Joint feedback to the Expert Group on Climate Change Policy Meeting on free allocation and carbon leakage list

1. Climate neutrality plans: application at sub-installation instead of installation level

The interpretation of the provisions on climate neutrality plans (and exemption from the cross sectoral correction factor) as being applied at “installation level” entails a disproportionate and inconsistent treatment. In the case of climate neutrality plans, operators of installations covering several product benchmarks and fall-back sub-installations would be subject to the obligation and penalty for their entire installations as soon as one sub-installation belonged to the worst 20% percentile of a given product benchmark in the years 2016-2017, regardless of the performance in all other sub-installations.

As explained below, the wording and spirit of article 10a paragraph 1 as well as the previous jurisprudence indicate that the obligation and penalty concerning climate neutrality plans for the least 20% efficient installations should be interpreted and applied at sub-installation level. This would lead to a more consistent and proportionate treatment, where the obligation and penalty are applied only for the relevant product benchmark sub-installations belonging to the worst 20% percentile.

a) The precedent of the activity level changes interpreted at sub-installation level

Article 10a (20) of the ETS Directive (EU) 2018/410 on the activity level changes referred to the concept of “installation”, even though the concept of “sub-installation” was already known to the co-legislators since it was part of the 2013-2020 Commission Decision 2011/278/EU. Yet, in the subsequent Commission Implementing Regulation (EU) 2019/1842 on activity level changes, the COM interpreted the "installation" of the ETS Directive as a 'sub-installation'. The relevant references are provided below:

Article 10a (20), Directive (EU) 2018/410:
The level of free allocations given to installations whose operations have increased or decreased, as assessed on the basis of a rolling average of two years, by more than 15 % compared to the level initially used to determine the free allocation for the relevant period referred to in Article 11(1) shall, as appropriate, be adjusted. Such adjustments shall be carried out with allowances from, or by adding allowances to, the amount of allowances set aside in accordance with paragraph 7 of this Article.

Recital 3, Commission Implementing Regulation (EU) 2019/1842
In accordance with Article 10a(20) of Directive 2003/87/EC, the allocation of emission allowances free of charge to installations whose operations have increased or decreased, as assessed on the basis of a rolling average of two years, by more than 15 % compared to the historical activity levels is to be adjusted in a symmetrical manner. To implement the adjustments of allocation of emission allowances due to changes in activity, since the installations are divided in sub-installations in accordance with Article 10 of Delegated Regulation (EU) 2019/331, it is appropriate to compare these changes against the historical activity levels at sub-installation level.

b) The reference to “product benchmarks” in article 10a paragraph 1

The new article 10a paragraph 1 refers to “operators of installations whose greenhouse gas emission levels are higher than the 80 percentile of emission levels for the relevant product benchmarks”. The reference to "product benchmarks" clearly entails an interpretation at sub-installation level, since product benchmarks are defined only at sub-installation level in the secondary legislation, including the Free Allocation Rules to be amended at this stage. As an extreme example, even when an installation produces only a product benchmark, its treatment under the FAR is defined as a sub-installation).

c) Only article 10b(4) shall be read as to referring to installation levelp

The new ETS Directive clearly states that only article 10b(4) "shall be read as only referring to installation level". Article 10b(4) is primarily developed for district heating, where the application at installation level may be indeed more justifiable and appropriate. Yet, no similar provision is mentioned for article 10a paragraph 1. Hence, this article is not subject to the obligation of interpreting it “at installation level”. Therefore, the concept of "operators of installations whose greenhouse gas emission levels are higher than the 80 percentile of emission levels for the relevant product benchmarks" should be interpreted as applying at sub-installation level.

d) Inconsistency with the legal wording of the Directive (penalty also to fall back benchmarks sub-installations)

The interpretation of new article 10a paragraph 1 at installation level is not consistent with the reference to “product benchmarks” in the same article. In fact, with such interpretation, all the fall back benchmarks sub-installations that have also product benchmark sub-installations within the boundaries of the ETS permit would be covered by the obligation and penalty on climate neutrality plans, regardless of their performance within the curve of the relevant fall back benchmark. This would make the reference to "product benchmarks" of the article legally irrelevant.

e) Distortion of competition among installations

The interpretation at installation level would also cause undue distortion of competition among installations, since those that have also product benchmark sub-installations above the 80th percentile within the ETS permit would be subject to the climate neutrality plan obligation and penalty for their entire installation (including for product benchmark sub-installations that are below the 80th percentile and fall back benchmark sub-installations) while those installations that do not have product benchmark sub-installations above the 80th percentile would be automatically exempted.

Such undue impact on competition would be inconsistent with the new wording of recital 20 of the ETS Directive, which prescribes that “the Commission should ensure that the application of the conditionality does not jeopardise a level playing field, environmental integrity and equal treatment between installations across the Union”.

2. Climate neutrality plans: targets and milestones should refer to measures and investments instead of emissions reductions

The draft concept note links targets and milestones of climate neutrality plans to (absolute or relative) emission reductions. However, as explained below, the revised ETS Directive clearly relates such targets and milestones only to measures and investments described in the plans.

Article 10b(4) provides a clear sequence of elements, notably:

• Point (a): measures and investments to reach climate-neutrality by 2050 at installation or company-level, excluding the use of carbon offset credits;
• Point (b): intermediate targets and milestones to measure, by 31 December 2025 and by 31 December of each fifth year thereafter, progress made towards reaching climate -neutrality as set out in point (a);
• Point (c): an estimate of the impact of each of the measures and investments referred to in point (a) as regards the reduction of greenhouse gas emissions.

The subsequent subparagraph clarifies that the scope of the verification shall be “the attainment of the targets and milestones referred to the third subparagraph of point (b)”.

Therefore, the format and design of climate neutrality plans should focus on the attainment of intermediate targets and milestones of point (b) against measures and investments of point (a) instead of emissions reductions of point (c), which is not mentioned in the final sub-paragraph.

3. Energy efficiency conditionality: sufficient time for implementing audits’ recommendations

According to the revised ETS Directive, operators applying for free allocation in May 2024 will need to provide evidence that they have implemented energy efficiency measures with proportionate costs and with a payback of three years or less in order to avoid the 20% free allocation penalty.
Since energy audits have a four-year calendar in line with the provisions of the Energy Efficiency Directive, the timeline of the energy efficiency conditionality should allow sufficient time to operators for implementing such recommendations.
Furthermore, companies that have implemented a certified energy or environmental management system which requires continuous improvements should be considered fulfilling the ETS energy efficiency conditionality.

4. Historical activity level

The European industry has been facing in the latest years unprecedented and unforeseeable situations linked firstly to the covid pandemic and secondly to the ongoing energy crisis. According to the existing rules, this situation is affecting already the 2021-2025 sub-trading period as a result of the 2-year rolling average adjustments.

If no modification is introduced to the Free Allocation, such unprecedented crises would also unduly penalise companies in the 2026-2030 sub-trading period, when free allocation would be based on the average production volumes of the period 2019-2023.

Against this background, we urge the Commission to amend the provisions on historical activity level in order to avoid that unrepresentative production volumes due to covid and/or energy crisis are taking into account in the free allocation calculation, for instance by allowing operators to exclude two years from the baseline period 2019-2023.