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EU ETS linear reduction factor (LRF)
European Union Carbon Market Glossary

 

 

The application of the Linear Reduction Factor (LRF) under the European Union Emission Trading Scheme (EU ETS) consists in the rule that in 2014 and in each subsequent year till 2020, the total quantity of allowances (cap) determined for 2013 on the basis of Article 9 and 9a of Directive 2003/87/EC decreases linearly by 1,74 % of the amount of allowances in 2010.

 

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Article 1(12) of the Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814 increases the EU ETS Linear Reduction Factor (LRF) from 1,74 % in the period 2013 - 2020 to 2,2 % starting in 2021

 

This decrease rate in absolute terms means the number of allowances will be reduced annually by a determined number of 38 264 246 allowances.

 

A separate non-declining cap applies to the aviation sector until 2020 (5% below the average annual emissions in the years 2004-06).

 

The linear reduction factor was decided in the context of the overall 20% reduction target and results in a 21% reduction compared to the EU ETS emissions in 2005.

 

Under the EU ETS free allocation architecture, the EU Member States have to take Linear Reduction Factor into account when deciding on the final annual amounts of allocation of emission permits to electricity generators for their heat production.

 

Article 3(u) of the EU ETS Directive defines an installation as 'electricity generator' if "on or after 1 January 2005, it has produced electricity for sale to third parties, and in which no activity listed in Annex I (of the EU ETS Directive) is carried out other than the combustion of fuels".

 

The LRF also applies to the free allocation of all phase 3 new entrants.

 

  

EU ETS cap 2013 - 2020

 

 Year

Annual cap

 (excluding aviation)

 2013

 

 2  084 301 856

 2014

 2 046 037 610

 2015

 2 007 773 364

 2016

 1 969 509 118

 2017

 1 931 244 873

 2018

 1 892 980 627

 2019

 1 854 716 381

 2020 

 1 816 452 135

 

 

Apart from the Linear Reduction Factor, other elements taken into account by the EU Member States in the process of determination for the final annual amount of emission allowances allocated free of charge for each year over the period from 2013 to 2020 are the NIMs (National Implementation Measures - i.e. the instruments that substituted for the national allocation plans), and the cross-sectoral correction factor.

 

Legal instruments that must be abided by in this processs are Directive 2003/87/EC, Decision 2011/278/EU and other relevant provisions of Union law.

 

Pursuant to the European Commision's Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments of 15 July 2015 (COM(2015) 337 final) 2015/148 (COD), the Linear Reduction Factor was proposed to be changed to 2.2% from 2021 onwards (Article 1(3)).

 

It was intended to ensure that the overall quantity of allowances ('cap') will decline at an increased annual pace resulting in an overall emission reduction of sectors under the EU ETS of 43% by 2030.

 

Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814 finally implemented this proposal in Article 1(12).

 

It is the opinion of the European Court of Justice that “due to the fact that the total quantity of allowances available in the ETS falls on the basis of annual linear reduction factor, it is intrinsic to the logic of such factor that the price of allowances will gradually increase as time goes on” (judgment of 21 June 2018, Republic of Poland v European Parliament and Council of the European Union, Case C-5/16).

 

 

 

Article 9 of the Directive 2003/87/EC

 

Community-wide quantity of allowances

 

The Community-wide quantity of allowances issued each year starting in 2013 shall decrease in a linear manner beginning from the mid-point of the period from 2008 to 2012. The quantity shall decrease by a linear factor of 1,74 % compared to the average annual total quantity of allowances issued by Member States in accordance with the Commission Decisions on their national allocation plans for the period from 2008 to 2012. The Community-wide quantity of allowances will be increased as a result of Croatia's accession only by the quantity of allowances that Croatia shall auction pursuant to Article 10(1). 


The Commission shall, by 30 June 2010, publish the absolute Community-wide quantity of allowances for 2013, based on the total quantities of allowances issued or to be issued by the Member States in accordance with the Commission Decisions on their national allocation plans for the period from 2008 to 2012.


The Commission shall review the linear factor and submit a proposal, where appropriate, to the European Parliament and to the Council as from 2020, with a view to the adoption of a decision by 2025.

 

 

 

 

Article 1(12) of the Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814


Directive 2003/87/EC is amended as follows:

...

In Article 9, the second and third paragraphs are replaced by the following:


"Starting in 2021, the linear factor shall be 2.2%."

 

 

 

 

 

IMG 0744

    Documentation    




 

Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814, Article 1(12)

 

Directive 2003/87/EC, Article 9

 

European Commision's Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments of 15 July 2015 (COM(2015) 337 final) 2015/148 (COD), Article 1(3)

 

 

 

 

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Last Updated on Sunday, 02 September 2018 20:02
 

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