  meeting  highest  tiers  in  one  way  or 

57 These action plans are specific to each Member State. However, an example of a commonly identified issue 
would be the correct classification of reported misstatements, non-conformities, and non-compliances in 
verification reports. MRR and AVR templates and guidance documents can be found here: 
https://ec.europa.eu/clima/policies/ets/monitoring_en#tab-0-1 
58 The main reason for this is that the measurement-based methodology involves the deployment of significant 
resources and know-how for the continuous measurement of the concentration of relevant GHGs, which a lot of 
smaller operators do not have. 
59 Commission Regulation (EU) No 601/2012 requires all operators to meet certain minimum tiers, with larger 
emission sources required to meet higher tiers (involving more reliable data quality), while for cost-efficiency 
reasons less strict requirements apply for smaller sources. 
32 

 
 
                                                            
another. Therefore, a steady improvement in category C installation highest tier compliance 
can be seen in each year of Phase 3 of the EU ETS.   

In  a  similar  way,  reports  from  22  participating  countries  (the  same  as  in  the  previous  two 
years) indicate that overall 22% of category B installations are permitted with some form of 
deviation  from  the  MRR  default  requirements,  compared  to  26%  in  the  previous  year  and 
28%  in  the  year  before  that,  again  demonstrating  a  steady  improvement  in  highest  tier 
compliance. 

6.3 Accredited verification 

The total number of verifiers is not reported in Article 21 reports, but a reasonable estimate 
based  on  the  number  accredited  for combustion  (the  primary  scope  of  accreditation) is  that 
there  were  at  least  130  different  accredited  verifiers  overall  concerning  2016  verifications. 
Article 21 submissions in 2017 indicate that there were 47 individual verifiers accredited for 
2016  concerning  aviation.  The  European  cooperation  for  Accreditation  (EA)  provides  a 
central  link  to  relevant  National  Accreditation  Bodies  (NABs)  and  their  lists  of  EU  ETS 
accredited verifiers60.        

The  mutual  recognition  of  verifiers  among  participating  countries  is  working  successfully: 
most countries (29, all except FR and LV) reported that at least one foreign verifier is active 
in their territory. 

Compliance of verifiers with the AVR is found to be high. Only Poland reported a suspension 
and  Sweden  a  withdrawal  of  accreditation  in  2016  (of  one  verifier  in  each  case).  This 
compares to no reported suspensions or withdrawals concerning 2015 and one suspension and 
one  withdrawal  for  2014.  Only  Poland  reported  a  reduction  made  in  the  scope  of  one 
verifier's accreditation in 2016, compared to four countries reporting such reductions for five 
verifiers in 2015 and three countries for six verifiers in 2014.  

Fewer  countries  reported  complaints  received  about  verifiers  this  year  (eight  compared  to 
nine last year). The overall number of complaints is also 17% lower. 96% of the complaints 
received are reported resolved (the same as last year). Nine countries reported identification 
of verifier non-conformities as part of the information exchange process between NABs and 
competent authorities (compared to eleven last year). 

60 EA list of access points to NABs accrediting verifiers for EU ETS: http://www.european-
accreditation.org/information/national-accreditation-bodies-having-been-successfully-peer-evaluated-by-ea  

33 

 
 
 
                                                            
7.  OVERVIEW OF ADMINISTRATIVE ARRANGEMENTS  

Countries participating in the EU ETS use different approaches regarding the competent 
authorities in charge of its implementation. In some countries several local authorities are 
involved,  while  in  others  the  approach  is  much  more  centralised.  Article  21  reports 
provide a high level overview of the organisational structure of each participating country. 

No  significant  changes  have  been  observed  in  the  administrative  arrangements  of 
participating countries since the last reporting period. According to Article 21 submissions in 
2017,  there were,  on  average,  5  competent  authorities  involved  in  EU  ETS  implementation 
per  country.61  With  regard  to  the  coordination  between  authorities,  different  tools  and 
methods were reported, such as legislative instruments for central management of monitoring 
plans or emission reports (in 12 countries), provision of binding instructions and guidance by 
a central competent authority to local authorities (in 10 countries), regular working groups or 
meetings  between  authorities  (in  15  countries),  and  the  use  of  a  joint  IT  platform  (in  13 
countries), among others. Seven countries (CY, EE, HU, IT, IS, LI, LU) indicated that none 
of the above are in place.  

On administrative fees charged in relation to permitting and approved monitoring plans, 14 
countries reported in 2017 that they do not charge any fees to installation operators (CY, DE, 
EE,  FR,  GR,  IE,  LI,  LT,  LU,  LV,  MT,  NL,  SE,  SK),  compared  to  16  last  year.  Aircraft 
operators do not pay fees in 15 countries (BE, CY, CZ, DE, EE, ES, GR, LI, LT, LU, LV, 
MT, NL, SE, SK), compared to 16 the year before. Charges vary significantly according to 
country and the particular service involved.  For example, the fees for permit and monitoring 
plan  approval  for  installations  vary  from  €  5  to  €  7621,  and  for  aviation  the  fees  for 
monitoring plan approval range from € 5 to € 2400. 

largely  effective  as  aligned 

Overall,  participating  countries'  systems  are 
their 
administrative organisation. Communication between local authorities and the sharing of best 
practices  among  Competent  Authorities,  including  via  the  activities  of  the  EU  ETS 
Compliance Forum, should continue to be reinforced and encouraged. In this regard, the 7th 
EU  ETS  Compliance  Conference62  was  held  in  2016,  as  well  as  two  separate  Compliance 
Forum  related  training  events.  This  annual  conference  helps  to  ensure  widest  awareness  of 
Compliance Forum activities in particular concerning its five Task Forces on Monitoring and 
Reporting,  Accreditation  and  Verification,  Aviation,  Electronic-reporting  and  Carbon 
Capture and Storage. 

to 

61 In some cases countries may be reporting a multiple number of regional/local authorities as one competent 
authority. 
62 The conference proceedings can be found here: https://ec.europa.eu/clima/events/articles/0114_en 

34 

 
 
 
 
                                                            
8.  COMPLIANCE AND ENFORCEMENT  

The  EU  ETS  Directive  provides  for  an  excess  emissions  penalty  in  the  form  of  €100 
(indexed) for each tonne of CO2 emitted for which no allowance has been surrendered in 
due  time.  Other  penalties  applicable  to  infringements  in  implementation  of  EU  ETS  are 
according to national provisions set by the concerned country. 

The  EU  ETS  has  a  very  high  compliance  rate:  each  year  around  99%  of  the  emissions  are 
covered by the required number of allowances on time. 2016 was not an exception. Less than 
1% of the installations reporting emissions for 2016 did not surrender allowances covering all 
their emissions by the deadline of 30 April 2017. These installations were typically small and 
accounted for approximately 0.4% of EU ETS emissions.  In the aviation sector the level of 
compliance was also very high: aircraft operators responsible for more than 99 % of EU ETS 
aviation emissions complied.  

The  competent  authorities  continue  to  carry  out  different  compliance  checks  on  the  annual 
emissions  reports.  According  to  Article  21  submissions  in  2017,  all  participating  countries 
check annual emission reports for completeness (100% of reports except FR 77%, SE 3% and 
UK 62%). The reports further indicate that on average countries check over 75% of reports 
for consistency against monitoring plans (all countries) and about 75% against allocation data 
(all countries except FI, MT and NO). Twenty five countries reported that they also carry out 
cross-checks  against  other  data.  Only  three  (LV,  SI,  SK)  suggest  an  absence  of  a  detailed 
check of emission reports by the competent authorities. 

Based  on  Article  21  submissions  in  2017,  competent  authorities  in  16  countries  (BE,  BG, 
DK,  ES,  FI,  FR,  EL,  HR,  IT,  LU,  NL,  NO,  PL,  SE,  SK,  UK)  carried  out  conservative 
estimates  regarding  missing  data  in  the  case  of  125  installations  in  2016.    However,  68  of 
these  were  reported  by  the  UK  for  emissions  in  years  prior  to  2016,  based  on  operator 
notifications of newly discovered historic errors. Discounting the UK data from the totals for 
2016,  conservative  estimates  were  reported  by  15  countries  for  57 
installations 
(approximately  0.5%  of  installations  overall),  compared  to  45  installations  (0.4%)  for  2015 
and  37  (0.3%)  for  2014.  The  reported  quantity  of  affected  2016  emissions  was  1.9  million 
tonnes CO2 (compared to 8.3 million tonnes last year and 9.1 million the year before that), 
approximately  0.1%  of  overall  emissions  (compared  to  nearly  0.5%  in  the  previous  two 
years). The most common reasons given for making conservative estimates were the absence 
of  an  emission  report  by  31  March  or  emission  reports  that  were  not  fully  in  line  with 
MRR/AVR requirements.   

Conservative  estimates  regarding  missing  data  for  aviation  were  reported  by  only  four 
countries  concerning  18  aircraft  operators  (approximately  3.5%  of  the  total),  all  of  which 
were very small emitters (in total under 0.2% of aviation emissions). This compares to 103 
aircraft operators (nearly 20%) reported by eight countries last year. 

Competent  authority  checks  also  remain  important  to  supplement  the  verifier’s  work.  For 
2016,  all  participating  countries  confirmed  that  they  carry  out  further  checks  in  the  case  of 

35 

 
 
 
installations. Most countries reported a similar approach regarding aircraft operators (except 
HU,  LV  and  SI).  However,  only  17  countries  reported  that  they  carried  out  any  site 
inspections at installations in 2016 (AT63, CY, CZ, DE, ES, FI, FR, GR, HR, HU, IE, IS, LT, 
LV, NL, NO, UK). 

For 2016, the application of excess emissions penalty was reported for only 14 installations 
by four countries (BG 1, PL 1, RO 6 and UK 6). For aviation, excess emission penalties were 
reported for 48 aircraft operators (BE 1, DE 4, ES 4 and UK 39).  

Ten countries confirmed issue of penalties (in addition to excess emissions penalties) in the 
2016  reporting  period.  No  imprisonments  were  reported,  but  fines  or  formal  notices 
concerning 56 installations and 8 aircraft operators were noted amounting to a total financial 
value of €1 573 389. Approximately one sixth of this was attributed to the discovery by the 
competent authority and trade associations of 19 installations found to be operating without a 
permit  in  the  UK.  These  operators  are  now  permitted  and  make  up  most  of  the  increased 
number of installations reported by the UK.  

The  most  common  offences  reported  for  2016  were  operation  without  a  permit  (21  cases), 
failure  to  report  capacity  changes  (14  cases),  failure  to  submit  verified  annual  emission 
reports by the due deadline (9 cases), failure to comply with permit conditions (6 cases) and 
failure  to  hold  a  duly  approved  monitoring  plan  (5  cases).  Other  cases  included  the  annual 
emission report being non-compliant with the requirements of the MRR, failure to surrender a 
sufficient number of allowances by 30 April and failure to submit improvement reports. 

63 As part of Industrial Emissions Directive (IED) inspections  

36 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
9.  CONCLUSIONS AND OUTLOOK  

In  2016,  the  EU  ETS  has  remained  the  EU's  flagship  tool  for  tackling  climate  change  in  a 
cost-effective  way.  The  system  delivered  emission  reductions  of  2.9%  from  participating 
installations, marking a decreasing trend in emissions since the start of Phase 3 in 2013, while 
the  surplus  of  allowances  in  the  carbon  market  fell  to  its  lowest  level since  the  start  of  the 
current  trading  period.  In  this  regard,  the  first  publication  of  the  Market  Stability  Reserve 
surplus indicator in May 2017 prepares the ground for the starting of operation in 2019 of the 
Market  Stability  Reserve,  the  EU  ETS’s  structural  solution  for  stabilising  the  European 
carbon market in the midterm. 

Important  progress  has  also  been  made  in  the  field  of  aviation.  Following  ICAO's  2016 
resolution  on  curbing  global  aviation  emissions,  the  Commission  has  taken  steps  towards 
continuing current measures for aviation in the EU ETS in view of the global scheme coming 
into effect and planning for its prompt implementation.  

Moreover, in the fourth year of phase 3 the EU ETS architecture has proven to remain robust. 
The compliance rate has remained consistently very high for both stationary installations and 
aviation operators and the administrative organisation in participating countries has proven to 
be effective. 

The 1000th auction in May 2017 marked a symbolic milestone in the smooth functioning of 
the infrastructure bringing allowances to the market. 

After  more  than  2  years  of  negotiations  on  the  proposal  for  reforming  the  EU  ETS  for  its 
fourth  trading  period,  a  landmark  agreement  has  been  reached  in  November  2017  which 
demonstrates that the European Union is turning its Paris commitment into concrete action. 
The  revised  and  substantially  strengthened  EU  ETS  will  be  a  major  part  of  the  EU 
contribution  to  the  implementation  of  the  Paris  agreement  towards  a  global  low-carbon 
transition. 

The Commission will continue to monitor the European carbon market and provide the next 
report in late 2018. 

37 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX  

Appendix 1 

Table 1: Number of free allowances requested for modernising the electricity sector  

MS 

BG 

CY 

CZ 

EE 

HU 

LT 

PL 

RO 

Number of free allowances requested by Member State pursuant to Article 10c 

2013 

2014 

2015 

2016 

11 009 416 

9 779 243 

8 259 680 

2 519 077 

2 195 195 

1 907 302 

25 285 353 

22 383 398 

20 623 005 

5 135 166 

4 401 568 

3 667 975 

7 047 25564 

n.a. 

n.a. 

322 449 

297 113 

269 475 

6 593 238 

1 583 420 

15 831 329 

2 934 380 

n.a. 

237 230 

65 992 703 

52 920 889 

43 594 320 

31 621 148 

15 748 011 

8 591 461 

9 210 797 

Total 

133 059 430 

100 568 867 

87 532 554 

7 189 961 

65 990 706 

Table 2: Maximum number of free allowances per year under the derogation from full auctioning for the 
power sector 

Maximum number of allowances per year 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

Total 

13 542 000 

11 607 428 

9 672 857 

7 738 286 

5 803 714 

3 869 143 

1 934 571 

54 167 999 

2 519 077 

2 195 195 

1 907 302 

1 583 420 

1 259 538 

935 657 

575 789 

10 975 978 

26 916 667 

23 071 429 

19 226 191 

15 380 953 

11 535 714 

7 690 476 

3 845 238 

107 666 668 

5 288 827 

4 533 280 

3 777 733 

3 022 187 

2 266 640 

1 511 093 

755 547 

21 155 307 

7 047 255 

0 

0 

0 

0 

0 

0 

7 047 255 

582 373 

536 615 

486 698 

428 460 

361 903 

287 027 

170 552 

2 853 628 

77 816 756 

72 258 416 

66 700 076 

60 030 069 

52 248 393 

43 355 049 

32 238 370 

404 647 129 

17 852 479 

15 302 125 

12 751 771 

10 201 417 

7 651 063 

5 100 708 

2 550 354 

71 409 917 

151 565 434 

129 504 488 

114 522 628 

98 384 792 

81 126 965 

62 749 153 

42 070 421 

679 923 881 

64 HU made use of the Article 10c derogation only in 2013.  

38 

 
 
 
 
 
 
 
 
 
 
                                                            
Appendix 2 

Figure 1: Overview of general allowances auctions from 2013 to 30 June 2017 

___ Auction Clearing Price 
   .        Cover Rate 

39 

 
 
 
 
 
 
 
 
 
 
Appendix 3 

Table 1: Summary of international credits exchange until 30 June 2017 

million 

percentages 

Internationa
l credits 
exchanged 
by 30 June 
2017 
CERs 

231,08 

China 

164,30 

India 

13,13 

Uzbekistan 

Brazil 

Chile 

Korea 

Mexico 

8,04 

4,59 

3,11 

2,92 

2,75 

Others 

19,25 

54,61% 

71,10% 

5,68% 

3,47% 

1,98% 

1,34% 

1,26% 

1,19% 

8,33% 

Track 1 

Track 2 

ERUs 

192,07 

45,39% 

million 

percentag
es of 
ERUs 

million 

percentages 
of ERUs 

Ukraine 

147,69 

76,89% 

145,95 

78,32% 

Russia 

32,06 

16,69% 

32,06 

17,20% 

Poland 

Germany 

France 

Bulgaria 

Others 

2,82 

1,65 

1,24 

0,49 

6,21 

Total 

423,16 

1,46% 

0,85% 

0,64% 

0,25% 

3,23% 

100% 

3,02 

1,66 

1,24 

0,49 

1,76 

1,62% 

0,89% 

0,67% 

0,26% 

0,94% 

186,18 

96,83% 

1,74 

0,00 

0,00 

0,00 

0,00 

0,00 

4,35 

6,09 

0,91% 

0,00% 

0,00% 

0,00% 

0,00% 

0,00% 

2,26% 

3,17% 

40 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Publication 

Update and uncertainties 

Appendix 4 

Table 1: ETS supply and demand elements 

Element 

total 

Banking 
phase 2 
Early  phase  3 
auctions  

Supply  or 
demand? 
Supply 

Supply 

Allowances  for 
NER 300 
Aviation 
auctions 

Supply 

Supply 

Phase 
auctions 

3 

Supply 

Carbon market 
report 
DG Climate 
website, EEX 
and ICE 
websites 
EIB website 

DG Climate 
website, EEX 
and ICE 
websites 

DG Climate 
website, EEX 
and ICE 
websites 

Free  allocation 
(NIMs) 

Supply 

EUTL, tables 

Free  allocation 
(NER) 
Free allocation 
(aviation) 

Free allocation 
(Article 10c) 
Emissions 
(stationary 
installations) 

Supply 

EUTL, tables 

Supply 

Supply 

Demand 

EUTL, MS 
publication of 
allocation tables 
EUTL, status 
table 
EUTL, 
compliance data 

No update is foreseen as phase 2 ended. 
Final figure.  
Not part of phase 2 banking total. Final 
figures. 

300 million allowances were monetised in 
2012-2014. Final figures. 
No – adjustments are reflected in the 
volumes for the following year. 

2013 and 2014 auctions took place in 
2015. 
No - the figure is not subject to revision. 
However, allowances (e.g. due to delays 
to start of auctioning for certain Member 
States, e.g. those for EEA-EFTA) 
withheld from auctions can be auctioned 
in subsequent years. 
These figures are updated throughout the 
year.  

- Member State may provide late 
submissions for previous years or actual 
allocation can be lower than the amount 
initially foreseen.  

The EUTL provides an accurate state of 
play of actual allocation. 

emissions 

Compliance  data  made  public  on  1  May 
shows 
surrendered 
allowances  for  installations  that  are  in 
compliance 
installations 
(i.e. 
reporting for all years concerned).  

those 

and 

Emissions 
(aviation) 
Allowances 
cancelled 

Demand 

Demand 

Compliance  for  aviation  operators  for 
both 2013 and 2014 took place in 2015. 
Carbon market report 

Table 2: Timeline for data publication  

Timing 

Data 

Scope 

41 

 
 
 
 
 
 
 
 
 
 
1 January – 30 April year x  Updates to free allocation to power 

Year x-1 

(Article 10c) 

1 April year x 

Verified emissions 

Year x-1 

1 May year x 

Free allocation (Article 10a(5) – 
NIMs) 

Compliance deadline: verified 
emissions and surrendered 
allowances 

Year x-1 

May/October year x 

International credits exchanged 

Last quarter of year x 

Carbon Market report 

Year x-1 

January/July year x 

Status of new entrants' reserve  - 
NER table 

Not published at EU level 

Free allocation to aviation published 
at Member States level 

Appendix 5 

Table 1: Preliminary rulings of the Court of Justice of the EU relevant to the functioning of the EU ETS 
in the period July 2016 to June 2017 

Case 
reference 

Legislation 
Concerned 

Parties 

Case summary 

Date 

Case C-
461/15 

Decision 
2011/278/EU 

E. ON 
Kraftwerke/DE 

Case C-
460/15 

Regulation EU 
601/2012 

Schaefer Kalk 
GmbH & Co. 
KG/DE 

08.09.2016 

19.01.2017 

Extent of 
obligation to 
provide 
information for the 
free allocation of 
emission 
allowances, having 
regard to changes 
made to the 
operation of one 
power station 

Legality of the 
exclusion of  CO2 
used in the 
production of 
precipitated 
calcium carbonate 
in Article 49(1) 
and point 10 of 
Annex IV 

42 

Judgement 
summary 

The competent 
authority can define 
'relevant information' 
to be reported 
concerning capacity, 
activity level and 
operation of an 
installation. 
Information can be 
regarded as relevant, 
no matter whether 
there could be a 
change in the 
operator's allocation. 
In the context of CO2 
transferred outside a 
lime producing 
installation and bound 
in a stable way in the 
production of 
precipitated calcium 
carbonate, Art. 49 and 
point 10. B of Annex 
IV  are contrary to 
Art. 3(d) of the ETS 
Directive, because 

 
 
 
 
 
 
Case C-
457/15 

Directive 
2003/87/EC 

Vattenfall Europe 
Generation AG/ 
DE 

Decision 
2013/448/EU 

Borealis 
Polyolefine 
GmbH/ AT 
Federal Minister 
for Agriculture, 
Forestry, 
Environment and 
Water 
Management 

Case C-
456/15; 
Joined 
Cases C-
191/14, C-
192/14, C-
295/14, C-
389/14 and 
C-391/14 
to C-
393/14 

Case C-
321/15 

Directive 
2003/87/EC 

ArcelorMittal 
Rodange et 
Schifflange SA/ 
LU 

Case C-
272/15 

Decision 
377/2013/EU, 
Directive 
2008/101/EC 

Swiss 
International Air 
Lines AG/ UK 
Secretary of State 
for Energy and 
Climate Change, 
Environment 
Agency 

28.07.2016 

When does the 
emission trading 
obligation arise for 
the inclusion of 
combustion of 
fuels in 
installations with a 
total rated thermal 
input > 20 MW in 
Annex I? 

14.07.2016; 
28.04.2016 

Validity of method 
for calculating the 
uniform cross-
sectoral correction 
factor (CSCF) 

they irrefutably 
presume that there is a 
release of CO2 in the 
atmosphere. 
Inclusion of 
‘Activities for the 
combustion of fuels in 
installations with a 
total rated thermal 
input > 20 MW’ in 
Annex I starts on the 
date of the first 
emissions of GHGs 
produced by the 
installation (even 
before producing 
electricity). 
Article 4 and Annex 
II of Decision 
2013/448/EU are 
invalid. Emissions 
data coming from 
new activities in 
existing installations 
should not have been 
taken into account, 
only installations 
newly covered by the 
EU ETS as of 2013. 
CSCF will be invalid 
as of 01.03.2017. 

08.03.2017  Member States are 

12.12.2016 

entitled to claim back 
wrongly allocated 
allowances without 
compensation. The 
question of the legal 
status of allowances is 
not essential to 
deliver a judgment in 
the case at stake. 
The fact that the 
moratorium on extra-
EEA flights does not 
apply to flights from 
and to Swiss airports 
does not infringe on 
the principle of equal 
treatment, which does 
not apply vis-à-vis 
third countries. 

Question on the 
surrender of 
wrongly allocated 
allowances and 
whether 
allowances can be 
considered as 
property 

Does Decision 
377/2013/EU 
infringe the EU 
principle of equal 
treatment by 
establishing a 
moratorium on the 
surrender of 
emission 
allowances for 
flights between 
EEA states and 
non-EEA states, 
but not for flights 
between EEA 
states and CH? 

43 

 
 
 
Case C-
180/15; 
Case C-
506/14 

Decision 
2011/278/EU, 
Decision 
2013/448/EU 

08.09.2016; 
26.10.2016 

Borealis AB and 
others/ SE 
Environmental 
Protection 
Agency; 
Yara Suomi Oy 
and others/ FI 
Ministry of 
Employment and 
the Economy 

Validity of the 
method for 
calculating the 
uniform cross-
sectoral correction 
factor (CSCF) and 
of the method for 
determining the 
product benchmark 
for hot metal 

Case C-
203/12 

Directive 
2003/87/EC 

Billerud 
Karlsborg 
Aktiebolag/ SE 
Environmental 
Protection 
Agency 

17.10.2016 

Must an operator 
who has not 
surrendered 
enough emission 
allowances by 30 
April pay a penalty 
regardless of the 
cause of the 
omission, even if 
the operator had a 
sufficient number 
of allowances on 
30 April? 

Invalidation of the 
CSCF as of March 
2017 (see cases C-
191/14 and others).  
The methodology for 
calculating the hot 
metal benchmark is 
judged valid. The 
Court stressed the 
principle of non-
double counting of 
emissions. 

Penalties according to 
the ETS Directive 
apply even if the 
operator who did not 
surrender its 
allowances on time 
had enough 
allowances available 
to cover its emissions 
for the past year on 30 
April. 

44