EU ETS cross-sectoral correction factor (CSCF)

 


 

 

 

Cross-sectoral correction factor (CSCF) values for the EU ETS period 2013 - 2020

 

 

Cross-sectoral correction factor (CSCF) under the European Union Emissions Trading Scheme (EU ETS) is the factor to ensure total allocation remains below the maximum amount pursuant to article 10a(5) of the Directive 2003/87/EC (the EU ETS Directive).

 

It is applied to calculate free allocation of emission allowances to non-electricity generators.

 

The European Commission's document Questions and Answers on the decision revising the cross-sectoral correction factor (CSCF) refers to the fact that according to the EU ETS Directive the total amount of allowances that can be handed out for free to industry (industry share) is limited.

 

The EU executive body further explains that if the bottom-up calculation of free allocations on the basis of the relevant rules for all eligible installations exceeds this limited amount, a CSCF applies and reduces the allocation for all installations that are not electricity generators by the same proportion.

 

Cross-sectoral correction factors for the EU ETS third trading period 2013 - 2020 have been initially laid down in the Annex II to the European Commission Decision of 5 September 2013 concerning national implementation measures for the transitional free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87/EC of the European Parliament and of the Council (2013/448/EU) - see Article 4 of the said Decision.

 

Pursuant to the said Decision, the CSCF values vary each year in the period 2013-2020. The exact figures are depicted in the table.

 

CSCF according to Annex II to the European Commission Decision of 5 September 2013 concerning national implementation measures for the transitional free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87/EC of the European Parliament and of the Council (2013/448/EU)

 

Year

Cross-sectoral

correction

factor (CSCF)

2013

94,272151%

2014

92,634731%

2015

90,978052%

2016

89,304105%

2017

87,612124%

2018

85,903685%

2019

84,173950%

2020

82,438204%

 

 

However, it should be noted that in the Judgment of 28 April 2016 (C‑191/14, C‑192/14, C‑295/14, C‑389/14 and C‑391/14 to C‑393/14) the Court of Justice of the European Union ruled that Article 4 of, and Annex II to, the said Commission Decision 2013/448/EU of 5 September 2013 are invalid.

 

The press release of the Court of Justice of the European Union No 47/16 of  28 April 2016 summarises the motives of this ruling as follows:

 

"As regards the Commission's 2013 decision, namely the one determining the correction factor, the Court notes, first, that the scope of the directive has been broadened from 1 January 2013 onwards so as to include, inter alia, emissions from the production of aluminium and from certain sectors of the chemicals industry. Next, the Court points out that, according to the directive and in spite of the various language versions – which have affected the uniformity of its interpretation and its application by the different Member States – the Commission, when calculating the maximum annual amount of allowances, is required to refer only to the emissions of the installations included in the Community system from 2013 onwards, and not to all of the emissions included from then onwards. Thus, the Commission should have ensured that the Member States communicated the relevant data to it. At the very least, in so far as that data did not enable it to determine the maximum annual amount of allowances and, consequently, the correction factor, it should have requested the Member States to make the necessary corrections. However, the Commission took account of data of certain Member States which, unlike others, communicated to it data concerning emissions generated by new activities carried out in installations already subject to the allowance trading scheme before 2013. The Commission's decision is invalid in that respect."

 

Considering the risk of potential legal gap that could arise as a consequence of above invalidation, the Court, moreover, ruled that the temporal effects of the declaration of invalidity of Article 4 of, and Annex II to, Decision 2013/448 "are to be limited so that, first, that declaration does not produce effects until 10 months following the date of delivery of this judgment so as to enable the European Commission to adopt the necessary measures and, second, measures adopted during that period on the basis of the invalidated provisions cannot be called into question."

 

 

CSCF according to Annex II Commission Decision (EU) 2017/126 of 24 January 2017 amending Decision 2013/448/EU as regards the establishment of a uniform cross-sectoral correction factor in accordance with Article 10a of Directive 2003/87/EC of the European Parliament and of the Council

 

Year

Cross-sectoral

correction

factor (CSCF)

2013

89,207101%

2014

87,657727%

2015

86,090119%

2016

84,506152%

2017

82,905108%

2018

81,288476%

2019

79,651677%

2020

78,009186%

 

It follows, the effect of this ruling is the dual system of the CSCF's application within the same, third trading period of the EU ETS, as both legal frameworks - the invalidated, and the new one - are binding, however, for different years.

 

"10 months following the date of delivery of the judgment" indicates, the Court of Justice points to 28 February 2017 i.e. the date for the annual allocation of emission permits under the EU ETS rules.

 

Hence, it was for the European Commission to fill in the Court's mandate and renew the Decision 2013/448/EU within the deadline as well as to set the methodology for the allocation of emission permits for industrial sectors with different CSCF values for years:
- 2012 - 2016, and
- 2017 - 2020;
both within the same, third trading period of the EU ETS.

 

The European Commission adopted new decision on CSCF on 24 January 2017 with amended CSCF values in the Annex II (Commission Decision (EU) 2017/126 of 24 January 2017 amending Decision 2013/448/EU as regards the establishment of a uniform cross-sectoral correction factor in accordance with Article 10a of Directive 2003/87/EC of the European Parliament and of the Council).

 

Accompanying the said Decision the European Commission's press release of 24 January 2017 clarified:

 

"The Commission calculated the new CSCF values set out in this Decision in line with the relevant provisions of the ETS Directive, following the interpretation given by the Court notably with respect to Article 10a(5) of this Directive, and in close cooperation with the Member States and EEA/EFTA states. In line with the findings of the Court, the new CSCF values are stricter than the previous ones, but the Court rules out a retro-active application of the re-calculated values. In other words, decisions on free allocations adopted before 1 March 2017 will not be affected by the higher CSCF, so that in practice the large majority of allocation decisions for the period 2013-2020 remain unchanged.

More precisely, the new CSCF values will only have to be applied in decisions on allocations or changes to allocations up to 2020 adopted after 1 March 2017."

 

The methodology the European Commission adopted in calculating the new CSCF values are described in detail in Recitals 7-11 of the said Decision 2017/126 of 24 January 2017, which read as follow:

 

- The recalculation of the amount of allowances referred to in Article 10a(5) point (b) of Directive 2003/87/EC was carried out following the same methodology, using the same data as for the initial calculation in 2013. In line with the Court's judgment, whereas the Commission had initially considered emissions generated by installations covered by the EU ETS before 1 January 2013 resulting from the activities listed in Annex I to Directive 2003/87/EC only as from 2013, these had to be removed from the calculation of the maximum annual amount of allowances as defined by Article 10a(5) of Directive 2003/87/EC.

- The Commission used as starting point the initial official submissions from Member States. The Commission then consulted Member States on their submission of emissions data and whenever necessary, requested additional clarifications. In accordance with Article 10a(5), only installations for which verified emissions were submitted by the Member States were taken into account.

- The Commission then removed installations from the calculation where they carried out activities covered by Directive 2003/87/EC only as from 2013 but were already part of the emissions trading system before 2013. Emissions from installations which had been opted-in by Member States in accordance with Article 24 of Directive 2003/87/EC prior to 2013 were removed as well.

- Installations affected between the date of the initial data collection and 2013, either by structural changes such as mergers, splits or closures or by technical changes so that they no longer met the relevant thresholds set out in Annex I to Directive 2003/87/EC were still taken into account in the recalculation exercise as these changes could not have been anticipated at the date of the data collection. Installations excluded from the system pursuant to Article 27 of Directive 2003/87/EC were also taken into account in the recalculation for the same reason.

- Changes correcting mistakes in Member States' National Implementing Measures for the period 2013-2020 and implemented by end 2016 were taken into account in the recalculation exercise, because the correct values should have been in place already at the time of the original calculation of the cross-sectoral correction factor.

 

In the aforementioned document "Questions and Answers on the decision revising the cross-sectoral correction factor (CSCF)" the European Commission summarised the impact of its Decision (EU) 2017/126 of 24 January 2017 and revised CSCF values on industry and the carbon market as follows:

 

1. the Decision on the revised CSCF is not expected to have a material impact on the vast majority of industrial installations subject to the EU ETS and the carbon market at large;

 

2. already adopted allocation decisions for the period from 2013 to 2020 will remain subject to the initial CSCF and thus remain unchanged;

 

3. ccordingly, auction volumes for the remaining years 2017 to 2020 will also remain unaffected;

 

4. as a consequence, where an installation has already been granted free allocations for the period 2013-2020 through a decision taken before this date, these allocations remain unaffected by the revised CSCF;

 

5. only where allocation decisions are taken or changed after 1 March 2017, the revised CSCF will need to be applied.

 

 

Cross-sectoral correction factor mechanics

 

 

The CSCF pursuant to the EU ETS rules ensures the limit set by Article 10a(5) of the EU ETS Directive on free allowances is not exceeded.

 

The cross-sectoral correction factor applied, if necessary, on an annual basis, reduces the number of free allowances in all installations eligible for free allocation in a uniform manner.

 

Article 15(3) of Decision 2011/278/EU, requires the European Commission to determine the cross-sectoral correction factor, which is done through comparing the sum of the preliminary total annual amounts of free allocation submitted by Member States to the limit set by Article 10a(5) in the manner set out in Article 15(3) of Decision 2011/278/EU.

 

Article 10a(5) of Directive 2003/87/EC limits the maximum annual quantity of allowances that is the basis for calculating allocations free of charge to installations not covered by Article 10a(3) of Directive 2003/87/EC. This limit is composed of two elements referred to in points (a) and (b) of Article 10a(5) of Directive 2003/87/EC, each of which has been determined by the European Commission.

 

 

Article 10a(5) of the Directive 2003/87/EC

 

"5. The maximum annual amount of allowances that is the basis for calculating allocations to installations which are not covered by paragraph 3 and are not new entrants shall not exceed the sum of:


(a) the annual Community-wide total quantity, as determined pursuant to Article 9, multiplied by the share of emissions from installations not covered by paragraph 3 in the total average verified emissions, in the period from 2005 to 2007, from installations covered by the Community scheme in the period from 2008 to 2012; and


(b) the total average annual verified emissions from installations in the period from 2005 to 2007 which are only included in the Community scheme from 2013 onwards and are not covered by paragraph 3, adjusted by the linear factor, as referred to in Article 9.


A uniform cross-sectoral correction factor shall be applied if necessary."

Under the EU ETS free allocation architecture, the EU Member States have to take cross-sectoral correction factor into account when deciding on the final annual amounts of allocation of emission permits to installations.

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Decision determining, pursuant to Directive 2003/87/EC of the European Parliament and the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage for the period 2015-2019 describes the cross-sectoral correction factor as "a backstop provision in the ETS Directive which caps the total amount of allowances that can be handed out for free to industry sectors in phase 3 (2013-2020). Because the aggregate amount of preliminary free allocation calculated by Member States in the NIMs exceeds the maximum amount of allocation available to industry, the allocation for all installations is reduced by the same proportion through the application of the cross-sectoral correction factor."

 

Apart from the cross-sectoral correction 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 linear 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.

 

 

CSCF values' firmness in the 2020 perspective

 

 

The important issue is whether the above figures are fixed until 2020 or are they subject to further changes.

 

The regulatory guidance from the European Commission (Questions and Answers on the Commission's decision on national implementation measures (NIMs)made the following clarification:

"[i]n principle the CSCF is determined for the entire period. However, if the carbon leakage list, which determines the sectors deemed to be exposed to a higher risk of carbon leakage (and therefore competitive pressure from outside of the EU), were to be shortened when it is revised in 2014, there would be fewer free allowances distributed to industry. Such a case might allow a review of certain aspects of the legal determination of the correction factor for the later years of phase three."

 

It follows that to establish risks for CSCF in the 2020 perspective market participants should closely monitor legislative developments with respect to EU ETS carbon leakage list as these instruments are mutually interlinked.

 

However, the Commission's above explanation that "in principle the CSCF is determined for the entire period" was made before the Court's Judgment of 28 April 2016, hence its consequences are not covered.

 

 


 

 

 

CSCF application in the EU ETS phase 4 (2020-2030)

 

 

 

"Will a correction factor apply in phase 4 (2021 to 2030) with the proposed carbon leakage rules?

 

The agreement by EU leaders on the 2030 framework provides that the share of allowances to be auctioned should not decline. As a result of this the amount of free allocation is limited. In total roughly 6.3 billion allowances will be available for this purpose between 2021 and 2030. This necessitates that the ETS Directive contains a clause to avoid over-subscription of the free allocation budget also beyond 2020.

 

At the same time the proposed rules have been crafted so that the likelihood and magnitude of any correction factor becoming necessary beyond 2020 is significantly reduced. Among other features this is achieved by:

 

- Feeding the phase 4 new entrants reserve with some 400 million unallocated allowances from phase 3;

 

- Channelling allowances not allocated in phase 4 due to (partial) closures of installations into the new entrant reserve;

 

- Reducing the number of sectors featuring on the carbon leakage list in phase 4;

 

- Updating twice the benchmarks to reflect technological advances;

 

- Updating twice the production figures used to determine free allocation.

 

The future level of any correction factor will be driven by the technological innovations of industry to reduce emissions as well as the production growth compared to the current base years dating back to 2010 or earlier. If e.g. industries improve their technologies such that emissions reduce on average by more than 1% per year the need for the cOrrection factor will already be significantly reduced. Beyond the rough figures presented in the accompanying impact assessment it is not possible to provide more precise estimates as detailed calculations will need to rely on the data on technological innovation and production volumes that will be collected once the ordinary legislative procedure will be finished."

 

Source: Detailed questions and answers on the proposal to revise the EU emissions trading system (EU ETS) of 15 July 2015, (p. 3, 4)

 

Commission Staff Working Document, Stakeholder Feedback on the
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 {COM(2015)337 final}, 14.1.2016, SWD(2015) 297 final provides an overview and stakeholders' feedback as regards potential CSCF application in the EU ETS phase 4 (2020-2030).

 

Pursuant to the said document, some industry stakeholders ask for the CSCF's removal in order to avoid costs for best performers.

 

Some further argue that unallocated allowances or other allowances that will be placed in the EU ETS Market Stability Reserve (MSR) should be used to prevent the application of the factor.

 

Some stakeholders from the power sector and NGOs however hold the view that the integrity of the MSR must not be undermined by bringing back allowances to the market outside the agreed rules of the MSR.

 

Other voices, advocating in principle for no CSCF as from 2020, propose - in the event that the CSCF were to be implemented - up to 7% of allowances to be taken from the auction share (EU-ETS phase IV from a cement industry perspective).

 

Hence, at that stage the CSCF application in the EU ETS phase 4 (2020-2030) appeared a controversial issue.

 

But the European Commission in the aforementioned document "Questions and Answers on the decision revising the cross-sectoral correction factor (CSCF)" explained that the CSCF values revised by the Commission Decision (EU) 2017/126 of 24 January 2017 will not impact allocations in phase 4 (2021-2030).

 

The above document reminds that the proposal made by the Commission in July 2015 (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, 15.7.2015, COM(2015) 337 final 2015/148(COD) {SWD(2015) 135 final} {SWD(2015) 136 final}) foresees a share of allowances available for auctioning fixed ex-ante at 57%.

 

"By setting the auction share in this way, the maximum amount of allowances available for free to industry will remain limited, but will be known upfront and not require complex calculations as was the case in the beginning of phase 3 (2013-2020).

 

Furthermore, the Commission as well as the co-legislators share the aim of minimising the risk of a CSCF having to apply in phase 4.

 

To this end, the Commission proposed a number of technical changes to the carbon leakage regime, including a carbon leakage list stable over 10 years, robust update of benchmarks for free allocation to reflect technological progress in the relevant sectors, well targeted carbon leakage rules and fostering innovation," the document said.

 

 

 

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Last Updated on Monday, 05 June 2017 21:43
 

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