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Start of phase 4 of the EU ETS in 2021: adoption of the cap and start of the auctions

20 November 2020 | Trading

 

The Commission is finalising the preparations for the period 2021-2030 of the EU ETS (phase 4), starting on 1 January 2021.

Several new elements of phase 4 of the EU ETS need to be taken into account in the Union-wide quantity of allowances to be issued from 2021 (the ‘cap’) and in the start of the auctions of phase 4 allowances. In addition, the end of the transition period established in the withdrawal agreement with the United Kingdom (UK) also needs to be considered.

 

The cap for 2021

The Commission has adopted a Commission Decision establishing the Union-wide quantity of allowances to be issued in 2021 and onwards. The following aspects are considered in the determination for the cap for 2021:

  • The linear reduction factor is increased from 1,74 % to 2,2 % in 2021. This percentage determines the amount by which the cap will decrease each year.
  • From 1 January 2021, the EU ETS Directive applies to and in the UK in respect of the generation of electricity in Northern Ireland, on the basis the Protocol on Ireland/Northern Ireland. As a result, only the emissions from electricity generation in Northern Ireland remain subject to the EU ETS and will be accounted for in the cap (applied from the base period 2008-12). This will determine a reduction of the cap in proportion to the emissions from the United Kingdom that are no longer accounted for.
  • The latest scientific data with regard to the global warming potential of greenhouse gases.
  • The exclusion from the EU ETS of small installations by Croatia, France, Germany, Italy, Slovenia, Spain, Portugal and Iceland.

The cap for 2021 set out in this Decision 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. The Commission will soon publish a notice explaining this bottom-up calculation.

 

Auction calendars for general and aviation allowances for 2021

Following the appointment of a new common auction platform, the 2021 auction calendars of the common auction platform (including the Modernisation Fund and the Innovation Fund) are expected to be published in December 2020. This will also apply to the auction calendars of the opt-out platform nominated by Germany. Due to technical reasons, the auctions are estimated to start at the end of January or early February 2021.

In the period 2013-2020 (phase 3), Poland has been auctioning on the common auction platform under a bilateral agreement with that platform (the European Energy Exchange). To continue using the services of the common auction platform to auction from January 2021, Poland will need to enter into a new bilateral agreement with the new platform.

 

Phase 4 allowances to be auctioned from 2021

The auctions of phase 4 allowances will start from the first scheduled auction date in 2021. According to the new rules for phase 4, allowances issued from January 2021 onwards (both auctioned and allocated for free) will include an indication showing in which trading period they were issued.

Unlike in the transition between phase 2 (2008-2012) and phase 3 (2013-2020) of the EU ETS, phase 3 allowances that are already in the market will not be replaced by phase 4 allowances. Instead, phase 3 and phase 4 allowances will continue to exist in parallel.

Phase 4 allowances cannot be surrendered to cover phase 3 emissions of compliance entities. In order to comply with their 2020 EU ETS obligations by the compliance deadline of 30 April 2021, the operators will have to surrender phase 3 allowances. Apart from this restriction, phase 3 and phase 4 allowances are both equally valid and can be surrendered to cover compliance obligations in phase 4 (starting from 30 April 2022).

Starting from phase 4 of the EU ETS, aviation allowances can be surrendered in order to meet the compliance obligations of both aviation operators and stationary installations. On the other hand, international credits, such as the certified emission reduction (CER), are no longer eligible for use in phase 4 of the EU ETS.

 

Source: European Commission