EU seeks to delay annual free EUA issuance date four months on increased workload

The EU wants to delay the annual deadline for adjusted issuance of free EU carbon allowances by four months to account for the administrative work involved, according to a draft legal text of the revised Emissions Trading System directive released Jan. 24.

The draft text said annual adjustments to free allocations of EUAs improved incentives but also increased administrative work, making a Feb. 28 date of issuance "not operational".

"The deadline for competent authorities to grant free allocation should therefore be postponed from February 28 to June 30 and the deadline for operators to surrender allowances should be postponed from April 30 to September 30," the draft text said.

Visibility on adjustments to free allocation of EUAs is particularly important to those sectors -- iron and steel, cement, fertilizer, aluminum, electricity and hydrogen -- that will be covered by the Carbon Border Adjustment Mechanism.

A copy of the text was released on the website of International Emissions Trading Association. A spokesperson at IETA declined to comment on the revised text.

The revised draft also acknowledged there is a need to amend the descriptions of activities in Annex I to Directive 2003/87/EC to ensure an equal treatment of installations.

"The EU ETS should incentivize production from installations that partly or fully reduce greenhouse gas emissions. It is therefore necessary to modify the definition of the products and of the processes and emissions covered for some benchmarks to ensure a level playing field for installations using new technologies that partly or fully reduce greenhouse gas emissions and existing technologies," the text said.

The text is not final and the Coreper and ENVI Committees will vote on the preliminary deal on the EU ETS Review in February.

December overhaul

The draft text came almost a month after a major reform of the EU's ETS was completed, increasing carbon-cutting ambitions to 2030, detailing the removal of free allowances and confirming the inclusion of maritime shipping and a new ETS II for buildings and transport.

The headline agreement requires the ETS's 10,000 covered installations to reduce their carbon emissions by 62% on 2005 levels by 2030, one percentage point more than proposed by the European Commission and a 44% increase on the current target.

A one-off reduction in EU Allowances of 90 million mtCO2e in 2024 and 27 million mtCO2e in 2026 would help Europe deliver on the target, in combination with an annual reduction in EUAs of 4.3% from 2024-2027 and 4.4% from 2028-2030, same as previously agreed by the EU Council and European Parliament.

"The Union-wide quantity of allowances of the EU ETS needs to be reduced to create the necessary long-term carbon price signal and drive for this degree of decarbonization," the draft text said.

The total quantity of allowances should be reduced in 2024 and 2026 to bring it more in line with the actual emissions.

CBAM measures

There was no change to the carbon leakage timeline. Free carbon allowances to sectors exposed to carbon leakage will still be phased out over a nine-year period between 2026 to 2034, allowing for the gradual introduction of the CBAM.

The draft text also said the Market Stability Reserve, providing price stability for installations covered by the ETS, "should be strengthened in a careful manner to improve its reactivity to unwarranted price evolutions."

That includes prolonging the raised annual intake rate of allowances (24%) beyond 2023, plus creation of a threshold of 400 million allowances.

"To ensure the orderly auctioning of the allowances released from the Market Stability Reserve pursuant to this safeguard measure and to improve market predictability, this measure should not apply again until at least 12 months after the end of the previous release of allowances in the market under the measure," the draft text said.