In July, the EU Commission published, as part of a 'Summer Energy Package', a Draft Directive to introduce changes to the EU ETS for Phase IV, which will run from 2021 to 2030.

The changes proposed for Phase IV include:

  • A more rapid reduction (2.2 per cent per annum, instead of 1.74 per cent per annum) in the overall cap on allowances under the scheme (EUAs).
  • Revision to the system of allocation of free allowances to reflect the tightening overall cap on EUAs. (Free allocation will focus on sectors at the highest risk of carbon leakage. Benchmark values are to be updated (i.e. reduced) in the light of advances in technology, and there will be a better reflection of changes in production, with allocation decisions being made for five years instead of eight, and there being provision for increased free allocation of EUAs if production increases where there is no increase in capacity).
  • There will be a larger New Entrants Reserve, which will include unallocated Phase III EUAs from the Market Stability Reserve currently being introduced into the Scheme.
  • The option for Member States to exclude small emitters from the scheme will be continued.
  • A new Modernization Fund to support transition to low-carbon technologies in Central and Eastern Europe and an Innovation Fund to finance R&D for new low-carbon technologies for the generating and relevant industrial sectors.
  • A broadening of the range of purposes which qualify for meeting Member States' obligation to spend 50 per cent of their EUA auction revenues, so as to include climate finance for vulnerable third countries, indirect carbon costs, and the development of skills for a decarbonising economy.

The UK Government has recently responded, broadly welcoming the proposals, but has called for provision for support for Sectors at risk of Carbon Leakage to vary according to the degree of risk of such Leakage.

The Government is also concerned that proposals for a reduction in benchmark values may not reflect genuine technological improvements, and could cause competitive distortion between sectors.