Anticipated Changes in Phase IV of the EU ETS
Phase III of the EU ETS will conclude on December 31, 2020, paving the way for Phase IV (2021-2030), which brings several changes aimed at strengthening the EU ETS and ensuring effective distribution of the declining quantity of freely allocated EUAs. The European Commission has introduced these changes, which will take effect from January 1, 2021. However, some of these changes need to be considered in advance to adequately prepare for the new phase.
This report highlights the main changes and their potential impact on your organization, including:
Amendments to reporting requirements for full participants and opt-outs.
- Tracking activity levels.
- Dynamic free allocation.
- Monitoring Methodology Plans.
Determining your participant type.
There are different categories of EU ETS participants, and each member state has the discretion to establish these categories. For example, the UK has chosen to maintain two installation categories: Full participants and Small emitters and hospital opt-outs. The inclusion criteria for these schemes remain largely unchanged in Phase IV, except for a name change for the Small Emitters and Hospital Opt-out scheme to the “Article 27” scheme. Additionally, a new scheme called Article 27a or the “Ultra-low emitter” scheme has been introduced. This scheme applies to installations of any capacity with total CO2 emissions of less than 2,500 tCO2/year. Other EU member states are expected to maintain similar rules.
The purpose of the ultra-low emitter scheme is to reduce administrative burdens and costs for emitters, such as data centers, that are included in the EU ETS primarily due to their standby generation usage. These installations, often with large standby electricity generation capacity (e.g., >35MW thermal), emit low levels of CO2 as the generators are only used during emergencies, power outages, or testing. The costs associated with administration, verification, and Competent Authority fees are often disproportionate to the emissions’ actual cost.
Activity level tracking and dynamic allocation
While tracking activity levels has always been a requirement under the Monitoring and Reporting Regulations, there has never been a formal opportunity to do so. In Phase III, full participants were required to complete an “Activity/Capacity level change form” annually to indicate significant changes that could cause partial cessation or significant capacity reduction. Previously, allocation would only be affected if operations changed substantially. However, this approach is changing in Phase IV.
The introduction of “dynamic allocation” aims to acknowledge that installations can undergo significant changes, and their free allocation requirements vary accordingly. As the overall free allocation pot decreases due to the linear reduction factor, the European Commission wants to ensure fair and continuous distribution that reflects operations. Starting from Phase IV, the level of free allocation will be adjusted symmetrically based on a two-year rolling average of the activity level, with variations of +/- 15% of the Historical Activity Level (HAL) determined in the NIMs exercise.
This additional reporting requirement will be fulfilled through ongoing NIMs, where the activity level report will be separate from the annual emissions report and subject to the same verification process. Operators should anticipate increased verification and consultancy costs to cover this additional workload. The European Commission has issued Verification Guidance (Commission Implementing Regulation (EU) 2018/2067) to outline the reporting requirements and auditing procedures.
Although this measure is part of Phase IV, it must be addressed from 2019 onwards as the 2021 level of free allocation becomes dynamic. If an installation’s activity level has varied by 15% of the HAL in 2019/2020, it could affect the level of free allocation in 2021. Consequently, it is expected that the first activity level report will be submitted during 2020.
To promote energy efficiency, the guidance emphasizes that if the activity level decreases disproportionately to production by 15% due to energy efficiency gains, the level of free allocation will not be affected.
Monitoring Methodology Plan
In addition to the NIMs exercise, a Monitoring Methodology Plan (MMP) has been developed to explain the calculations and data sources used to determine the activity levels from 2013 to 2018. This plan, known as the “backwards looking” MMP, will now be updated to account for activity levels from 2019 onwards or the “forward-looking” MMP. Competent Authorities will contact operators to request an update to their MMPs.
What does this mean for you?
Full participants should expect to hear from their Competent Authority soon, requesting an update to their MMPs. Over the next few months, information regarding activity level reporting will be issued, and verifiers or consultants will provide details on the potential financial implications for your installation. Annual activity level reporting will become a separate report, required in addition to the annual emissions report, following a similar timeline.
If your installation is new or you missed the opportunity to opt into Article 27 or Article 27a schemes but are eligible, you will have a second chance to do so in 2023, in preparation for the second stage of Phase IV starting in 2026.
For UK installations, it is assumed that the UK will either remain in the EU ETS or implement a symmetrical UK ETS scheme.
