Rules on carbon allowances' validity between trading periods of the EU ETS are significantly modified as from 2021.
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 has amended Article 13 of the EU ETS Directive - see the boxes below.
EU ETS Directive - fourth trading period (2021-2030)
Article 13 Validity of allowances
Allowances issued from 1 January 2013 onwards shall be valid indefinitely. Allowances issued from 1 January 2021 onwards shall include an indication showing in which ten-year period beginning from 1 January 2021 they were issued, and be valid for emissions from the first year of that period onwards.
EU ETS Directive - third trading period (2013 - 2020)
Article 13 Validity of allowances
1. Allowances issued from 1 January 2013 onwards shall be valid for emissions during periods of eight years beginning on 1 January 2013.
2. Four months after the beginning of each period referred to in paragraph 1, allowances which are no longer valid and have not been surrendered and cancelled in accordance with Article 12 shall be cancelled by the competent authority.
Member States shall issue allowances to persons for the current period to replace any allowances held by them which are cancelled in accordance with the first subparagraph.
As a result, the emission allowances will no more be replaced between periods, but will be valid indefinitely.
ECC Clearing Circular 54/2020 of 16 December 2020 (TP4 Transition) summarises the undergoing changes and reminds as follows:
- the 3rd Trading Period (TP3) of the EU ETS ends in December 2020;
- the deadline for surrender of allowances for 2020 is 30th April 2021;
- emissions of the year 2020 can only be surrendered with TP3 allowances;
- TP3 allowances can also be surrendered for emissions of compliance years after 2020 (“banking”);
- 4th Trading Period (TP4) of the EU ETS starts in January 2021;
- TP4 allowances can only be surrendered for emissions of the compliance years from 2021 onwards;
- CERs cannot be surrendered anymore for emissions from 2021 onwards;
- during January to April 2021, TP3 and TP4 allowances will be in circulation in parallel, but only TP3 allowances can be submitted for compliance obligations for 2020;
- after April 2021, both TP3 and TP4 allowances can be surrendered for compliance for 2021 or later years.
The European Commission’s approach is analogous (website Phase 4 allowances to be auctioned from 2021):
- the auctions of phase 4 allowances will start from the first scheduled auction date in 2021;
- according to the new rules for phase 4, allowances issued from January 2021 onwards (both auctioned and allocated for free) will include an indication showing in which trading period they were issued;
- unlike in the transition between phase 2 (2008-2012) and phase 3 (2013-2020) of the EU ETS, phase 3 allowances that are already in the market will not be replaced by phase 4 allowances - instead, phase 3 and phase 4 allowances will continue to exist in parallel;
- phase 4 allowances cannot be surrendered to cover phase 3 emissions of compliance entities - in order to comply with their 2020 EU ETS obligations by the compliance deadline of 30 April 2021, the operators have to surrender phase 3 allowances;
- apart from above restriction, phase 3 and phase 4 allowances are both equally valid and can be surrendered to cover compliance obligations in phase 4 (starting from 30 April 2022).
According to the ICE Futures Europe Circular 21/037 of 11 March 2021 announcing changes to EUA Daily Futures (cessation of admission to trading):
- the EUA Phase 4 Daily Futures contract (EC4) will be delisted after trade date 30 April 2021;
- on 3 May 2021 the product name and the hub of the EUA Phase 3 Daily Futures Contract (ECP) will change to EUA Daily Futures and EUA Daily respectively;
- after 30 April 2021 there will be no discrepancy in eligibility between EUAs issued before, or after, 1 January 2021.
According to the answer given by the Commissioner Arias Cañete on 10 December 2018 on behalf of the European Commission (005394/2018) to the European Parliament question:
“The current legislative framework of the EU Emissions Trading System (EU ETS) does not allow for restricting the possibility of carrying over emission allowances from one trading period to the following period (known as ‘banking’).
The body of scientific research on this topic concludes that restricting the possibility to bank allowances would undermine the efficiency of an emission trading system as a policy tool that reduces emissions in the most cost-efficient manner. In light of this, the Commission does not intend to introduce expiry dates for ETS allowances in the future.”
Before the fourth phase of the EU ETS some companies used the emission allowances allocated in February to surrender them in April of the same year.
This is not be possible during the transition from phase 3 to phase 4, as phase 4 allowances are not valid in phase 3.
Accordingly, the CO2 registry does not permit surrendering phase 4 allowances before the final year-end closing of phase 3.
Participants who have to surrender allowances over 2020 need to make sure they have enough emission allowances from phase 3 in their account to surrender.
Identifying phase 4 allowances
It will be possible to identify phase 4 allowances by a marking indicating that they are from phase 4.
This applies to all phase 4 allowances, so both the auctioned allowances and the allowances distributed through free allocation.
The allowances of different phases will be also clearly separated with the EU ETS Registry.
European Commission's website https://ec.europa.eu/clima/policies/ets/registry_en#tab-0-2
It is noteworthy, given the fact that allowances issued in the Swiss Emissions Trading System are equivalent to EU emission allowances, the Swiss allowances also have indication of the period of issuance and, consequently, the same restrictions apply to them as to EU allowances.
From 1 January 2021, operator holding accounts may hold aviation allowances (this does not depend on the issuance year of the allowances).
In accordance with the revised ETS Directive, stationary installations may use aviation allowances for emission in the fourth trading period, i.e. for emissions in 2021 and later - it is not possible to use (surrender) them for emissions in 2020, during the compliance period that ends on 30 April 2021.
Buying allowances by auction
The allowances that will be issued by auction from 1 January 2021 will be phase 4 allowances.
These cannot be used for the 2020 year-end closing.
Buying allowances from third parties
In case of buying of allowances from third parties during the transition period it is important to know whether these are phase 3 or phase 4 allowances.
EU ETS Directive, Article 13
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