The EU ETS

Directive 2003/87/EC was adopted in 2003 to set up the EU ETS.³³ It has subsequently been amended substantially on three occasions. As early as 2004, through the ‘linking Directive’, the EU ETS was linked to the system set up by the Kyoto Protocol, thereby enabling use of credits from the so-called project-based mechanisms established by the Protocol, among them joint implementation (JI) and the clean development mechanism (CDM), for fulfilling obligations within the EU scheme.3⁴ In 2008 the Directive was amended in order to include aviation activities in the EU ETS,35 and in 2009 further amendments were made as part of the climate and energy package, inter alia extending the coverage to some greenhouse gases other than carbon dioxide.3⁶ As will be further discussed in the relevant contexts presently, further amendments have been proposed to implement the 2030 Climate and Energy Policy Framework with respect to the EU ETSTh

Directive 2003/87/EC is based on an article corresponding to the current Article 192 TFEU and does not in principle prevent individual Member States from adopting more far-reaching requirements within the area covered by the Directive. As will be seen, however, approval by the Commission is needed for any Member State that wants to include additional installations or greenhouse gases in the scheme.

• 3² Regulation (EU) No 525/2013 of the European Parliament and of the Council on a mechanism for monitoring and reporting greenhouse gas emissions and for reporting other information at national and Union level relevant to climate change and repealing Decision No 280/2004/EC [2013] OJ L 165/13.
• 33 Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC [2003] OJ L 275/32.
• 34 Directive 2004/101/EC of the European Parliament and of the Council amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms [2004] OJ L 338/18.
• 35 Directive 2008/101/EC of the European Parliament and of the Council amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community [2009] OJ L 8/3.
• 3⁶ Dir 2009/29/EC (n 21).
• 37 Conclusions on 2030 Climate and Energy Policy Framework (n 23).

The scheme for emission allowance trading established by the Directive, which now includes thirty-one countries, including the EU Member States and the EEA States Iceland, Lichtenstein, and Norway, aims to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner (Art 1).

The Directive applies to emissions from the activities listed in Annex I and the greenhouse gases listed in Annex II. The activities covered include, inter alia, combustion installations; oil refineries; installations for the production of pig iron or steel; installations for the production of cement; and industrial plants for the production of pulp from timber or other fibrous materials, paper, and board. In most cases only activities with a certain output, expressed, for example, as a minimum number of tonnes produced per day, are covered. All in all, more than 11,000 power stations and industrial plants are included.

In principle the Directive applies to six (groups of) greenhouse gases, including carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulphur hexafluoride (SF₆). However, this list is largely theoretical since Annex I, specifying which gases are covered when emitted from which activities, only includes carbon dioxide, nitrous oxide, and perfluorocarbons, and the latter two only when emitted from one or two specific activities.^{[1] [2]} Thus in reality the EU ETS is largely a scheme for addressing emissions of carbon dioxide.

Member States must ensure that no installation carries out any activity listed in Annex I resulting in emissions specified in relation to that activity unless its operator holds a permit issued by a competent authority (Art 5). An application for such a permit must include a description of the measures planned to monitor and report emissions in accordance with guidelines adopted by the Commission.3⁹ A greenhouse gas emissions permit may be issued only if the competent national authority is satisfied that the operator is capable of monitoring and reporting emissions and the permit must contain a monitoring plan and reporting requirements. It must also follow from the permit that the operator has an obligation to surrender allowances equal to the total verified emissions of the installation in each calendar year within four months following the end of that year. At least every five years the permit must be reviewed by a competent authority and amendments made as appropriate. (Arts 4-6.)

An ‘allowance’ here means an allowance to emit one tonne of carbon dioxide equivalent during a specified period under the EU ETS. One tonne of carbon dioxide equivalent is the same as one tonne of carbon dioxide or an amount of any other greenhouse gas listed in Annex II with an equivalent global warming potential (Art 3). As an example, perfluoroethane, which belongs to the perfluorocarbons, has a global warming potential of 9,200 when measured over 100 years. The emission of one tonne of perfluoroethane thus equals the emission of9,200 tonnes of carbon dioxide.

All emissions are converted into carbon dioxide equivalents, which is the standard unit for measuring and accounting greenhouse gas emissions.

Following consultation with the operator, a Member State may, under certain conditions, exclude from the EU ETS installations which have reported emissions of less than 25,000 tonnes of carbon dioxide equivalent in each of the three preceding years provided that they are subject to measures, to be notified to the Commission, that will achieve an equivalent contribution to emission reductions. Such an installation will then not require a greenhouse gas emissions permit. (Arts 4 and 27.)

Under certain conditions a Member State may also apply emission allowance trading in accordance with the Directive to activities and to greenhouse gases not listed in Annex I. Any such inclusion of activities or gases must be approved by the Commission and must consider, inter alia, the effects on the internal market, the environmental integrity of the EU ETS, and the reliability of planned monitoring and reporting systems. (Art 24.)

• [1] Dir 2003/87/EC (n 33), Annexes I and II.
• [2] 39 See Commission Regulation (EU) No 601/2012 on the monitoring and reporting of greenhousegas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council [2012] OJ L 181/30.