REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the Functioning of the European Carbon Market in 2020 pursuant to Articles 10(5) and 21(2) of Directive 2003/87/EC (as amended by Directive 2009/29/EC and Directive (EU) 2018/410)
Date: 2021-10-26
Institutions: Directorate-General for Climate Action, European Commission
Subjects: EU Emissions Trading Scheme, EU emission allowance, air transport, carbon, energy efficiency, environmental monitoring, greenhouse gas, industrial pollution, reduction of gas emissions, tradeable emission permit

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.10.2021  COM(2021) 962 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the Functioning of the European Carbon Market in 2020 pursuant to Articles 10(5) and 21(2) of Directive 2003/87/EC (as amended by Directive 2009/29/EC and Directive (EU) 2018/410) {COM(2021) 950 final} - {SWD(2021) 308 final}  
 
 
Table of Contents 
List of acronyms and abbreviations ........................................................................................................ 2 

1. INTRODUCTION .............................................................................................................................. 3 

2. EU ETS INFRASTRUCTURE AND COVERAGE........................................................................... 4 

2.1 EU Registry and the European Union Transaction Log .................................................................... 5 

3. FUNCTIONING OF THE CARBON MARKET ............................................................................... 6 

3.1. Supply: allowances put in circulation .......................................................................................... 6 

3.1.1. Cap ........................................................................................................................................ 6 

3.1.2. Free allocation .................................................................................................................... 10 

3.1.3. Auctioning of allowances .................................................................................................... 12 

3.1.4. Derogation from full auctioning for electricity and heat production ................................. 15 

3.1.5 NER 300 programme ........................................................................................................... 18 

3.1.6. Innovation Fund .................................................................................................................. 19 

3.1.7. Modernisation Fund ............................................................................................................ 19 

3.1.8. Compensation of indirect carbon costs ............................................................................... 20 

3.1.9. International credits ............................................................................................................ 22 

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

3.2.1. Emissions reductions........................................................................................................... 23 

3.2.2. Balancing supply and demand ............................................................................................ 27 

4. AVIATION ....................................................................................................................................... 29 

5. MARKET OVERSIGHT .................................................................................................................. 32 

6. MONITORING, REPORTING AND VERIFICATION OF EMISSIONS ...................................... 35 

7. LINK OF THE EU ETS AND THE SWISS ETS ............................................................................ 36 

8. EFFECTS OF IMPLEMENTING THE ENERGY EFFICIENCY DIRECTIVE AND THE 
NATIONAL ENERGY AND CLIMATE PLANS ON THE EU ETS ................................................. 39 

8.1 Impact of the Energy Efficiency Directive implementation on the EU ETS .............................. 39 

8.2 Impact of national energy and climate plans’ implementation on the EU ETS .......................... 41 

9. CONCLUSIONS AND OUTLOOK ................................................................................................. 42 

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List of acronyms and abbreviations 

Accreditation and Verification Regulation 
Connecting Europe Facility Debt Instrument 
Continuous Emissions Measurement Systems 
European Climate, Infrastructure and Environment Executive Agency 
Carbon Dioxide 
Carbon Dioxide Equivalent 
Carbon Offsetting and Reduction Scheme for International Aviation 
Second Commitment Period of the Kyoto Protocol 
European Cooperation for Accreditation 
European Economic Area 
Energy Efficiency Directive  
European Energy Exchange 
European Investment Bank 
European Securities and Markets Authority 
European Union Member States 
European Union Emissions Trading System 
European Union Transaction Log 
Greenhouse Gas 
International Civil Aviation Organization 
InterContinental Exchange Futures Europe  

AVR 
CEF DI 
CEMs   
CINEA 
CO2 
CO2eq  
CORSIA 
CP2 
EA 
EEA 
EED 
EEX 
EIB 
ESMA  
EU27   
EU ETS 
EUTL   
GHG    
ICAO   
ICE 
InnovFin EDP InnovFin Energy Demonstration Projects  
Market Abuse Regulation 
MAR   
Directive on Markets in Financial Instruments 
MiFID2 
Regulation on Markets in Financial Instruments 
MiFIR  
Monitoring and Reporting Regulation 
MRR 
Market Stability Reserve 
MSR     
Nitrous Oxide 
N2O 
National Energy and Climate Plans 
NECPs  
New Entrants Reserve 
NER 
Over-the-counter 
OTC 
Perfluorocarbons 
PFCs 
CORSIA Standards and Recommended Practices 
SARPs  
Total Number of Allowances in Circulation 
TNAC  
United Kingdom 
UK 
United Nations Framework Convention on Climate Change 
UNFCCC 

2 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1. INTRODUCTION 

The  European  Union  Emissions  Trading  System  (EU  ETS)  has  been  a  cornerstone  of  the 
EU's  strategy  for  reducing  greenhouse  gas  (GHG)  emissions  since  2005.  Since  it  was 
launched  in  2005,  emissions  in  the  power  and  heat  generation  as  well  as  energy-intensive 
industrial sectors, covered by the EU ETS, have fallen by around 43%1. Together with other 
legislation,  such  as  on  renewable  energy2  and  energy  efficiency3,  it  has  contributed 
significantly  to  achieving  the  EU’s  overall  target  of  reducing  GHG  emissions  by  20%  by 
2020  from  1990  levels.  The  EU  surpassed  this  target  and  reduced  GHG  emissions  by 
approximately 31%4 below 1990 levels in 2020. 

In July 2021, the Commission adopted a package of proposals to deliver the European Green 
Deal5. The proposals aim to make the EU's climate, energy, land use, transport and taxation 
policies fit for the task of reducing net GHG emissions by at least 55% by 2030 compared to 
1990  levels.  The  EU  ETS  will  play  a  major  role  in  achieving  this  objective.  The  package 
contains a proposal to increase the ambition of the EU ETS with a new emissions reduction 
target of 61%6 below 2005 levels by 2030 (compared to 43% below 2005 levels currently), a 
lower overall emissions cap, and a steeper annual emissions reduction of 4.2% instead of the 
current 2.2% per year.7 The proposal for the revision of the EU ETS also extends its coverage 
to  maritime  emissions  and  proposes  a  new,  separate  emissions  trading  system  to  cover 
emissions from fuels used in road transport and buildings8.  

A  separate  proposal  strengthens  the  Market  Stability  Reserve  (MSR)9,  the  mechanism  that 
addresses  the  surplus  of  allowances  built  up  in  the  EU  ETS  since  2019  and  improves  the 
system's resilience to major shocks by adjusting the supply of allowances to be auctioned.  

Two  additional  proposals  from  the  July  package  strengthen  the  EU  ETS  for  aviation10  to 
ensure  the  sector  contributes  to  the  EU’s  emissions  reduction  target,  and  to  implement  the 

1 Until the end of 2020, for EU27 + the UK + Iceland, Liechtenstein and Norway (which was the scope of the EU ETS until 
31 December 2020). 
2 Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the 
use of energy from renewable sources, OJ L 328, 21.12.2018, p. 82 
3  Directive  (EU)  2018/2002  of  the  European  Parliament  and  of  the  Council  of  11  December  2018  amending  Directive 
2012/27/EU on energy efficiency, OJ L 328, 21.12.2018, p. 210 
4 Emissions reductions for EU27. For EU27 + the UK, the decrease was 32.5% below 1990 levels. 
5 Delivering the European Green Deal of 14.7.2021  
6 This target includes the proposed extention of the scope of the EU ETS to the maritime transport sector.  
7  Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council  amending  Directive  2003/87/EC  establishing  a 
system  for  greenhouse  gas  emission  allowance  trading  within  the  Union,  Decision  (EU)  2015/1814  concerning  the 
establishment  and  operation  of  a  market  stability  reserve  for  the  Union  greenhouse  gas  emission  trading  scheme  and 
Regulation (EU) 2015/757, COM/2021/551 final 
8 COM(2021)551 final (as above) 
9 Proposal for a Decision of the European Parliament and of the Council amending Decision (EU) 2015/1814 as regards the 
amount  of  allowances  to  be  placed  in  the  market  stability  reserve  for  the  Union  greenhouse  gas  emission  trading  scheme 
until 2030, COM/2021/571 final 
10  Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council  amending  Directive  2003/87/EC  as  regards 
aviation's  contribution  to  the  Union’s  economy-wide  emission  reduction  target  and  appropriately  implementing  a  global 
market-based  measure,  COM/2021/552  final,  and  Proposal  for  a  Decision  of  the  European  Parliament  and  the  Council 
amending  Directive  2003/87/EC  as  regards  the  notification  of  offsetting  in  respect  of  a  global  market-based  measure  for 
aircraft operators based in the Union, COM/2021/567 final 

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Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) in EU law in 
a way that is consistent with the EU’s 2030 climate objectives. 

This  report  on  the  functioning  of  the  European  carbon  market  is  presented  in  line  with 
Articles  10(5)  and  21(2)  of  the  Directive  2003/87/EC  (EU  ETS  Directive)11.  It  covers  the 
year 2020 and the first half of 2021 (until 30 June 2021); as 2020 marks the last year of phase 
3 of the EU ETS (2013-20), it also provides an overview of the main developments over this 
period. 

The  report  examines  the  significant  emissions  reductions  achieved  during  phase  3  and  the 
drivers behind them (Chapter 3.2.1), and analyses the role of the MSR in reducing the surplus 
of  allowances  built  up  in  the  EU  ETS  (Chapter  3.2.2).  It  also  highlights  major  phase  3 
developments  in  the  fields  of  aviation  (Chapter  4),  free  allocation  (Chapter  3.1.2),  the 
auctioning of allowances, the resulting auction revenues and their utilisation (Chapter 3.1.3), 
the EU ETS funding instruments (Chapters 3.1.4 to 3.1.8), market oversight (Chapter 5), and 
the  effectiveness  of  implementing  the  EU  ETS  in  participating  countries  (Chapter  6).  It 
includes  two  new  chapters:  Chapter  7  describes  the  linking  between  the  EU  ETS  and  the 
Swiss ETS and examines the effect the link had on the two carbon markets, while Chapter 8 
examines the impact of implementing the Directive 2012/27/EU as amended by the Directive 
(EU)  2018/200212  (Energy  Efficiency  Directive)  and  the  2019  national  energy  and  climate 
plans (NECPs) on the EU ETS.  

Unless otherwise indicated, the data used for this report were data that were either publicly 
available  or  available  to  the  Commission  by  the  end  of  June  2021.  The report  covers  2020 
data  for  the  United  Kingdom  (UK),  to  reflect  the  scope  of  the  EU  ETS  until  31  December 
2020. Technical and descriptive information on the EU ETS is provided in the appendices to 
the staff working document accompanying this report.   

2. EU ETS INFRASTRUCTURE AND COVERAGE 

Throughout  phase  3  of  the  EU  ETS  (2013-20),  the  system  covered  28  EU  Member  States 
(including the UK) and three EFTA countries - Iceland, Liechtenstein and Norway. As of 1 
January 2021, the EU ETS covers 27 Member States plus Iceland, Liechtenstein and Norway, 
and also electricity generating installations in Northern Ireland. As of 1 January 2020, the EU 
ETS is linked with the Swiss carbon market (See Chapter 7).  

In total, the EU ETS regulates emissions from more than 10 400 power and heat plants and 
manufacturing installations, as well as around 350 aircraft operators flying between European 
Economic Area (EEA) airports, and from the EEA to Switzerland and the UK. Although in 
the beginning of phase 3, the EU ETS covered approximately half of all GHG emissions in 

11  Directive  2003/87/EC  of  the  European  Parliament  and  of  the  Council  of  13  October  2003  establishing  a  system  for 
greenhouse  gas  emission  allowance  trading  within  the  Union  and  amending  Council  Directive  96/61/EC,  OJ  L  275, 
25.10.2003, p. 32 
12  Directive  (EU)  2018/2002  of  the  European  Parliament  and  of  the  Council  of  11  December  2018  amending  Directive 
2012/27/EU on energy efficiency, OJ L 328, 21.12.2018, p. 210 

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the EU, it currently covers around 36% of the EU's GHG emissions. A detailed overview of 
the EU  ETS  coverage  in phase 3  is available in  Appendix 1  to the  staff working document 
accompanying this report.  

2.1 EU Registry and the European Union Transaction Log  

The EU Registry and the European Union Transaction  Log (EUTL) track the ownership of 
general  and  aviation  allowances  by  recording  the  amounts  owned  in  the  accounts  and  the 
transactions between accounts. These systems also register the emissions of stationary (power 
and heat, and industry) installations and aircraft operators, and compliance with obligations 
stemming  from  these  emissions.  Both  systems  are  operated  and  maintained  by  the 
Commission,  whereas  the  national  registry  administrators  in  the  participating  countries 
remain  the  point  of  contact  for  account  holders  and  representatives  (companies  and 
individuals).  While  the  EU  Registry  holds  the  accounts  and  registers  information  on 
compliance,  and  the  EUTL  automatically  checks,  records  and  authorises  all  transactions 
between accounts, thus ensuring that all transfers comply with the EU ETS rules.  

The data recorded in the EU Registry and the EUTL continues to be an important source of 
information underpinning multiple types of the EU ETS reporting, such as the calculation of 
the Market Stability Reserve (MSR) surplus indicator (See Chapter 3.2.2) and the reporting 
carried out by the European Environment Agency. The EUTL also provides transparency in 
the  EU  ETS  by  publishing  information  on  the  compliance  of  stationary  installations  and 
aircraft operators with EU ETS provisions and on the transactions between accounts. 

During  phase 3, the public website of the  EUTL functioned reliably, remaining operational 
for  365  days  around  the  clock  each  year,  with  only  minor  interruptions  due  to  planned 
technical upgrades. This was also the case in 2020. An exception was 18 August 2020, when, 
due  to  technical  issues,  several  transactions  were  not  processed  correctly.  Due  to 
troubleshooting  and  repair  work  between  19  and  21  August,  the  EU  Registry  was 
unavailable.  

Several major development works were carried out on the EU Registry in 2020 and the first 
half of 2021. First, the Trade and Cooperation Agreement13 between the EU and the UK was 
applied  provisionally  as  of  1  January  2021  and  entered  into  force  on  1  May  2021.  In  the 
Agreement, the EU and  the UK commit to  upholding the level  of ambition of their climate 
and environmental policies as at the end of 2020, and to adapting these policies in line with 
their  international  obligations.  Article  392  of  the  Agreement  provides  that  as  of  1  January 
2021, both parties shall have a system of carbon pricing in place, covering GHG emissions 
from  electricity  and  heat  generation,  industry  and  aviation.  Northern  Ireland  electricity 
generators  and  departing  flights  from  the  EEA  to  the  UK  remain  covered  by  the  EU  ETS, 
while flights from the UK to the EEA fall under the UK’s carbon pricing system (See Chapter 

13 Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, of the one 
part, and the United Kingdom of Great Britain and Northern Ireland, of the other part, OJ L 149, 30.4.2021, p. 10  

5 

 
 
                                                           
4).  Consequently,  Northern  Ireland  electricity  generators  remained  in  the  EU  Registry,  and 
the EU ETS Directive was amended to accommodate changes in the flights’ coverage.14 

The  Doha  Amendment  establishing  the  second  commitment  period  (CP2)  of  the  Kyoto 
Protocol  (1  January  2013  -  31  December  2020)  also  entered  into  force15  on  31  December 
2020.  According  to  Article  5  of  the  Commission  Regulation  (EU)  389/2013  (Registry 
Regulation)16, the Commission acts as the administrator of the EU's Kyoto Protocol Registry, 
which is part of the EU Registry. Although 31 December 2020 was the last day of CP2, the 
Kyoto  Protocol transparency and compliance system will continue to  operate until  the final 
compliance  check.  In  2023,  the  emissions  inventories  for  the  last  year  of  CP2  will  be 
reported, reviewed and a final report submitted.  

The agreement on linking the EU ETS with the Swiss ETS17 entered into force on 1 January 
2020. To operationalise the link between the systems, a provisional solution to link registries 
of the two systems and enable allowances to be transferred between them was put in place on 
21 September 2020 (See Chapter 7).  

Finally,  technical  implementation  of  the  new  rules  brought  by  the  Commission  Delegated 
Regulation (EU) 2019/112218 was successfully completed and the new functionalities became 
available in the EU Registry as of 1 January 2021. 

3. FUNCTIONING OF THE CARBON MARKET 

3.1. Supply: allowances put in circulation  

3.1.1. Cap 

The cap is the maximum absolute quantity of GHG emissions that may be emitted by entities 
covered by the EU ETS to ensure the ETS emissions reduction target is met, corresponding to 
the number of allowances put into circulation over a trading period. A common EU-wide cap 
applies for the entire EU ETS (for detailed information on the cap, see Appendix 2 to the staff 
working document accompanying this report). During phase 3 of the EU ETS (2013-20), the 
cap  decreased  every  year  by  the  linear  reduction  factor  of  1.74%,  ensuring  that  total 
emissions  fell  (See  Chapter  3.2.1).  In  phase  4  of  the  EU  ETS  (2021–30),  the  cap  for  both 
stationary installations and aviation decreases annually by the linear reduction factor of 2.2%. 

14  Commission  Delegated  Regulation  (EU)  2021/1416  of  17  June  2021  amending  Directive  2003/87/EC  of  the  European 
Parliament  and  of  the  Council  as  regards  the  exclusion  of  incoming  flights  from  the  United  Kingdom  from  the  Union 
emissions trading system, OJ L 305, 31.8.2021, p. 1  
15 Communication from the Commission concerning the entry into force of the Doha Amendment to the Kyoto Protocol to 
the United Nations Framework Convention on Climate Change, OJ C 432, 14.12.2020, p.1 
16 Commission Regulation (EU) No 389/2013 of 2 May 2013 establishing a Union Registry pursuant Directive 2003/87/EC 
on  the  European  Parliament  and  of  the  Council,  Decisions  No  280/3004/EC  and  No  406/2009/EC  of  the  European 
Parliament  of  the  Council  and  repealing  Commission  Regulations  (EU)  No  920/2010  and  No  1193/2011,  OJ  L  122, 
3.5.2013, p. 190 
17 Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions 
trading systems, OJ L 322, 7.12.2017, p. 3 
18  Commission  Delegated  Regulation  (EU)  2019/1122  of  12  March  2019  supplementing  Directive  2003/87/EC  of  the 
European Parliament and of the Council as regards the functioning of the Union Registry, OJ L 177, 2.7.2019, p. 3 

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Table  1  shows  the  figures  for  the  cap  on  emissions  from  stationary  installations  and  the 
number of aviation allowances put into circulation19 each year during phase 3.  

Table 1. EU ETS cap in phase 3 of the EU ETS (2013-20) 

Year 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

Annual cap (stationary 
installations) 

Annual aviation allowances put into 
circulation20 

2 084 301 856 

2 046 037 610 

2 007 773 364 

1 969 509 118 

1 931 244 873 

1 892 980 627 

1 854 716 381 

1 816 452 135 

32 455 296 

41 866 834 

50 669 024 

38 879 316 

38 711 651 

38 909 585 

38 830 950 

42 803 537 

On  1  February  2020,  the  Agreement  on  the  withdrawal  of  the  United  Kingdom  from  the 
European  Union21  entered  into  force.  The  EU  ETS  Directive  applied  to  the  UK  until  31 
December  2020,  and  pursuant  to  the  Protocol  of  Ireland  and  Northern  Ireland22,  electricity 
generation  located  in  Northern  Ireland  remains  in  the  EU  ETS  with  the  relevant  rights  and 
obligations.  

The Commission reacted to these changes by adopting the Decision on the adjusted EU-wide 
quantity of allowances on 16 November 2020.23 Only emissions from electricity generation in 
Northern Ireland were accounted for in the updated cap (applied from the base period 2008-

19 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 distribution to fast-
growing aircraft operators and new entrants) should be 85% of the total volume. Auctioning represents the remaining 15%. 
20 The updated figures include exchanges of international credits to EU ETS allowances in addition to the free allocation and 
auctioned amounts.  
21 Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and 
the European Atomic Energy Community, OJ L 29, 31.1.2020, p. 7 
22 OJ L 29 (as above) 
23 Commission Decision C/2020/1722 of 16 November 2020 on the Union-wide quantity of allowances to be issued under 
the EU Emmissions Trading System for 2021, OJ L 386, 16.11.2020, p. 26 

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2012), which calculated  a reduction of the  cap in proportion to  the emissions from  the UK 
that were no longer accounted for.24 

Figure 1 summarises the cap reduction following the increase of the linear reduction factor to 
2.2% as of 2021. It also illustrates the role of the Market Stability Reserve (MSR) feed and 
the backloading contributions to the MSR (See Chapter 3.2.2). The dashed bars in the figure 
approximate  the  impact  of  the  higher  2030  emissions  reduction  target  as  proposed  by  the 
Commission in the revision package to deliver on the European Green Deal on 14 July 2021. 

24  The  cap  for  2021  set  out  in  the  Commission  Decision  C/2020/1722  does  not  include  the  quantity  of  allowances  to  be 
issued pursuant to Chapter II of the EU ETS Directive in respect of aircraft operators. This quantity is the result of a bottom-
up approach starting from free allocation to aviation, as explained in the Notice on the Union-wide quantity of allowances 
for 2021 and the Market Stability Reserve under the EU Emissions Trading System, OJ C 428I, 11.12.2020, p. 1 

8 

 
 
 
                                                           
Figure 1. Cap reduction applying the linear reduction factor of 2.2% as of 202125 

Backloaded allowances (total 900 million) 
Market Stability Reserve feed  
Market Stability Reserve feed in/out depending on market surplus 

25 The cap for phase 4 reflects the post-BREXIT publication of the EU ETS total volume of allowances in the Commission Decision (EU) 2020/1722.  

9 

 
 
 
 
                                                           
3.1.2. Free allocation 

Although  since  phase  3  auctioning  accounts  in  principle  for  the  distribution  of  57%  of  the 
total volume allowances, a significant volume of allowances is allocated for free to address 
the  risk  of  carbon  leakage  (when  activites  move  to  non-EU  countries  with  less  ambitious 
climate  policies  on  GHG  emissions,  which  may  lead  to  an  overall  increase  in  emissions). 
Electricity production was not eligible for free allowances, and the free allocation to industry 
was based on performance benchmarks to strengthen the incentives to reduce GHG emissions 
and increase innovation. 

At  the  start  of  phase  3,  the  New  Entrants'  Reserve  (NER)  was  created  in  the  EU  ETS  to 
provide  additional  free  allocations  to  new  industrial  installations  and  installations  with  a 
significantly increasing capacity, equivalent to 5% of the total volume of allowances for this 
period.  The  sectors  and  sub-sectors  deemed  to  be  exposed  to  a  significant  risk  of  carbon 
leakage,  and  thereby  awarded  a  higher  share  of  free  allocation,  were  placed  on  a  carbon 
leakage list.26 As demand for free allocation exceeded the supply available, the allocation was 
reduced for all installations by the same percentage by applying the cross-sectoral correction 
factor27, which was revised28 in  2017. The values of the  cross-sectoral  correction factor  are 
presented in Table 3.1 of Appendix 3 to the accompanying staff working document. 

The initial Reserve held 480.2 million allowances, after deducting 300 million allowances for 
the NER 300 programme supporting innovation (See Chapter 3.1.5). As at June 2021, 178.3 
million  allowances  were  reserved  for  1  392  installations  for  the  entirety  of  phase  3. 
Therefore,  301.9  million  allowances  remain  in  the  Reserve.  Of  this  amount,  200  million 
allowances will be placed in the Reserve for phase 4 and the rest will be placed in the MSR. 

As  at  June  2021,  the  originally  approved  volume  of  free  allocation  for  phase  3  has  been 
reduced  by  around  585  million  out  of  6.5  billion  allowances,  due  to  installations  closing 
down  or  reducing  their  production  or  production  capacity.  Table  2  summarises  free 
allocations to industry in phase 3.  

26 Commission Decision of 27 October 2014 determining, pursuant to Directive 2003/87/EC of the European Parliament and 
of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, for the 
period 2015 to 2019, OJ L 308, 29.10.2014, p. 114  
27  Commission  Decision  2013/448/EU  of  5  September  2013  concerning  national  implementation  measures  for  the 
transitional free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87/EC 
of the European Parliament and of the Council, OJ L 240, 7.9.2013, p. 27 
28 Commission Decision 2017/126/EU of 24 January 2017 amending Decision 2013/448/EU as regards the establishment of 
a  uniform  cross-sectoral  correction  factor  in  accordance  with  Article  10a  of  Directive  2003/87/EC  of  the  European 
Parliament and of the Council, OJ L 19, 25.1.2017, p. 93 

10 

 
 
                                                           
Table 2. Free allowances allocated to industry, January 2013 - June 2021 (in millions) 29 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

903.0 

874.8 

847.6 

821.3 

796.2 

771.9 

748.131 

724.8 

11.7 

15.2 

18.9 

22.8 

24.6 

26.9 

29.1 

28.9 

41.9 

61.3 

74.0 

76.5 

79.9 

85.1 

80.3 

85.9 

Free allocation30  
(EU27 + the UK + 
Iceland, Liechtenstein 
and Norway) 

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 

Although submissions from participating countries concerning free allocation changes for the 
last year of phase 3 could still be sent in 2021, the vast majority of the changes have already 
been  reported.  Therefore,  it  can  be  concluded  that  at  the  end  of  phase  3,  there  were 
approximately:  

  1 821 installations out of 11 646 that ceased operation or had a physical change that 
reduced their capacity under the threshold and thus their GHG permit was withdrawn  

  505 new entrants  
  887 significant capacity extensions  
  378 significant capacity reductions  
  2 985 installations that underwent partial cessations and  
  1 434 installations that recovered after a partial cessation.  

Unallocated  allowances  from  closures,  partial  cessations  or  significant  capacity  reductions 
(under Articles 10a(19) and 10a(20) of the EU ETS Directive) will be placed in the MSR in 
accordance  with  Article  1(3)  of  the  Decision  (EU)  2015/1814  (MSR  Decision)32,  like  the 
unallocated allowances from the NER. 

29  Althought  in  previous  Carbon  market  reports,  data  were  based  on  notifications  by  participating  countries  submitted 
annually by the end of June, in this and last year’s Carbon market  reports data are based on the  EU Registry  with cut-off 
dates of 30 June 2021 and 2020 respectively. This new approach was chosen to reflect allocations more accurately as they 
occur and are recorded in the Registry. 
30 Initial allocation volume, before the application of the cross-sectoral correction factor.  
31 Allocation for the UK (48.0 million allowances of the total for 2019), suspended in 2019 due to the safeguard measures to 
protect the environmental integrity of the EU ETS  in cases where EU law ceases to apply to a Member State withdrawing 
from the EU, resumed in 2020.  
32 Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment 
and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 
2003/87/EC, OJ L 264, 6.10.2015, p. 1  

11 

 
 
 
                                                           
To prevent the risk of carbon leakage, free allocation continues in phase 4, based on updated 
benchmark values derived from the performance of the 10% most efficient installations in the 
EU.  After  the  political  agreement  reached  on  the  revised  EU  ETS  Directive  in  November 
2017,  the  Commission  adopted  legislation  for  the  implementation  of  free  allocation  to 
industry  in  phase  4.  The  adopted  legal  acts  are  listed  in  Table  4.1  of  Appendix  4  to  the 
accompanying staff working document.  

3.1.3. Auctioning of allowances 

As of phase 3, auctioning is the primary method of distributing allowances in the EU ETS, 
accounting  for  57%  of  the  total  volume.  The  auctioning  is  governed  by  the  Commission 
Regulation  (EU)  1031/201033  (Auctioning  Regulation),  which  specifies 
timing, 
administration  and  other  aspects  of  how  auctions  should  take  place  to  ensure  an  open, 
transparent, harmonised and non-discriminatory process. 

the 

In phase 3, auctions 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. It also auctions 
for  Poland  (which  opted-out  from  the  joint  procurement  procedure  but  has  not  yet 
appointed its own auction platform), and, since June 2019, for Iceland, Liechtenstein 
and Norway (after the EEA Agreement was amended to allow Iceland, Liechtenstein 
and  Norway  to  participate  in  the  Joint  Procurement  Agreement  for  the  common 
auction platform) 

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

ICE  Futures  Europe  (ICE),  auctioning  for  the  UK  as  the  'opt-out'  auction  platform 
until the end of 2020. 

The  EEX  was  reappointed  as  the  common  auction  platform  as  from  2021,  without  major 
changes to the participation in auctions. 

Over 1 800 auctions were held in phase 3, and by 30 June 2021, this figure was well over 1 
900. Table 3 provides an overview of the volumes of allowances34 auctioned by the EEX and 
ICE platforms up to 30 June 2021, including early auctions35 of general allowances. 

33  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 
34 The volumes of general allowances have been determined taking into account Decision 1359/2013/EU. The volumes of 
aviation allowances have been determined taking into account Decision No 377/2013/EU and Regulation (EU) No 421/2014.  
35  Early  auctions of  allowances  in  phase  3  were  performed  in  2012  in  view  of  the  widespread  commercial  practice  in  the 
electricity  sector  of  selling  electricity  on  a  forward  basis  and  purchasing  the  required  inputs  (including  allowances)  when 
they sell their output. 

12 

 
 
                                                           
Table 3. Total auctioned volumes of phase 3 allowances, January 2012 - 30 June 202136 

Year 

2012 

2013 

2014 

2015 

2016 

2017   

2018  

2019 

2020  

2021 (until 30 June 2021) 

Source: EEX 

General allowances  

Aviation allowances  

89 701 500 

808 146 500 

528 399 500 

632 725 500 

715 289 500 

951 195 500 

915 750 000 

588 540 000 

778 505 000 

308 326 000 

2 500 000 

0  

9 278 000 

16 390 500 

5 997 500 

4 730 500 

5 601 500 

5 502 500 

7 505 000 

1 343 000 

When the MSR became operational in January 2019, it has substantially lowered the supply 
of allowances available for auction. Generally, the auctions were conducted smoothly and the 
auction clearing prices were closely aligned with secondary market prices. 

In phase 3, a total of 15 auctions out of over 1 800 were cancelled either because the reserve 
price was not met or because the total bid volume fell short of the auctioned volume, in line 
with  the  rules  of  the  Auctioning  Regulation.  Figure  2  gives  an  overview  of  the  auction 
clearing prices in the EU carbon market since 2013.  

36 The table includes auction volumes for EU27 + the UK + Iceland, Liechtenstein and Norway (except for 2021, which does 
not include data on the UK).  

13 

 
 
                                                           
Figure 2. Clearing prices for auctions of general allowances, January 2013 - 30 June 2021 

Source: EEX 

The  number  of  participants  in  the  auctions  of  general  allowances  in  phase  3  is  provided  in 
Appendix 5 to the staff working document accompanying this report. The auction platforms 
publish detailed results of each auction in a timely manner on the specific websites. Further 
information  on the performance of the auctions,  including on the participation, cover ratios 
and prices, can be found in the participating countries' reports published on the Commission's 
website37.  

The  total  revenues  generated  by  Member  States,  the  UK  and  Iceland,  Liechtenstein  and 
Norway from the auctions in phase 3 exceeded EUR 68 billion (See Tables 5.1, 5.2, and 5.3 
in  the  accompanying  staff  working  document)38.  In  2020  alone,  auctions  generated  total 
revenues of over EUR 19 billion, and EUR 13.9 billion in the first half of 2021. The EU ETS 
Directive  provides  that  Member  States  should  use  at  least  50%  of  their  auction  revenues, 
including  all  revenues  generated  from  allowances  distributed  for  the  purposes  of  solidarity 
and growth, and all revenues from allowances issued in respect of aviation39, for climate- and 
energy-related purposes.  

According to the information submitted by Member States to the Commission, it is estimated 
that in 2020, around 72% of auction revenues was used for climate and energy purposes, and 
around 75% (EUR 56.5 billion) of total revenues throughout phase 3. Although a small share 
of this amount (about 3% of total revenues since 2013) was spent internationally, the majority 
of auction revenues in phase 3 was spent on domestic climate and energy purposes (mostly 

37 Auctioning in the EU ETS 
38 The numbers include allowances auctioned for the Innovation and Modernisation Funds. 
39 Article 3d(4) of the EU ETS Directive 

14 

 
 
 
                                                           
on renewable energy, energy efficiency, and research and development). In practice, Member 
States spend more on climate- and energy-related purposes than their auctioning revenues.40 

3.1.4. Derogation from full auctioning for electricity and heat production 

In phase 3, Article 10c of the EU ETS Directive derogated from the general rule to auction 
allowances  in  order  to  support  investments  in  modernising  the  electricity  sector  in  several 
lower income Member States.41  The free allowances  under Article 10c were deducted from 
the  quantity  that  the  Member  State  would  otherwise  auction.  As  the  free  allocation  of 
allowances  to  electricity  generators  under  Article  10c  involved  State  aid,  the  national 
schemes  set  up  to  implement  the  Article  10c  derogation  were  cleared  under  State  aid  rules 
and were subject to the requirements of the State aid Guidelines.42  

The total value of reported investment support under Article 10c from 2009 to 2020 is over 
EUR 13.1 billion. As shown in Figure 3, 83% of this amount was dedicated to upgrading and 
retrofitting  infrastructure  (mostly  to  modernise  coal  and  gas  power  plants,  and  to  upgrade 
electricity and heat networks). The residual investments were to diversify the energy mix and 
to develop clean technologies.  

Figure 3. Total support under Article 10c per type of investment, 2013 - 2019 

Source: DG Climate Action 

Figure  4  shows  the  number  of  Article  10c  allowances  allocated  for  the  period  2013-19  per 
EU Member State (no allowances were allocated for 2020).  

40  Detailed  information  on  the  use  of  auctioning  revenues  can  be  found  in  the  EU  Climate  Action  Progress  Report  2021 
COM(2021)960. 
41  Bulgaria,  Cyprus,  Czechia,  Estonia,  Hungary,  Latvia,  Lithuania,  Malta,  Poland  and  Romania  were  eligible  to  use  the 
Article 10c derogation. Malta and Latvia decided not to do so in phase 3. 
42 Guidelines on certain State aid measures in  the context of the greenhouse gas emission allowances trading scheme post 
2012, OJ C158, 5.6.2012, p. 4 

15 

 
 
 
                                                           
Figure 4. Allowances allocated for free pursuant to Article 10c, 2013 - 201943 

Source: DG Climate Action 

Table 6.1 of Appendix 6  to  the staff working document accompanying this  report indicates 
that  the  number  of  allowances  eligible  Member  States  allocated  for  free  to  electricity 
generators in phase 3. Table 6.2 of Appendix 6 indicates the maximum number of allowances 
per year to be allocated under Article 10c. 

The Article 10c allowances that remained unallocated from phase 3 could either be auctioned 
or, in line with the EU ETS Directive, allocated in phase 4 to Article 10c investments selected 
through  competitive  bidding  or  transferred  to  the  Modernisation  Fund.  Figure  5  shows  the 
extent to which Article 10c allowances from each year of phase 3 were allocated, auctioned 
or transferred to phase 4. 

43 The number of the Aricle 10c allowances included in Figure 4 can include allowances issued with a delay  for previous 
years. The relevant amounts per year are indicated in the EUTL. 

16 

 
 
 
                                                           
Figure 5. Distribution of the residual Article 10c allowances (allocated, auctioned, transferred to 
phase 4) 44 

Source: DG Climate Action 

Overall,  around  74%  of  available  Article  10c  allowances  were  allocated  between  2013  and 
2019.  Most  of  the  remaining  allowances  were  auctioned,  with  only  a  small  amount  (about 
0.5%)  transferred  to  phase  4.  The  number  of  unallocated  allowances  auctioned  (or  planned 
for  auction)  by  Member  State  under  the  Article  10c  derogation  in  phase  3  is  indicated  in 
Table 6.3 of Appendix 6 to the accompanying staff working document. 

Transitional  free  allocation  under  Article  10c  of  the  EU  ETS  Directive  continues  to  be 
available  in  phase  4,  but  with  stronger  provisions  on  transparency  and  with  the  option  for 
eligible Member States to use all or part of their Article 10c allocation to support investments 
within the framework of the Modernisation Fund. Bulgaria, Romania and Hungary opted to 
continue  to  use  Article  10c  in  phase  445,  and  are  in  the  process  of  drawing  up  national 
frameworks to implement this provision. These need to be cleared by the Commission under 
State  aid  rules46.  Other  eligible  Member  States47  chose  to  either  auction  their  phase  4 

44 Figure 5 includes volumes to auction, up to and including the 2021 auctioning calendar. The allowances transferred from 
2013  to  phase  4  (912  630)  were  originally  meant  to  be  allocated  to  five  Hungarian  installations,  which  in  2014  were 
determinded  ineligible  to  receive  the  allocation.  On  27  September  2019,  pursuant  to  Articles  10c(5)  and  10d(4)  of  the 
revised  EU  ETS  Directive,  Hungary  informed  the  Commission  of  its  intention  to  use  all  912  630 Article  10c  allowances, 
which had not been allocated by 2020, for implementing the Article 10c derogation in phase 4.  
45  In  line  with  Article  10c(2),  any  Member  State  intending  to  make  use  of  optional  transitional  free  allocation  for  the 
modernisation of the energy sector in phase 4 had to publish, by 30 June 2019, a detailed national framework and/or a list of 
small  projects  to  be  supported.  Only  Bulgaria,  Hungary  and  Romania  did  so.  In  line  with  Article  10c(5),  Member  States 
could  decide  by  30  September  2019  to  use  unallocated  free  allocation  from  phase  3  for  the  optional  transitional  free 
allocation  in  phase  4  or  to  auction  these  allowances  (see  Table  6.3  of  Appendix  6  to  the  accompanying  staff  working 
document).  
46 Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post 
2021, OJ C 317, 25.9.2020, p. 5 
47 In phase 4, Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Romania are eligible to 
use the Article 10c derogation. 

17 

 
 
 
                                                           
allowances or transfer them to the Modernisation Fund. The number of phase 4 allowances to 
be used under the Article 10c derogation, transferred to the Modernisation Fund, or auctioned 
is  included  in  Table  6.4  of  Appendix  6  to  the  staff  working  document  accompanying  this 
report.  

3.1.5 NER 300 programme  

In  phase  3,  the  NER  300  was  a  large-scale  funding  programme  for  innovative  low-carbon 
energy  demonstration  projects.  The  aim  was  to  demonstrate  environmentally  safe  carbon 
capture and storage and innovative renewable energy technologies on a commercial scale in 
the EU. The NER 300 was funded from the monetisation of 300 million allowances from the 
New  Entrants’  Rerserve  (NER).  Funding  was  awarded  to  projects  selected  following  two 
rounds of call for proposals in December 2012 and July 2014.  

In  total,  38  renewable  energy  projects  and  one  carbon  capture  and  storage  project  in  20 
Member States were awarded support from the NER 300, amounting to EUR 2.1 billion. By 
30 June 2021, eight projects had become operational: the bioenergy project Verbiostraw in 
Germany,  the  onshore  wind  project  Windpark  Handalm  in  Austria,  offshore  wind  projects 
Veja Mate  and Nordsee  One in  Germany, the smart  grid project  Puglia Active Network  in 
Italy, floating offshore wind projects Vertimed in France and Windfloat in Portugal, as well 
as the concentrated solar power project Minos in Greece. Two projects, the Italian bioenergy 
BEST and Swedish onshore wind project Windpark Blaiken, are considered completed48.  

A further four projects selected following the second call for proposals are advancing in their 
preparations. However, due to the COVID-19 pandemic, their launch dates were amended49. 
Given  the  difficulties  to  co-finance  under  the  NER300  requirements  together  with  a 
challenging  economic  and  policy  context,  23  projects  were  unable  to  raise  sufficient 
additional  funding  and  were  withdrawn  from  the  programme,  releasing  a  total  of  almost 
EUR 1.5 billion.  

In 2017, the amended NER 300 Decision50 authorised the re-investment of the funds released 
from the projects cancelled under the first call for proposals (EUR 708.7 million) to projects 
supported    under  the  existing  financial  instruments  -  the  InnovFin  Energy  Demonstration 
Projects  and  the  Connecting  Europe  Facility  Debt  Instrument,  both  managed  by  the 
European  Investment  Bank.  These  projects  and  their  related  pipelines  are  successfully 
demonstrating  that  the  blending  mechanism  put  in  place  is  working  efficiently.  The  full 
allocation of NER 300 undisbursed funds is expected by the end of 2022. 

48  Operational  projects  have  entered  into  operation  and  are  being  implemented,  while  completed  projects  have  finished 
operation. 
49 Commission Implementing Decision C(2021)1712 amending Implementing Decisions C(2012)9432 and C(2014)4493 as 
regards certain projects under the NER 300 funding programme, in particular those affected by the COVID-19 pandemic 
50 Commission Decision (EU) 2017/2172 of 20 November 2017 amending Decision 2010/670/EU as regards the deployment 
of non-disbursed revenues from the first round of calls for proposals, OJ L 306, 22.11.2017, p. 24 

18 

 
 
                                                           
The remaining unspent funds from the second round of calls for proposals will be channelled 
to  the  Innovation  Fund.  So  far,  EUR  746.6  million  has  been  transferred  to  the  Innovation 
Fund.  

Appendix 7 to the accompanying staff working document contains more information on the 
NER300. 

3.1.6. Innovation Fund  

The Innovation Fund under the EU ETS pools at least EUR 20 billion51 for the period 2020-
30,  from  the  auctioning  of  450  million  allowances.  This  makes  it  one  of  the  largest 
programmes  in  the  world  that  aims  to  finance  the  commercial  demonstration  of  innovative 
low-carbon  technologies  and  industrial  solutions  to  decarbonise  Europe’s  energy-intensive 
industries, innovative renewables, energy storage, and carbon capture use and storage. 

The  Commission,  together  with  the  European  Climate,  Infrastructure  and  Environment 
Executive Agency, launched the first calls for proposals under the Innovation Fund in 2020. 
The  calls  attracted  significant  interest  from  companies  of  all  sizes  looking  for  funding  for 
their  innovative  clean  technology  projects,  across  a  variety  of  sectors  and  in  all  Member 
States, plus Iceland and Norway. Under the call for large-scale projects52, the best-ranked 70 
projects (out of 311 applications) were invited to submit a full proposal for the second stage 
by 23 June 2021. 66 full proposals were received, requesting about EUR 6 billion of support, 
against  the  total  available  funding  under  this  call  of  EUR  1  billion.  The  results  of  the 
evaluation will be available in the fourth quarter of 2021.  

The call for small-scale projects53 closed on 10 March 2021 with 232 submissions received. 
32 small-scale projects were selected for funding and invited to the grant preparation phase in 
July  2021,  for  a  total  volume  of  EUR  118  million.  Successful  projects  are  located  in  12 
Member States plus Iceland and Norway, and will reduce GHG emissions in both energy and 
industry sectors.   

15  large-scale  projects  were  selected  for  Project  Development  Assistance  under  the 
Innovation Fund for a total amount of EUR 4 million.   

3.1.7. Modernisation Fund  

The Modernisation Fund is the key funding instrument under the EU ETS set up with a view 
to supporting decarbonisation in central and eastern Member States54. It pools an approximate 
of EUR 25 billion55, from the auctioning of over 643 million allowances56 in phase 4.    

51 The amount depends on the carbon price; the carbon price used here is EUR 40. In the package to deliver on the European 
Green Deal, the Commission proposes to increase substantially the volume of the Innovation Fund. 
52 Innovation Fund: call for large-scale projects 
53 Innovation Fund: call for small-scale projects 
54 The beneficiary Member States are Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and 
Slovakia. 
55 The amount depends on the carbon price; the carbon price used here is EUR 40. In the package to deliver on the European 
Green Deal, the Commission proposes to increase the volume of the Modernisation Fund by an additional 2.5% of the cap. 

19 

 
 
                                                           
The  Modernisation  Fund  became  operational  in  January  2021.  In  the  first  bi-annual 
dibursement cycle, six multiannual schemes were confirmed in Hungary, Poland and Czechia 
for  a  total  volume  of  EUR  304  million.  The  schemes  include  investments  in  renewable 
energy, energy efficiency, smart grids, and developing power grids and energy communities. 

Table  7.3  of  Appendix  7  to  the  accompanying  staff  working  document  shows  the  total 
number of allowances per beneficiary Member State in phase 4.  

3.1.8. Compensation of indirect carbon costs 

In addition to free allocation covering direct emissions, Member States can grant State aid to 
compensate  some  electro-intensive  industries  for  carbon  costs  arising  from  indirect 
emissions, i.e. from higher electricity prices due to power generators passing on the costs of 
buying allowances to consumers. To ensure a harmonised application of indirect carbon cost 
compensation between Member States and to minimise competition distortions in the internal 
market, the Commission adopted the EU ETS State aid Guidelines. The first edition of these 
Guidelines  applied  to  the  indirect  costs  incurred  from  2013  to  202057.  It  was  subsequently 
revised to cover the period 2021-3058.  

This  report  details  Member  States’  expenditure  in  2020  for  indirect  costs  incurred  in  2019, 
under the first edition of the Guidelines. Data on the compensation for indirect costs incurred 
in 2020 is not available yet. Member States that choose to start or continue compensating for 
indirect  costs  incurred  in  2021  and  beyond,  under  the  revised  Guidelines,  must  notify  their 
schemes to the Commission. 

A growing number of Member States have started compensating for indirect costs. To date, 
the  Commission  has  approved  16  schemes  in  15  Member  States.  In  2020,  Poland  and 
Romania  have  started  compensating  indirect  costs  for  the  first  time.  The  Commission 
approved a new Czech scheme59 in November 2020 and a new Italian scheme60 in July 2021. 
Both Czechia and  Italy  will start  compensating indirect  costs in  2021 (for costs incurred in 
2020). 

The EU ETS  Directive  specifies  that within three months of the end of each  year, Member 
States that have an indirect cost compensation scheme in place should make available to the 
public,  in  an  easily  accessible  form,  the  total  amount  of  compensation  provided  and  a 
breakdown per recipient sector and subsector. Table 4 below presents a summary of the data 
published by the Member States for compensation paid out in 2020 for indirect costs incurred 
in 2019. These are compared to the auction revenues in 2019. 

56 This volume includes transfers  made to the Modernisation Fund by Member States  from the pools of allowances under 
Articles  10(2b)  and  10c  of  the  EU  ETS  Directive.  The  intial  volume  of  the  Modernisation  Fund  amounts  to  nearly  276 
million allowances (See Table 7.3 of Appendix 7 to the accompanying staff working document).  
57 Guidelines on certain State aid measures in the context of the greenhouse gas emission allowances trading scheme post 
2012, OJ C158, 5.6.2012, p. 4 
58 Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post 
2021, OJ C 317, 25.9.2020, p. 5 
59 SA.58608 
60 SA.60787 

20 

 
 
                                                                                                                                                                                     
Table 4. Indirect carbon cost compensation paid out by EU Member States and the UK in 202061 

Compensation disbursed in 
2020 for indirect costs 
incurred in 2019 (in million 
euros) 

Number of 
beneficiaries 
(installations) 

Auction revenues 
in 2019 (excl. 
aviation 
allowances, in 
million euros) 

Percentage of auction 
revenues spent on 
indirect cost 
compensation 

546 

89.4 

20 

110.1 

42.2 

0.66 

4 

266.4 

74.6 

61 

10.6 

76.6 (340.9 PLN)  

 N.A. 

57.25 (50.9 GBP) 

902 

 108 

 31 

93 

48 

1 

10 

302 

61 

204 

4 

25 

44 

61 

3146.1 

353.5 

435.6 

503.3 

83.7 

244.4 

711.6 

217.4 

1225.2 

16.8 

2545.9 

747.9 

N.A. 

17.4% 

 30.9% 

25.3% 

8.3% 

0.7% 

4.1% 

37.4% 

34.3% 

5.0% 

63.0% 

 3% 

 N.A. 

N.A. 

Member 
State 

DE 

BE (FL) 

BE (WL) 

NL 

EL 

LT 

SK 

FR 

FI 

ES 

LU 

PL 

RO 

UK 

The total indirect cost compensation paid out by 13 Member States in 2020 for costs incurred 
in 2019 amounted to at least EUR 1.358 million - more than double the amount paid out in 
2019 (for costs incurred in 2018). This sizable increase was primarily related to the increase 
in carbon prices. The majority of schemes do not have a fixed budget but compensate based 
on actual indirect costs incurred. Moreover, the formula to calculate compensation laid down 
in  the  State  aid  Guidelines  specifies  that  Member  States  must  use  the  average  allowance 
forward price of year t-1 when calculating disbursed compensation. This means that forward 
prices from 2018 are used to calculate the compensation for indirect costs incurred in 2019. 
Between  2018  and  2019,  the  carbon  price  used  as  basis  for  the  compensation  rose  from 
around EUR 6 to around EUR 16.  

One  of  the  transparency  provisions  in  the  EU  ETS  Directive  specifies  that  Member  States 
spending more than 25% of their auction revenues on indirect cost compensation in any year 
must publish a report setting out the reasons why this amount was exceeded. In 2020, at least 
five  Member  States  exceeded  the  25%  limit,  while  in  2019  no  Member  State  had  done  so. 
Moreover,  the  average  share  of  total  compensation  compared  to  total  auction  revenues 
increased significantly: up to 13.7% in 2020 against 7.9% in 2019.  

61 The Commission did not receive full data on indirect cost compensation for Romania. As for the UK, no auction revenues 
are included since no allowances were auctioned in 2019 on behalf of the UK in accordance with the safeguard measures 
adopted  to  protect  the  environmental  integrity  of  the  EU  ETS  in  cases  where  EU  law  ceases  to  apply  to  a  Member  State 
withdrawing from the EU. 

21 

 
 
                                                           
As  carbon  prices  rise,  both  auction  revenues  and  indirect  cost  compensation  increase; 
therefore,  the  relative  share  should  remain  similar.  In  2019,  however,  higher  carbon  prices 
did  not  translate  into  higher  auction  revenues,  because  it  was  the  first  year  that  the  MSR 
reduced the volume of auctioned allowances. Some 30% fewer allowances were auctioned in 
2019 than in 2018. When comparing indirect costs incurred in 2019 and 2018 (compensation 
paid out in 2020 and 2019 respectively), it is thus important to take into account the fact that 
future carbon prices are used to determine compensation amounts. Since the average t-1 price 
rose  stronger  than  the  auction  revenues,  the  relative  share  of  compensation  compared  to 
auction revenues increased as well. 

The reduction of auction revenues is the main reason quoted by Member States to explain the 
higher  share  of  auction  revenues  spent  on  indirect  carbon  cost  compensation  in  2020. 
Comparing the auction revenues of the 10 Member States that granted compensation in both 
2019 and 2020 (for the costs incurred in 2018 and 2019 respectively) shows that the revenues 
decreased by around 4.2% due to the MSR reducing auction volumes. Another reason is that 
some Member States have a relatively high share of electro-intensive industries, and hence a 
relatively  high  amount  of  indirect  cost  compensation.  As  these  industries  are  not  direct 
emitters of CO2, they do not play a role in the division of auction revenues between Member 
States,  which  is  based  on  historical  emissions.  Last,  Member  States  with  historically  low 
emissions  due  to  a  relatively  low-carbon  energy  mix  have  a  tendency  to  show  relatively 
elevated shares of auction revenues used for indirect cost compensation.  

It  can  therefore  be  concluded  that  the  higher  compensation  amounts  in  2020  are  linked  to 
increasing carbon prices. The fact that compensation shares increased can be explained by the 
use  of  the  forward  carbon  price  to  determine  compensation  and  by  auction  revenues 
decreasing due to the MSR reducing auction volumes. 

3.1.9. International credits 

In  phase  3,  participants  in  the  EU  ETS  could  use  international  credits  from  the  Kyoto 
Protocol's  Clean  Development  Mechanism  and  Joint  Implementation  towards  fulfilling  part 
of  their  EU  ETS  obligation.  These  credits  are  financial  instruments  that  should  represent  a 
tonne of CO2 removed or reduced from the atmosphere as a result of an emissions reduction 
project.  Participants  could  use  international  credits  until  the  end  of  the  2020  compliance 
cycle62,  subject  to  qualitative  and  quantitative  standards.  Credits  were  not  surrendered 
directly, but exchanged for EU ETS allowances.  

At  the  start  of  phase  3,  market  analysts  estimated  that  the  quantity  of  international  credit 
entitlements  used  over  phases  2  and  3  (2008-2020)  would  amount  to  approximately  1.6 
billion  credits.  As  of  1  May  202163,  the  total  number  of  international  credits  used  or 
exchanged  amounted  to  around  1.57  billion,  almost  98%  of  the  estimated  maximum.  The 

62  Clean  Development  Mechanism  and  Joint  Implementation  projects  generate  Kyoto  carbon  credits:  Certified  Emission 
Reductions and Emission Reduction Units respectively. 
63 The exchange of international credits was possible until the end of April 2021, i.e. the end of the 2020 compliance cycle.  

22 

 
 
                                                           
total  number  of  international  credits  exchanged  throughout  phase  3  only  amounted  to 
approximately 506 million.  

For a full overview of the international credits surrenders and exchange, see Tables 8.1, 8.2 
and 8.3 of Appendix 8 to the staff working document accompanying this report. 

In line with the EU ETS Directive, international credits may no longer be used for EU ETS 
compliance  as  of  the  2021  compliance  cycle.  This  ensures  that  emissions  are  reduced 
domestically, safeguarding the environmental integrity of the system and that over-supply is 
curbed preserving its cost-efficiency. 

3.2. Demand: allowances taken out of circulation 

3.2.1. Emissions reductions  

Since the start of phase 3 in 2013, emissions from stationary installations covered by the EU 
ETS  (power  plants  and  manufacturing  installations)  fell  by  almost  29%  contributing  to  the 
overall decrease of around 43% since the system was set up in 2005. 

In 2020, verified emissions from stationary installations amounted to 1.355 million tonnes of 
CO2eq, a decrease of 11.4% compared to 2019, based on the information recorded in the EU 
Registry.  As  demonstrated  in  Table  5,  the  decrease  in  emissions  was  driven  mostly  by 
electricity  and  heat  production,  where  emissions  fell  by  over  15%  compared  to  2019, 
reflecting  both  reduced  electricity  consumption  due  to  the  COVID-19  pandemic  and  the 
previously observed decarbonisation trends. These include both a switch from coal to natural 
gas-fired  power  generation,  and  a  replacement  of  fossil  fuels  by  renewable  energy  sources. 
Emissions  from  industrial  installations  decreased  by  7%,  which  was  the  largest  single 
decrease  since  the  beginning  of  phase  3,  and  GDP  in  EU27  decreased  by  6%  due  to 
pandemic. 

23 

 
 
 
 
 
Table 5. Verified emissions from stationary installations (in million tonnes CO2eq)64 

Year 

2011 

2012 

2013 

2014 

2015 

2016 

2017 

2018 

2019 

2020 

Verified total emissions 

1 904 

1 867 

1 908 

1 814 

1 803 

1 751 

1 755 

1 683 

1 530 

1355 

Change from year 
x-1 
Verified emissions from 
electricity and heat 
production 
Change from year 
x-1 

Verified emissions from 
industrial installations 

Change from year 
x-1 

Real GDP growth rate EU27 
+ the UK 

-2.0% 

2.2% 

-4.9% 

-0.6% 

-2.9% 

0.2% 

-4.1% 

-9.1% 

-11.4% 

1 261 

1 254 

1 191 

1 100 

1 091 

1 046 

1036 

964 

822 

696 

-0.5% 

-5.0% 

-7.7% 

-0.8% 

-4.1% 

-1.0% 

-7.0% 

-14.7% 

-15.3% 

643 

613 

717 

714 

712 

704 

719 

719 

708 

659 

-4.7% 

17.0% 

-0.4% 

-0.3% 

-1.1% 

2.0% 

0.1% 

-1.6% 

-7.0% 

1.8% 

-0.4% 

0.3% 

1.8% 

2.3% 

2.0% 

2.6% 

2.0% 

1.6% 

-6%65 

Source: EUTL, GDP data as reported on Eurostat (table code: tec00115, accessed in July 2021). Verified aviation emissions are reported separately in Chapter 4. 

64 Figures for EU27 + the UK + Iceland, Liechtenstein and Norway. The categorisation into electricity and heat production and industry in Table 7 is based on the NACE classification from the 
2020 submission by Member States of their National Implementation Measures pursuant to Article 11 of the EU ETS Directive.   
65 This percentage reflects only the GDP growth rate in EU27, as EU27 + the UK data for 2020 is not available. The rest of the growth rates up to 2019 reflect EU27 + the UK. 

24 

 
 
 
 
 
                                                           
Lower  emissions  in  2020,  also  reflecting  the  effect  of  COVID-19  pandemic,  lowered  the 
demand for allowances, which had an impact on the overall surplus of allowances in the EU 
carbon market, leading to a slight increase in comparison to 2019 (See Chapter 3.2.2). 

As shown in  Figure 6, throughout  phase 3,  the  most important  energy  source streams  were 
hard  coal,  lignite  (and  sub-bituminous  coal)  and  natural  gas.  These  three  groups  together 
represent about 75% of fossil fuel emissions in each year, but the share of hard coal is clearly 
decreasing, while the share of natural gas is rising. This was more pronounced in 2019 and 
2020 - emissions from hard coal represented a share of only 16% of total emissions in these 
two years (down compared to 29% in 2013), 2020 emissions from natural gas amounted to 
35% (up compared to 24% in 2013), whereas emissions from lignite  fell slightly from their 
peak  of  27%  in  2014  to  23%  in  2020.  Similar  to  earlier  years,  in  the  last  year  of  phase  3, 
other  significant  energy  sources  included  mainly  refinery  gas  (and  other  process-derived 
gases)  and  other  fossil  fuel  types,  accounting  for  8.4%  and  6.8%  of  the  total  reported 
combustion emissions respectively.  

Figure 6. Share of emissions  by fuel type (% of total fuel emissions in  the EU ETS, labels not 
shown if fuel never exceeds 3% of the total), [*] not covered by the other specified fuels66 

Based on the 2021 Article 21 reports submitted by Member States67, the zero-rated emissions 
from biomass decreased from 150 Mt in 2019 to 142 Mt in 2020, a similar level as in 2018.  
2  163  out  of  9  623  installations  (22.5%  of  all  reporting  installations  under  the  EU  ETS) 
reported the use of biomass. The total biomass emissions in 2020 are about ten times lower 

66 The UK data is included up to 2019. In 2020, only Northern Ireland data is included. The UK did not submit an Article 21 
report in 2021. 
67 The UK did not submit an Article 21 report in 2021. 

25 

 
 
 
                                                           
than  the  fossil  fuels  emissions  of  EU  ETS  sectors.  Emissions  from  non-zero-rated  biomass 
are still minimal, at about 0.9 Mt CO2eq and accounting for less than 0.1% of total EU ETS 
emissions. 

From 1 January 2022, the  new sustainability and GHG emissions savings criteria under the 
Directive 2018/2001 (Renewable Energy Directive)68 will apply in the EU ETS to zero-rated 
biomass emissions. This will strengthen the current criteria on biofuels and bioliquids in the 
EU  ETS,  and  will  add  new  criteria  for  solid  and  gaseous  biomass.  Figure  7  distinguishes 
between category A, B and C installations69 and shows emissions originating from biomass 
reported in phase 3. It excludes the absorption phase and the net value of emissions. 

Figure  7.  Emissions  originating  from  zero-rated  biomass  in  phase  3  of  the  EU  ETS  (2013-20)  
(in million tonnes CO2eq)70 

A breakdown of phase 3 verified non-CO2 emissions from stationary installations by the type 
of GHG (N2O and PFCs) is provided in Table 9.1 of Appendix 9 to the accompanying staff 
working document. 

In 2020, 92 812 allowances were cancelled on a voluntary basis. In phase 3 in total, voluntary 
cancellations  of  498  435  allowances  were  recorded  by  the  end  of  June  2021.  Most  of  the 
cancellations  in  phase  3  were  authorised  by  account  holders  in  the  Registries  of  Germany, 
Sweden, Norway, the Netherlands and the UK. 

68 Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December  2018 on the promotion of the 
use of energy from renewable sources, OJ L 328, 21.12.2018, p. 82 
69 Category C installations emit more than 500 000 tonnes CO2eq per year, category B installations emit between 500,000 
and 50 000 tonnes CO2eq per year, and category A installations emit less than 50 000 tonnes CO2eq per year. Installations 
with low emissions are a subset within category A installations, which emit less than 25,000 tonnes CO2eq per year. 
70 The table contains the UK data up to and including 2019. The line shows the total biomass emissions in the current scope 
of the EU ETS, while the bars include the UK. The totals displayed in the labels cover the current EU ETS scope without the 
UK. 

26 

 
 
 
                                                           
3.2.2. Balancing supply and demand  

At the start of phase 3, the EU ETS had a high structural imbalance between the supply and 
demand  of  allowances,  equalling  2.1  billion  allowances.  To  address  this  imbalance,  as  a 
short-term  measure,  in  2014  the  Commission  postponed  the  auctioning  of  900  million 
allowances from 2014, 2015, and 2016 to 2019-2020, and as a long-term solution created the 
MSR in 201571. The MSR adjusts auction volumes according to predefined thresholds of the 
total  number  of  allowances  in  circulation  (TNAC)  so  as  to  maintain  the  carbon  market  in 
balance. 

From 2018 to 2019, when the MSR began operating, the surplus fell significantly from 1.65 
billion  to  around  1.385  billion  allowances.  In  2020,  due  to  lower  demand,  the  surplus 
increased to 1.579 billion allowances. The additional 2020 surplus is expected to be absorbed 
over  the  next  two  to  four  years.  Figure  8  presents  the  development  of  the  surplus  in  the 
European carbon market until 2020.  

Figure 8. Surplus of allowances in phase 3 of the EU ETS (2013-20) 

s
n
o

i
l
l
i

B

2,085

2,093

1,818

1,685

1,655

1,655

1,579

1,385

2,5

2,0

1,5

1,0

0,5

0,0

2013

2014

2015

2016

2017

2018

2019

2020

Source: DG Climate Action 

When the EU ETS was revised in 201872, major changes were made to the functioning of the 
MSR, as shown in Figure 10.1 of Appendix 10 to the staff working document accompanying 
this report. 

71 Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment 
and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 
2003/87/EC, OJ L 264, 9.10.2015, p. 1. 
72  Directive  (EU)  2018/410  of  the  European  Parliament  and  of  the  Council  of  14  March  2018  amending  Directive 
2003/87/EC to enhance cost-effective emission reductions and low-carbon investments and Decision (EU) 2015/1814, OJ L 
76, 19.3.2018, p. 3 

27 

 
 
 
                                                           
This report  consolidates  supply  and demand figures, published  according to  the timeline of 
reporting obligations stemming from the EU ETS Directive and its implementing provisions. 
Figure 9 shows the composition of cumulative supply and demand in 2020. The relevant data 
were also published in the Commission’s communication on the TNAC for MSR purposes.73 

Figure 9. Cumulative supply and demand in the EU ETS as at the end of 2020 

Supply (cumulative, billions) 

                                               Demand (cumulative, billions) 

s
e
c
n
a
w
o

l
l

a
n
o

i
l
l
i

B

18

16

14

12

10

8

6

4

2

0

Auctioned 
allowances

Free allocation

Withheld auction 
volumes for MSR
Backloaded 
allowances

Unallocated 
allowances *

Banking from 
phase 2

International credits

Early auctions

NER 300 monetisation

Cancellations

MSR 
holdings

Verified 
emissions

Source: DG Climate Action (*The final figure of the allowances not allocated to installations pursuant to Article 
10a(7)  of  Directive  2003/87/EC  and  allowances  not  allocated  to  installations  because  of  the  application  of 
Article 10a(19) and (20) of that Directive was not yet available at the time of finalising this report.) 

In  preparation  for  the  MSR  to  become  operational  in  2019,  the  Commission  regularly 
published  the  TNAC  for  the  preceding  year,  starting  mid-May  201774.  In  May  2021,  the 
TNAC was published for the fifth time, corresponding to 1 578 772 426 allowances75. Once 
again,  the  communication  leads  to  the  placement  of  allowances  in  the  MSR,  reducing  the 
auction volume in 2021 and 2022. 

Based  on  the  functioning  of  the  EU  ETS  in  2020  and  2021,  the  TNAC  and  the  revised 
legislation, the auction  volumes  in  2021 were  reduced by  nearly  40%,  close to  320 million 
allowances. The auction volumes in 2022 will be reduced in a similar manner. Table 10.1 of 
Appendix  10  to  the  accompanying  staff  working  document  provides  information  on  the 
contributions to the MSR by Member State since it became operational in 2019 until the end 
of 2021. 

73 C(2021)3266 final 
74 C(2017)3228 final 
75 C(2021)3266 final 

28 

 
 
 
                                                           
 
In  2021,  the  Commission  carried  out  the  first  review  of  the  MSR76,  as  part  of  the  broader 
initiative to strengthen the EU ETS.77 It showed that the MSR has been fulfilling its purpose 
to  reduce  the  surplus  of  allowances  and  stabilise  the  EU  carbon  market,  even  during  the 
COVID-19 pandemic. 

The MSR has begun to address historical imbalances in 2019, leading to intakes of nearly 1 
billion  allowances.  This  includes  an  adjustment  of  264  million  allowances  withdrawn  from 
auction  volumes  in  2019,  397  million  allowances  withdrawn  from  auction  volumes  over 
2019-2020,  and  over  300  million  allowances  to  be  withdrawn  from  auction  volumes  over 
2020-2021, representing 24% of the previous year’s surplus in each case. Reduced emissions 
in 2020 due to the COVID-19 crisis will result in a higher MSR intake over the period 2021-
2022, of 379 million allowances.  

Intakes to the MSR are expected to continue reducing the auction supply in the coming years, 
with  the  surplus  remaining  above  the  upper  threshold  and  the  aftermath  of  the  COVID-19 
pandemic  affecting  the  demand.  The  MSR  will  thus  continue  to  address  the  historical 
imbalance  built  up  in  the  EU  carbon  market  over  phases  2  and  3  while  simultaneously 
responding to the impact of the demand shock caused by the pandemic.  

4. AVIATION 

The aviation sector has been part of the EU ETS since 2012. The original legislation covered 
all  flights  outgoing  and  incoming  to  the  EEA.  However,  the  EU  temporarily  limited  ETS 
obligations  to  flights  within  the  EEA  operated  by  all  nationalities  of  airlines,  in  order  to 
support  the  development  of  a  global  market-based  measure  by  the  International  Civil 
Aviation Organisation (ICAO) to reduce aviation emissions.   

In October 2016, the  ICAO Assembly agreed on a resolution on CORSIA, to start in 2021. 
CORSIA is  a carbon offsetting scheme with  the  objective of stabilising net  emissions from 
international  aviation  at  fixed  levels  through  the  purchase  and  cancellation  of  international 
credits. In light of this agreement, the EU ETS Directive was amended in 2017 to extend the 
intra-EEA scope of the EU ETS for aviation until the end of 2023.  

As a result of the Agreement between the EU and Switzerland to link their respective carbon 
markets (See Chapter 7), from 1 January 2020 the aviation scope of the EU ETS is extended 
to all departing flights from the EEA to Switzerland. Switzerland in turn applies its ETS to all 
flights  departing  to  EEA  airports.  This  ensures  a  level  playing  field  on  both  directions  of 
routes.  

76 The Impact Assessment can be found in Annex 7 of SWD(2021)601 final. 
77 Proposal  for  a  Directive  of  the European Parliament  and of  the Council  amending  Directive  2003/87/EC  establishing  a 
system  for  greenhouse  gas  emission  allowance  trading  within  the  Union,  Decision  (EU)  2015/1814  concerning  the 
establishment  and  operation  of  a  market  stability  reserve  for  the  Union  greenhouse  gas  emission  trading  scheme  and 
Regulation (EU) 2015/757, COM/2021/551 final and Proposal for a Decision of the European Parliament and of the Council 
amending Decision (EU) 2015/1814 as regards the amount of allowances to be placed in the market stability reserve for the 
Union greenhouse gas emission trading scheme until 2030, COM/2021/571 final 

29 

 
 
                                                           
Based  on  the  Trade  and  Cooperation  Agreement  between  the  EU  and  the  UK,  reached  in 
December 2020 and applicable as of 1 January 2021, the EU ETS also continues to apply to 
flights from the EEA to the UK, while the new UK ETS applies to flights departing from the 
UK to the EEA. 

In 2020, allowances were issued in line with the intra-EEA scope of the EU ETS for aviation, 
extended  to  Switzerland.  The  free  allocation  amounted  to  slightly  over  32.5  million 
allowances.  This  includes  the  free  allocation  (slightly  over  31.7  million  allowances)  and 
nearly 0.8 million free allowances allocated from the special reserve for new entrants and fast 
growing operators.  In addition,  aircraft operators  administered by national administrators in 
the EEA received about 0.5 million Swiss aviation allowances for free under the Swiss ETS.  

The volume of aviation allowances auctioned in 2020 was approximately 9.2 million.  

In phase 3 of the EU ETS (2013-20), aviation  emissions  had  risen  year-on-year until  2020, 
when  this  trend  was  reversed  by  the  COVID-19  pandemic.  Between  2013  and  2019, 
emissions from flights covered by the EU ETS rose by 27.5%. In 2020, verified emissions of 
aircraft operators administered by the EEA states fell sharply by 63% compared to 2019 due 
to the pandemic and the related travel restrictions, reaching 24.9 million tonnes of CO2 under 
the EU ETS and 0.3 million tonnes under the Swiss ETS (25.2 million tonnes of CO2 in Table 
6  below).  This  meant  that  2019  was  the  year  with  the  highest  aviation  emissions  to  date. 
Table 6 shows a summary of verified emissions, free allocation and auction volumes for the 
aviation sector since the start of phase 3.  

Table 6. Aviation sector: verified emissions, free allocation and auction volumes, 2013-2021  
(in millions) 

Year 

2012 

2013 

2014 

2015 

2016  2017  2018 

2019 

2020 

2021 

Verified emissions (in 
million tonnes CO2 
eq) 

Change of verified 
emissions to year x-1 

Free 
allocation  (EU27 + 
the UK + Iceland, 
Liechtenstein and 
Norway  
+ Switzerland for 
2020 and 2021)80 

84 

53.5 

54.8 

57.1 

61.5 

64.4 

67.5 

68.2 

25.278 

-79 

2.5% 

4.1% 

7.7%  4.8%  4.8% 

1% 

-63% 

173.8 

32.4 

32.4 

32.1 

32.0 

33.1 

31.3 

31.381  32.582  17.383 

78 Including 0.3 million tonnes under the Swiss ETS. 
79 Due to the different scope of the EU ETS, the change cannot be compared to the previous year. 
80 These numbers do not take into account all closures of aircraft operators and free allowances from the special reserve  for 
new entrants and fast growing operators, neither the returns in 2012 due to the scope change. 

30 

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

Volumes of 
allowances auctioned 

0 

0 

0 

0 

0 

1.1 

1.1 

1.0 

0.8 

0.3 

2.5 

0 

9.3 

16.4 

6.0 

4.7 

5.6 

5.5 

9.2 

1.384 

Sources: EUTL, DG Climate Action 

The volumes of aviation allowances auctioned over the period 2013-2015 reflect the 2014 co-
legislators’ decision to ‘stop the clock’85 and limit climate obligations only to flights within 
the  EEA.  Compliance  for  the  aviation  sector  was  postponed  for  201386.  For  aviation 
emissions from 2013 and 2014, compliance took place between January and April 2015. 

Including  the  aviation  sector  in  the  EU  ETS  had  a  significant  impact  on  the  environmental 
performance of the system as a whole in phase 3. By 2020, aircraft operators had surrendered 
308 million aviation allowances and 139 million general allowances. The latter figure shows 
that the aviation sector had to buy high volumes of allowances from stationary installations, 
thus contributing to the overall stringency and ambition of the EU ETS.  

The  significant  impact  of  COVID-19  on  international  aviation  also  had  repercussions  on 
CORSIA. Global aviation emissions in 2020 fell to below 54% of 2019 levels.87 In light of 
this  impact,  the  aviation  industry,  supported  by  numerous  ICAO  participating  countries, 
successfully  requested  adjusting  CORSIA’s  baseline  from  the  original  2019-20  average  of 
emissions to 2019 emissions for the pilot phase (years 2021-23). Since the aviation industry 
is not expected to recover before 202388 (return to 2019 traffic levels), there would likely be 
no or few offsetting obligations for airlines during the CORSIA pilot phase.  

The EU ETS Directive requires the Commission to report to the European Parliament and to 
the Council on the general ambition and overall environmental integrity of CORSIA. Article 
3d of the Directive requires the Commission also to ‘study the ability of the aviation sector to 
pass  on  the  cost  of  CO2  to  its  customers  with  the  intention  to  propose  to  increase  the 
percentage of auctioning’. 

81 Taking into account the numbers withheld due to closures of aircraft operators, the real allocation for 2019 would be 4 
million below the presented figure (see footnote 8 in Notice C/2020/8643, OJ C 428, 11.12.2020, p. 1). Allocation for the 
UK  (4.31  million  allowances  of  the  total  for  2019)  suspended  in  2019  due  to  the  safeguard  measures  adopted  by  the 
Commission to protect the environmental integrity of the EU ETS in cases where EU law ceases to apply to a Member State 
withdrawing from the EU, resumed in 2020. 
82  This  number  takes  into  account  departing  flights  from  EEA  to  Switzerland,  and  between  the  EEA  and  the  UK,  in 
accordance with the Withdrawal Agreement. 
83 This number does not take into account the departing flights from EEA to the UK yet, which are part of the EU ETS in 
accordance with the Trade and Cooperation Agreement between the EU and the UK.  
84 Until the end of June 2021. 
85 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,  OJ  L 
113, 25.4.2013, p. 1 
86 Regulation (EU) No 421/2014 of the European Parliament and of the Council of 16 April 2014, OJ L 129, 30.4.2014, p. 1 
87 ICAO, C-WP/15209 of May 2021 
88 Eurocontrol, COVID-19 impact on the European air traffic network of September 2021 

31 

 
 
                                                                                                                                                                                     
As part of the broader package to deliver on the European Green Deal published on 14 July 
2021, and based on the EU ETS Directive as amended in 201789, the Commission  proposed 
to amend the EU ETS for aviation90. This proposal, in its accompanying impact assessment91, 
includes  a  report  on  the  CORSIA  assessment  and  the  cost-pass  through  study.  It  seeks  to 
implement  CORSIA  into  EU  law  in  a  way  that  is  consistent  with  the  EU’s  2030  climate 
objective.  

5. MARKET OVERSIGHT 

During phase 3 of the EU ETS (2013-20), a robust legal framework has been put in place to 
oversee  the  EU  carbon  market.  Derivatives  in  emission  allowances  were  classified  as 
financial  instruments  from  the  start  of  the  EU  ETS.  However,  since  January  2018,  spot92 
emission  allowances  are  also  classified  as  financial  instruments  under  the  Directive  on 
Markets  in  Financial  Instruments93  (MiFID).  The  classification  of  emission  allowances  has 
been  reflected  in  a  number  of  secondary  legislation  acts,  including  the  Auctioning 
Regulation94,  to  oversee  the  primary  market  (auctions).  Therefore,  all  trading  in  emission 
allowances is effectively subject to the same regime applicable to EU financial markets.  

The main financial market rules that apply to the trading of emission allowances are:  

  Markets in Financial Instruments Directive and Regulation (MIFID II/MIFIR), 
which  sets  out  authorisation  requirements  for 
trading  venues  and  financial 
intermediaries (investment firms), important reporting and transparency requirements 
to  avoid  market  abuse  and  rules  on  supervision  and  cooperation  between  national 
competent authorities.  

  Market  Abuse  Regulation95,  which  is  the  EU’s  rulebook  that  prohibits  different 
kinds  of  market  abuse,  such  as  insider  dealing  or  market  manipulation  through 
practices like spreading false information or rumours. The Market Abuse Regulation 
applies to all market participants, irrespective of whether the abuse takes place in the 
EU or outside the EU. 

89  Regulation  (EU)  2017/2392  of  the  European  Parliament  and  of  the  Council  of  13  December  2017  amending  Directive 
2003/87/EC to continue current limitations of scope for aviation activities and to prepare to implement a global market-based 
measure from 2021, OJ L 350, 29.12.2017, p. 7  
90  Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council  amending  Directive  2003/87/EC  as  regards 
aviation's  contribution  to  the  Union’s  economy-wide  emission  reduction  target  and  appropriately  implementing  a  global 
market-based measure, COM/2021/552 final 
91 The Impact Assessment can be found in SWD(2021)603 final. 
92 Contracts under which the delivery of allowances takes place (almost) immediately. 
93 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, OJ L 173, 12.6.2014, p. 349 
94  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 
95  Regulation  (EU)  No  596/2014  of  the  European  Parliament  and  of  the  Council  of  16  April  2014  on  market  abuse  (the 
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, OJ L 173, 12.6.2014, p. 1 

32 

 
 
                                                           
  Anti-Money Laundering Directive96, which lays down important safeguards against 

money laundering and terrorist financing.  

The  market  is  supervised  by  the  financial  authorities  of  27  Member  States97,  under  the 
coordination  of  the  European  regulator,  the  European  Securities  and  Markets  Authority 
(ESMA). In line with financial market rules, trading venues and investment firms are subject 
to robust reporting and transparency requirements. This enables the competent authorities in 
Member States to monitor the trading behavior of market participants. In addition, the Market 
Abuse  Regulation  obliges  market  participants  to  report  suspicious  orders  and  transactions 
without delay. The national authorities have the power to impose remedial action or penalties 
when they decide that certain behaviours give rise to market abuse. 

Financial market rules are an important safeguard of the integrity and transparency of the EU 
carbon market. So far, the established framework has worked well and it is essential to ensure 
that the rules are implemented properly. 

Every year, ESMA publishes an estimate of the size of different European markets, including 
the carbon market. In the most recent estimate for 2020, ESMA calculated the overall trading 
activity  in  emission  allowances  at  around  EUR  687  billion98.  Of  this  total,  derivatives  of 
emission allowances represent by far the largest share of the market. Most transactions take 
place on trading venues (approx. 95%), with only a small share conducted over-the-counter 
(OTC).  

Derivatives play a crucial role as they provide ETS operators with flexible ways to manage 
their carbon price risk. These contracts are offered by exchanges and financial intermediaries, 
which  are  free  to  ‘package’  emission  allowances  in  different  financial  products,  subject  to 
market preferences and the established legal framework.  

As in all markets, the EU carbon market also felt the effects of the COVID-19 pandemic in 
2020. In the wake of the crisis, the price of emission allowances dipped to EUR 14.71 from 
the  average  level  of  EUR  24.84  in  201999.  Nevertheless,  carbon  prices  rebounded  swiftly. 
Market  analysts  have  pointed  out  that  the  Market  Stability  Reserve  (MSR)  significantly 
improved the resilience of the market to major demand shocks, such as the shock caused by 
the global pandemic. 

There are many factors that can influence the price of emission allowances100. In particular, 
leading market analysts point out the MSR, which is absorbing the market surplus, and long-

96 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, OJ L 141, 5.6.2015, p. 73 
97  The  list  of  national  competent  authorities  responsible  under  the  Market  Abuse  Regulation  can  be  found  on  ESMA’s 
webpage.  
98 ESMA’s opinion on ancillary activity – market size calculation – update for the year 2020. 
99 Price on 23 March 2020 (EUR 14.71). 
100 Some short-term factors are gas and oil prices, weather conditions, renewable energy generation, scheduling of auctions 
and free allocation, etc. 

33 

 
 
                                                           
term  policy  expectations  of  market  players.  The  carbon  market  is  forward-looking  and 
anticipates future legislative changes. The increased 2030 climate ambition, enshrined in the 
European  Climate  Law,  requires    a  lower  EU  ETS  emissions  cap,  which  would  reduce  the 
supply of allowances. According to analysts, market participants are already factoring in this 
expected change. 

ETS  compliance  entities  remain  the  dominant  category  on  both  the  primary  and  secondary 
market.  The  number  of  bidders  eligible  for  the  auctions  at  the  common  auction  platform 
increased  slightly  to  reach  90  participants  as  of  December  2020.  The  vast  majority  of 
participants  were  operators  (72%),  while  the  remainder  were  investment  firms  and  credit 
institutions (18%), as well as persons exempt from MiFID requirements (10%)101.  

On the secondary market, MiFID rules require trading venues and investment firms to report 
to  competent  authorities  the  positions  held  in  emission  allowances.  The  aggregate 
breakdowns  of  positions  in  emission  allowances  held  by  different  market  participants, 
including  investment  firms,  are  also  publicly  available  and  published  on  a  weekly  basis  on 
the webpages of ESMA102. These reports provide a good indication of the distribution of the 
volumes  between  market  participants  and  show  that  investment  funds,  which  can  be 
associated with speculative behaviour, currently hold a small share of  the total positions on 
the market. 

The  start  of  the  phase  4  was  marked  by  a  significant  change  on  the  secondary  market. 
Historically,  the  major  share  of  secondary  market  trading  took  place  on  the  UK-based 
exchange platform ICE Futures Europe. On 7 June 2021, ICE London moved the trading in 
EU emission allowances (both spot and derivatives) to its subsidiary in the Netherlands, ICE 
Endex.  Trading  on  ICE  Endex  is  subject  to  the  supervision  of  the  Dutch  Authority  for  the 
Financial Markets. 

The  increase  in  energy  prices  in  2021  has  renewed  the  interest  in  carbon  prices  and  the 
oversight regime of the EU carbon market. There is common agreement that the main cause 
of the increase are the record global prices of gas, while the increased price of carbon has a 
much smaller effect. The Commission’s communication of 13 October 2021103 demonstrates 
that the effect of the gas price increase on the electricity price is nine times bigger than the 
effect of the carbon price increase. Fair price formation and integrity of the EU carbon market 
is  guaranteed  by  a  robust  oversight  regime  also  applicable  to  other  financial  markets. 
Nevetheless,  the  Commission  announced  that  it  will  ask  ESMA  to  further  enhance  the 
monitoring of developments in the EU carbon market. 

101 This concerns a separate category defined in MiFID, for companies that deal in financial instruments, but on an ancillary 
basis (as minor part of their overall business activity). 
102 Commodities Derivatives Weekly Position Reporting System 
103 Communication from the Commission to the European Parliament, the European Council, the European Economic and 
Social  Committee  and  the  Committee  of  the  Regions,  Tackling  rising  energy  prices,  a  toolbox  for  action  and  support, 
COM/2021/660 final 

34 

 
 
                                                           
 
6. MONITORING, REPORTING AND VERIFICATION OF EMISSIONS 

For phase 3 (2013-20) and beyond, the monitoring, reporting, verification and accreditation 
requirements  of  the  EU  ETS  are  harmonised  in  the  Monitoring  and  Reporting  Regulation 
(MRR)104 and the Accreditation and Verification Regulation (AVR)105. 

The monitoring system in the EU ETS is designed as a building block approach, which gives 
operators  a  high  degree  of  flexibility  to  ensure  cost-efficiency,  while  achieving  a  high 
reliability  of  the  emissions  data  monitored.  For  this  purpose,  operators  may  use  several 
monitoring  methods  ('calculation-based'  or  'measurement-based'  as  well  as,  by  exception, 
'fall-back  approaches'),  including  a  combination  of  methods  for  individual  parts  of  an 
installation. For aircraft operators, only calculation-based approaches  are allowed, with  fuel 
consumption being the central  parameter to  be  calculated for the flights  covered by the EU 
ETS.  The  requirement  for  installations  and  aircraft  operators  to  have  a  monitoring  plan 
approved by the relevant  competent  authority on  the basis of the  MRR prevents them from 
making an arbitrary selection of monitoring methods and temporal variations (For a detailed 
overview of the monitoring applied in the EU ETS participating countries, see Chapter 11.1 
of Appendix 11 of the accompanying staff working document). 

The  AVR  put  in  place  an  EU-wide  harmonised  approach  to  the  accreditation  of  verifiers. 
Verifiers  must  be  accredited  by  a  National  Accreditation  Body  in  order  to  carry  out 
verifications in compliance with the AVR. This uniform accreditation system allows verifiers 
to  operate  with  mutual  recognition  across  all  participating  countries,  thereby  taking  full 
advantage  of  the  internal  market  and  ensuring  sufficient  availability  across  the  EU  (For  a 
detailed  overview  of  AVR  implementation  in  the  EU  ETS  participating  countries,  see 
Chapter 11.2 of Appendix 11 to the accompanying staff working document).  

Following the first update of the MRR and the AVR in 2018 to improve, clarify and simplify 
the monitoring, reporting, verification and accreditation  rules and improve the efficiency of 
the system, a second update of the two regulations started in February 2019. The aim was to 
address outstanding issues such as the implementation of the recast of the Renewable Energy 
Directive.  This  resulted  in  the  adoption  of  the  Commission  Implementing  Regulation 
2020/2085 amending the MRR106 and the Commission  Implementing  Regulation 2020/2084 
amending the AVR107 on 14 December 2020. 

104  Commission  Implementing  Regulation  (EU)  2018/2066  of  19  December  2018  on  the  monitoring  and  reporting  of 
greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council and amending 
Commission Regulation (EU) No 601/2012, OJ L 334, 31.12.2018, p. 1 
105  Commission  Implementing  Regulation  (EU)  2018/2067  of  19  December  2018  on  the  verification  of  data  and  on  the 
accreditation  of  verifiers  pursuant  to  Directive  2003/87/EC  of  the  European  Parliament  and  of  the  Council,  OJ  L  334, 
31.12.2018, p. 94 
106  Commission  Implementing  Regulation  (EU)  2020/2085  of  14  December  2020  amending  and  correcting  Implementing 
Regulation (EU) 2018/2066 on the monitoring and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC 
of the European Parliament and the Council, OJ L 423,15.12.2020, p. 37 
107  Commission  Implementing  Regulation  (EU)  2020/2084  of  14  December  2020  amending  and  correcting  Implementing 
Regulation (EU) 2018/2067 on the verification of data and on the accreditation of verifiers pursuant to Directive 2003/87/EC 
of the European Parliament and the Council, OJ L 423, 15.12.2020, p. 23  

35 

 
 
                                                           
Countries participating in the EU ETS take different approaches to the competent authorities 
in charge of implementation. In some countries, several local authorities are involved, while 
in  others,  implementation  is  more  centralised  (For  a  detailed  overview  of  administrative 
arrangements in the EU ETS participating countries, see Chapter 11.3 of Appendix 11 to the 
accompanying  staff  working  document).  Overall,  the  organisation  of  the  EU  ETS 
administration in the participating countries has proven largely effective throughout phase 3.  

Regarding  compliance  measures,  the  EU  ETS  Directive  provides  for  a  EUR  100  penalty 
(indexed  to  inflation)  for  each  tonne  of  CO2  emitted  for  which  no  allowance  has  been 
surrendered in due time, in addition to the price of  surrendering. Other penalties applicable 
to infringements in implementing the EU ETS are based on national provisions set by each 
concerned  country  (For  a  detailed  overview  of  the  EU  ETS  compliance  in  participating 
countries, see Chapter 11.4 of Appendix 11 to the accompanying staff working document). 

The efficiency of the compliance system has improved since the MRR allowed countries to 
make  electronic  reporting  mandatory.  Throughout  phase  3,  more  than  half  of  the  EU  ETS 
participating  countries  reported  the  use  of  electronic  templates  for  monitoring  plans, 
emissions  reports,  verification  reports  and/or  improvement  reports.  The  other  half  reported 
that they use some form of automated IT system for EU ETS reporting. 

Throughout phase 3, and despite the difficult economic situation due to the COVID-19 crisis 
affecting  the  2020  and  2021  compliance  cycles,  the  level  of  compliance  with  the  EU  ETS 
remained  consistently  very  high.  Operators  responsible  for  over  99%  of  emissions  from 
stationary installations and aviation in most years, met their legal obligations.  

7. LINK OF THE EU ETS AND THE SWISS ETS 

The  negotiations  on  linking  the  EU  ETS  with  the  carbon  market  of  Switzerland  were 
concluded  during  the  21st  Conference  of  the  Parties  to  the  UNFCCC  in  December  2015. 
Based  on  Council  Decision  (EU)  2017/2240108,  the  Linking  Agreement109  was  signed, 
provisionally applied from 23 November 2017 and approved on behalf of the EU by Council 
Decision (EU) 2018/219110. The EU and the Swiss Confederation exchanged the instruments 
of  ratification  on  6  December  2019,  after  the  Swiss  Confederation  extended  its  ETS  to 
aviation via Decision 2/2019 on 5 December 2019111. Consequently, the Linking Agreement 

108  Council  Decision  (EU)  2017/2240  of  10  November  2017  on  the  signing  on  behalf  of  the  Union,  and  provisional 
application of the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse 
gas emissions trading systems, OJ L 322, 7.12.2017, p. 1 
109 Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas emissions 
trading systems, OJ L 322, 7.12.2017, p. 3 
110 Council Decision (EU) 2018/219 of 23 January 2018 on the conclusion of the Agreement between the European Union 
and the Swiss Confederation on the linking of their greenhouse gas emissions trading systems, OJ L 43, 16.2.2018, p. 1 
111 Decision No 2/2019 of the Joint Committee established by the Agreement between the European Union and the Swiss 
Confederation on the linking of their greenhouse gas emissions trading systems of 5 December 2019 amending Annexes I 
and II to the Agreement between the European Union and the Swiss Confederation on the linking of their greenhouse gas 
emissions trading systems, OJ L 314, 29.9.2020, p. 68 

36 

 
 
 
                                                           
entered into force on 1 January 2020112. Since then, emissions in 2020 in the EU ETS and the 
Swiss ETS are covered by the linked systems.  

The  Linking Agreement  does not  affect  the independent  character of the  EU and the Swiss 
ETS.  Both  systems  remain  independent,  unlike  the  systems  of  Iceland,  Liechtenstein  and 
Norway, which are fully integrated into the EU ETS by means of the mechanisms laid down 
in  the  EEA  Agreement.  The  Linking  Agreement  defines  the  conditions  and  requirements 
under which the two systems are linked and establishes the mechanism needed to ensure that 
the linking conditions of Article 25 of the EU ETS Directive113 are met. 

Including aviation in the Linking Agreement was a crucial requirement for the EU. Based on 
Article  6  of  the  Agreement,  Switzerland  applies  the  same  approach  to  coverage,  cap  and 
allocation of allowances as the EU ETS. Swiss domestic flights and flights from Switzerland 
to  the  EEA  are  covered  by  the  Swiss  ETS,  while  flights  from  the  EEA  to  Switzerland  fall 
under the EU ETS.  This  enables the  Linking Agreement  to  contribute  to  the environmental 
integrity of both the EU ETS and the ETS of Switzerland.  

As shown in Table 7, compatibility of the two systems is not a matter of size, but a matter of 
qualitative  requirements  and  considerations  to  safeguard  the  integrity  of  the  linked  carbon 
markets and the level playing field for operators.  

Table 7. Comparison of the EU ETS and the Swiss ETS 

EU ETS 

Swiss ETS 

Number of general allowances 
auctioned in 2020 

778 505 000 

Number of aviation allowances 
auctioned in 2020 
Number of general allowances 
allocated for free in 2020 

Number of aviation allowances 
allocated for free in 2020 to 
operators   

Verified emissions of 
stationary installations in 2020  

9 174 000 

66 775 8544 

EU aviation 
allowances for 
EU ETS 
32 486 017 

1 355 141 953 

265 000 (out of which 175 000 
auctioned in 2021 due to cancellation 
of auctions in 2020) 

196 500 

4 391 331 

Swiss aviation 
allowances for 
Swiss ETS 
501 278 

Swiss aviation 
allowances for 
Swiss ETS 
570 696 

EU aviation 
allowances for 
EU ETS 
473 521 

Verified emissions of aviation 
operators in 2020114 

EU ETS 
24 917 481 

Swiss ETS 
299 610 

Number of stationary 
installations in 2020  

10 437115 

4 874 278 

Swiss ETS 
283 329 

51 

EU ETS 
366 102 

112 Notice concerning the entry into force of the Agreement between the European Union and the Swiss Confederation on the 
linking of their greenhouse gas emissions trading systems, OJ L 330,20.12.2019, p. 1 
113 In accordance with Article 25 of the EU ETS Directive, the EU ETS can be linked to ‘compatible mandatory greenhouse 
gas emissions trading systems with absolute emissions caps’. 
114 Some aviation operators face compliance obligations under both systems.  
115 Operators not excluded in 2020 based on the EU Registry; the number of operators which reported emissions is 10 317. 

37 

 
 
 
                                                           
Number of aviation operators 
in 2020 
Source: EUTL and the Swiss Registry117  

352116 

3 

As  from  the  entry  into  force  of  the  Linking  Agreement,  emissions  generated  under  either 
system  can  be  covered  by  surrendering  allowances  issued  in  either  system.  Therefore, 
operators of both systems can access a larger market, which may unlock efficiency gains. To 
make  this  happen,  a  direct  link,  as  required  by  Article  3(2)  of  the  Agreement,  was  made 
between the registries of both systems to transfer allowances from an account in one system 
to an account in the other system.  

Following the entry into force of the Linking Agreement in 2020, operators (both stationary 
and  aviation)  used  642  413  allowances  issued  under  the  Swiss  ETS118,  exercising  the 
increased flexibility offered by the link between the EU and the Swiss ETS.  

Tables 8 and 9 below show the effect of linking or the extent to which operators administered 
by either the EU ETS (Table 8) or the Swiss ETS (Table 9) benefitted from the link by using 
allowances issued in the other system to meet their surrendering obligations.  

In the EU ETS, stationary installations used Swiss ETS allowances for compliance only to a 
very  small  extent,  0.0044%  of  obligations  met  using  less  than  60  000  Swiss  general 
allowances. Aircraft operators covered by the EU ETS met 2.34% of obligations using Swiss 
aviation allowances but no general allowances.  

Table 8. Units used for compliance in the EU ETS 

In  the  Swiss  ETS,  stationary  installations  met  0.19%  of  their  obligations  using  EU  ETS 
allowances.  In  contrast,  EU  ETS  general  and  aviation  allowances  accounted  for  more  than 
40% of compliance of the aircraft operators covered by the Swiss ETS. This was due to the 
allocation of allowances from the EU received by some operators in the Swiss ETS to cover 
their emissions under the EU ETS. 

116 Operators not excluded in 2020 based on the EU Registry; the number of operators which reported emissions is 320. 
117 Swiss ETS Registry 
118 The figure includes direct allocation. 

38 

EU ETS Stationary installationsFree allocation and auctioningVerified emissionsSurrendered units    TotalEUACHU 20201.446.263.5441.355.141.9531.348.077.9201.348.018.39659.524% of total100%99,9956%0,0044%Aviaton operatorsFree allocation (incl Swiss ETS) and auctioningVerified emissions incl under CH ETSSurrendered units TotalEUAAEUACHUA 2020CHU 202042.177.10825.217.09124.880.71512.292.50512.005.321582.8890% of total100%49,41%48,25%2,34%0,00% 
 
 
                                                           
Table 9. Units used for compliance in the Swiss ETS 

Table 10. Transfers of allowances between the EU and the Swiss ETS, September 2020 – April 
2021 

Transfers  
(general and aviation allowances from both systems) 

From 

EU 

CH 

Balance 

To 

CH 

EU 

Total number 

977.065 

450.578 

526.487 

8. EFFECTS OF IMPLEMENTING THE ENERGY EFFICIENCY DIRECTIVE AND 
THE NATIONAL ENERGY AND CLIMATE PLANS ON THE EU ETS 

The  carbon  market  report  should  take  into  consideration  the  effects  of  implementing  the 
Energy Efficiency Directive and the overall impact of the policies and measures included in 
the integrated national energy and climate plans (NECPs), on the operation of the EU ETS, 
including the supply-demand balance of allowances on the EU carbon market119. This chapter 
covers these two topics. 

8.1 Impact of the Energy Efficiency Directive implementation on the EU ETS 

There are several interactions between the EU ETS and the Energy Efficiency Directive, in 
particular  where  policy  measures  have  an  impact  on  the  energy  efficiency  of  operators 
subject  to  the  system.  Article  8  of  the  Energy  Efficiency  Directive  promotes  cost-effective 
energy efficiency measures by requiring large operators to conduct an energy audit every four 
years or to use a certified energy or an environmental management system. This helps large 

119  Based  on  Article  24 of  the  Directive  (EU)  2018/2002 of  the  European Parliament  and of  the  Council  of  11  December 
2018 amending Directive 2012/27/EU on energy efficiency (OJ L 328, 21.12.2018, p. 210), and on Articles 29 and 35 of the 
Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the 
Energy Union and Climate Action (OJ L 328, 21.12.2018, p. 1). 

39 

ETS of Switzerland Stationary installationsFree allocation and auctioning (CHU)Verified emissionsSurrendered units    TotalEUACHU 2020CER4.656.3314.874.2784.877.6179.3904.761.361106.866% of total100%0,19%97,62%2,19%Aviation operators (administered by Switzerland)Free allocation (incl EU ETS) and auctioningVerified emissions incl under EU ETSSurrendered units TotalEUAAEUACHUACHUCER1.240.717649.431649.971263.375540373.640012.416% of total100%40,52%0,08%57,49%0,00%1,91% 
 
 
                                                           
operators identify energy losses, the energy savings’ potential and cost-effective measures to 
reduce their energy consumption.  

A  central  provision  of  the  Energy  Efficiency  Directive  aimed  directly  at  producing  energy 
savings is Article 7, which requires Member States to take policy measures to achieve energy 
savings120.  Since  Member  States  have  a  choice  as  to  which  sectors  to  focus  on,  these 
measures might  interact  with  obligations  under the EU ETS. As concerns  potential impacts 
on EU ETS sectors, Member State measures can be classified into four categories: 

  Energy efficiency policy measures implemented in sectors outside of the scope of the 
EU  ETS  that  have  no  direct  interactions  with  the  system,  such  as  replacing  an  old 
coal stove with a more efficient biomass-fired boiler.  

  Energy efficiency measures targeting a reduced consumption of energy supplied from 
ETS  sectors,  such  as  electricity,  district  heating  and  refineries  providing  fuel  for 
transport and heating. These include insulating buildings supplied by district heating, 
replacing  electric  appliances  and  transport  fuel  efficiency  measures.  While  the 
relevant  decisions  lie  outside  of  installations  covered  by  the  EU  ETS,  the  carbon 
price signal may incentivise action by market actors, predominantly consumers.    
  Policy  measures  promoting  actions  leading  to  a  change  of  energy  carrier,  such  as 
replacing  an  electric  heater  with  a  solar  heater  (leading  to  reduced  energy 
consumption in an ETS sector) or replacing of a gas boiler with a heat pump (leading 
to increased energy consumption in an ETS sector). 

  Policy  measures  promoting  energy  efficiency  of  the  core  processes  of  installations 

subject to the EU ETS.  

The latter measures interact directly with the  EU ETS.  In the 2014-20 period, Belgium, the 
Netherlands and Romania121 reported Article 7 policy measures focused on ETS installations 
-  voluntary  agreements  (in  the  case  of  Belgium  and  the  Netherlands)  or  equivalent  (for 
Romania)122.  These  measures  accounted  for  a  high  share  of  the  cumulative  energy  savings 
reported by  these countries for 2014-2018:  61%  for  Belgium,  20%  for the Netherlands  and 
44% for Romania123. While the voluntary agreements stipulate that operators should commit 
to  energy  efficiency  or  energy  savings  targets,  these  targets  are  not  limited  to  the  energy 
consumption subject to the EU ETS. In practice, most energy savings are likely to come from 
energy efficiency improvements in the industrial processes falling under the EU ETS, but part 
of  the  savings  may  come  from  the  energy  consumption  outside  of  the  system  (e.g.  fuel 

120 Commission Recommendation on the transposition of the energy savings obligation, C(2019) 6621 final 
121 Member States had an obligation to report annually until 30 April 2020. The final report covering the whole obligation 
period is due by March 2022. These are the three Member States that have designed a measure to specifically address the 
industries in the EU ETS. There are significantly more measures targeting industries in general (those could cover industries 
in the scope of EU ETS and outside). The ODYSSEE-MURE database on energy efficiency measures in EU lists more than 
200 measures addressed to industries in Member States. 
122 Voluntary agreements and equivalent measures are both alternative measures in the meaning of Article 7(b) of the Energy 
Efficiency  Directive.  The  original  iteration  of  the  Directive,  adopted  in  2012,  had  included  a  non-exhaustive  list  of 
alternative measures but after its revision in 2018 the list was removed.)  
123  These  numbers  originate  from  annual  reports  submitted  by  Member  States  in  line  with  Article  24(1)  of  the  Energy 
Efficiency Directive. The shares are expressed in relation to Article 7 cumulative savings reported for years 2014-18.  

40 

 
 
                                                           
efficiency in transport, energy efficiency in offices). Although most Member States include at 
least  one  policy  measure  targeting  industries  also  covered  by  the  EU  ETS  in  their  action 
scope, the Article 7 reported data do not distinguish between the share of savings from ETS 
industries and savings from other (sub-)sectors. 

For  the  period  2014  –  June  2020,  provisions  of  Article  7(4)  of  the  Energy  Efficiency 
Directive addressed interactions with the EU ETS. 

  Article 7(4)(b) referred to an  option that Member States could  use when  calculating 
the  required  amount  of  energy  savings  for  the  period  2014-20.  They  could  exclude 
from the calculation all or part of the sales of energy used in industrial sites covered 
by the EU ETS. The option was used by 15 Member States.124 

  Article  7(4)(c)  made  it  possible  for  Member  States  to  report  energy  savings  from 
measures  promoting  energy  efficiency  on  the  supply  side  towards  the  amount  of 
energy  savings  calculated  in  accordance  with  Article  7(2)  and  (3).  This  option  has 
only been used by three Member States125.  

Energy  savings  from  energy  efficiency  policy  measures  in  the  ETS  reduce  the  demand  for 
allowances.  The  impact  on  GHG  emissions  is  more  complex,  since  the  ETS  caps  the 
aggregate  emissions  of  all  covered  entities,  and  the  MSR  takes  care  of  supply-demand 
imbalances.  Energy  savings  in  the  sectors  directly  included  in  or  indirectly  linked  with  the 
ETS may hence contribute to reducing emissions or to lowering of carbon prices. Also, to the 
extent that energy efficiency policy measures tackle market failures and barriers to the uptake 
of  cost-effective  energy-saving  measures,  and  have  additional  benefits,  they  also  enable 
participants to reduce emissions at lower costs. In turn, the carbon price incentive of the EU 
ETS  contributes  to  achieving  the  EU  targets  and  the  indicative  national  energy  efficiency 
targets under Article 3. 

8.2 Impact of national energy and climate plans’ implementation on the EU ETS 

27 national energy and climate plans (NECPs) finalised in 2019 give an overview of how EU 
Member  States  approach  the  first  phase  of  their  transition  towards  climate  neutrality  from 
2021 to 2030.  

The  Commission’s  assessment  of  the  NECPs126  showed  that  under  existing  and  planned 
measures, Member States plan to reduce emissions by 41% below 1990 levels, surpassing the 
EU’s previous 2030 reduction target of 40%. The plans also indicate that almost all Member 

124 This option cannot be used for 2021-30, as for this obligation period, the options in Article 7(4) of the Energy Efficiency 
Directive do not reduce the minimum amount of cumulative savings required, cf. Article 7(5) of the Directive. 
125  Denmark  (energy  savings  related  to  district  heating  as  part  of  the  EEOS),  Romania  (set  of  5  measures  dealing  with 
efficiency in power plants, high-efficiency cogeneration, efficiency in transmission and distribution networks and efficiency 
in district heating) and Slovenia (3 measures related to efficiency in district heating). 
126  The  assessment  of  the  cumulative  impact  of  the  NECPs  (COM(2020)  564  final),  is  available  here:  https://eur-
lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0564&from=EN 
The  Commission’s  individual  assessments  of  each  NECP  can  be  found  here:  https://ec.europa.eu/energy/topics/energy-
strategy/national-energy-climate-plans/individual-assessments_en  

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States that use coal  to  generate electricity are phasing it  out  or have set  phase-out  dates.  A 
total of 21 Member States are either already coal-free in terms of electricity production127, or 
have committed to phasing-out coal (including lignite and peat), indicating specific dates in 
their NECPs. In this context, the NECPs project the use of coal to decrease by 70% by 2030 
compared  to  2015,  with  renewable  electricity  set  to  reach  60%  of  electricity  produced  by 
2030.  These  developments  would  directly  affect  the  EU  ETS,  potentially  leading  to  a 
substantial decrease in emissions from the power sector, and a subsequent fall in demand for 
emission allowances. To the extent these policy-driven phase-outs accelerate carbon-market 
driven coal phase-outs and those impacts are not neutralised by the Market Stability Reserve, 
they could lower carbon prices in the ETS. 

The  Commission’s  assessment  also  showed  that  the  share  of  renewable  energy  at  EU  level 
under  existing and planned measures  could  reach 33.1-33.7% by 2030, exceeding the  2030 
target  of  at  least  32%.  Further  investments  and  reforms  in  renewable  energy  identified  in 
NECPs  have  the  potential  to  push  this  share  higher  still.  With  regard  to  energy  efficiency, 
more ambition is needed to reach the 2030 target.128 Although the final plans and measures 
planned  at  EU  level  show  a  heightened  awareness  of  the  issue,  there  are  still  significant 
efforts to be made to close the gap. In as much as these developments would affect the sectors 
directly included in or indirectly linked with the EU ETS, they may drive down demand for 
allowances.  In  turn,  the  carbon  price  incentive  of  the  EU  ETS  contributes  to  achieving  the 
national renewable energy and energy efficiency targets set in the NECPs. 

Since  the  Commission’s  assessment  of  the  final  NECPs  in  October  2020,  some  Member 
States  have  made  changes  and  adaptations  to  their  plans.  More  detailed  information  on  the 
implications  thereof  is  available  in  the  EU  Climate  Action  Progress  Report  2021129.  All 
Member States are due to submit  updates of  their NECPs in  June 2023  (in  draft  form) and 
2024 (final plans). These should reflect the increased ambition in line with the EU target to 
reduce  net  GHG  emissions  by  2030  by  at  least  55%  relative  to  1990,  including  potentially 
taking  into  account  the  higher  2030  energy  efficiency  (savings  of  36-39%  of  final  and 
primary  energy  consumption)  and  renewable  energy  (40%  share  of  renewables  in  the  EU’s 
energy mix) targets proposed by the Commission with the legislative package on deliver on 
the European Green Deal. The Commission will assess all updated draft plans by the end of 
2023 and the final plans by the end of 2024. 

9. CONCLUSIONS AND OUTLOOK  

In  phase  3  of  the  EU  ETS  (2013-20),  GHG  emissions  from  electricity  production  and 
industrial  installations  covered  by  the  system  fell  by  almost  29%130,  contributing  to  the 
overall decrease of around 43% since the system was set up in 2005. Although the significant 
decrease of emissions by 11.4% in 2020 undoubtedly can be attributed to a large extent to the 

127 Belgium, Cyprus, Estonia, Latvia, Lithuania, Luxembourg  and Malta 
128  The  gap  stands  at  2.8  percentage  points  for  primary  energy  consumption  and  3.1  percentage  points  for  final  energy 
consumption, compared to the target to increase energy efficiency by at least 32.5% by 2030. 
129 Climate Action Progress Report 2021, COM(2021)951 final  
130 Between 2013 and 2020 

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effects of the COVID-19 pandemic, it marked another year in an almost uninterrupted trend 
of  emissions  falling  year-on-year  in  phase  3.  This  reflects  the  decarbonisation  trends 
identified  mainly  in  electricity  and  heat  production.  Confirming  this  trend,  pre-pandemic 
2019 emissions fell by more than 9% compared to 2018. 

In aviation, ETS-covered GHG emissions rose by 27.5% between 2013 and 2019, increasing 
every year until 2020, when the trend was reversed by the  pandemic and verified emissions 
fell sharply by 63% compared to 2019. This meant that 2019 was the year with the highest 
aviation emissions to date. 

The legislative changes agreed in phase 3 to reinforce the EU ETS and address the surplus of 
allowances  yielded positive results. From 2018 to 2019, when the Market Stability Reserve 
began  operating,  the  surplus  fell  significantly  from  1.65  billion  to  around  1.39  billion 
allowances.  Although  in  2020  the  surplus  increased  due  to  lower  demand,  the  additional 
surplus  is  expected to  be absorbed over  the next  two to  four  years, thus  contributing to  the 
proper functioning of the market. Moreover, on the basis of the published surplus  indicator 
and the EU ETS legislation for phase 4 (2021-30), auction volumes in 2021 were reduced by 
nearly 40% and volumes in 2022 will be reduced in a similar manner. 

The end of phase 3, after the Market Stability Reserve had become operational, was marked 
by  an  increase  in  confidence  of  market  participants,  reflected  in  a  stronger  carbon  price 
signal.  In  2020  and  2021  when,  despite  the  difficult  economic  situation  for  industry  and 
aviation due to the COVID-19 crisis, the carbon price signal remained stable in 2020 and rose 
considerably  in  2021,  influenced  by  high  gas  prices  and  market  anticipation  of  the 
implications of the increased 2030 climate ambition. 

The higher price of emission allowances led to a substantial increase in total revenues from 
auctioning  generated  by  the  EU  ETS  participating  countries.  Between  2012  and  30  June 
2021, these revenues exceeded EUR 83.5 billion, with more than EUR 19 billion generated in 
2020 and close to EUR 14 billion in the first half of 2021.131  In phase 3 overall, a high share 
(75%) of these revenues was used for climate– and energy-related purposes.  

Throughout phase 3, and despite the difficult economic situation due to the COVID-19 crisis 
in  the  2020  and  2021  compliance  cycles,  the  level  of  compliance  in  the  EU  ETS  remained 
consistently very high. Operators responsible for over 99% of emissions from both stationary 
installations  and  aviation  in  most  years,  had  complied  with  their  legal  obligations.  The  EU 
ETS  architecture  remained  robust  and  the  administrative  organisation  put  in  place  across 
participating countries has proven to be effective. 

The first agreement to link  arethe EU ETS with another system – the Swiss ETS, in the last 
year  of  phase  3,  fosters  increased  flexibility  and  efficiency  in  both  carbon  markets,  by 
enabling operators of both systems to reap the benefits of a larger market. 

131 The 2020 figure includes EU27, Iceland, Liechtenstein and Norway, and the UK, while the 2021 figure includes EU27 
plus Iceland, Liechtenstein and Norway only.  

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For  the  following  years,  as  part  of  the  package  to  deliver  on  the  European  Green  Deal 
adopted in July 2021, the Commission proposed to reinforce and expand the role of carbon 
pricing  to  enable  the  EU  to  meet  its  heightened  climate  ambitions.  The  EU  ETS  remains  a 
key  pillar  of  EU  climate  policy.  The  next  carbon  market  report,  due  for  publication  in  late 
2022, will provide an overview of the operation of the EU ETS in the first year of phase 4. 

44