(1)

Directive 2003/87/EC has been revised and amended by Directive (EU) 2023/959 of the European Parliament and of the Council (2) to align it with Regulation (EU) 2021/1119 of the European Parliament and of the Council (3) setting a target of at least 55 % net emission reductions by 2030 compared to 1990. The revision of Directive 2003/87/EC also concerns free allocation of allowances and requires changes to Commission Delegated Regulation (EU) 2019/331 (4).

(2)

Directive (EU) 2023/959 introduces obligations for monitoring and reporting of emissions on operators of installations for the incineration of municipal waste. Given that those installations do not have to surrender allowances in accordance with Article 12 of that Directive, it is appropriate not to consider heat delivered by those installations to other installations as covered by the European Union Emissions Trading System (EU ETS) for the purpose of free allocation.

(3)

In order to incentivise the electrification of industrial processes as an important technology to significantly reduce emissions from such processes and to ensure equal treatment of processes covered by product benchmarks and the heat and fuel benchmarks, measurable and non-measurable heat produced from electricity should in principle be eligible for free allocation under the heat and fuel benchmarks.

(4)

In Case C-271/20 (5), the Court of Justice ruled that chemical energy stored in the raw material and released as heat during the combustion process is to be treated as a fuel for the purpose of free allocation. As such combustion processes release emissions other than greenhouse gases, it is appropriate to explicitly exclude the heat released during such combustion processes from free allocation under the fuel benchmark to ensure environmental integrity, in particular in view of the release of sulphur oxides during such combustion processes. Therefore, the use of the fuel benchmark should be restricted to combustion processes where the primary purpose is the generation of non-measurable heat.

(5)

Article 10a of Directive 2003/87/EC provides the Commission with a mandate to integrate the implementation of the new conditionality on energy efficiency measures into the existing five-year cycle for installations applying for free allocation established by this Regulation, in order to ensure harmonisation with existing procedures and to avoid undue administrative burden.

(6)

The competent authority should approve the monitoring methodology plan in order to ensure consistency with the monitoring rules. Due to time constraints, approval by the competent authority had not been required for the submission of baseline data reports in 2019, the year in which the monitoring methodology plans were introduced by Delegated Regulation (EU) 2019/331. This exemption is no longer necessary and should no longer apply.

(7)

Directive 2003/87/EC provides that no free allocation shall be given in relation to the production of products covered by the Carbon Border Adjustment Mechanism (CBAM), established by Regulation (EU) 2023/956 of the European Parliament and of the Council (6), with a gradual phase-out of free allocation during a transitional period. To ensure a harmonised implementation of this provision, operators should provide information and evidence, in particular based on Combined Nomenclature (CN) codes established by Council Regulation (EEC) No 2658/87 (7), on the goods produced.

(8)

In order to simplify procedures, in particular in relation to annual activity level reporting and subsequent adjustments to free allocation in accordance with Commission Implementing Regulation (EU) 2019/1842 (8), data for all sub-installations, including small sub-installations, should be reported as a basis for later free allocation adjustments.

(9)

In order to incentivise the electrification of industrial processes to significantly reduce emissions from such processes, it is necessary to remove the rules for the exchangeability of fuel and electricity. Consequently, highly or entirely electrified processes covered by the EU ETS should benefit from free allocation in the same way as processes with high direct emissions. Therefore, the amount of free allocation should be determined regardless of the share of direct and indirect emissions for installations falling under the same benchmark. Even though free allocation for those processes will cover also indirect emissions, it does not necessarily imply that carbon leakage risks determined in accordance with Article 10a(6) of Directive 2003/87/EC have been fully addressed for those processes. Indirect costs passed on to electricity consumers may vary depending on the electricity mix in a relevant geographic area. Any free allocation granted to indirect emissions of electrified processes should not prejudge the possibility to receive compensation for indirect costs in accordance with Article 10a(6) of Directive 2003/87/EC. In turn, financial measures to compensate indirect costs passed on in electricity prices should not compensate the same indirect costs covered by free allocation. For the purpose of the determination of electricity benchmarks, it is appropriate to collect data on electricity consumption for relevant product benchmarks.

(10)

In order to further incentivise the recovery of heat from fuel benchmark sub-installations and process emissions sub-installations, such heat should be eligible for free allocation in addition to the allocation based on fuel consumption and process emissions. The risk of double counting should be considered mitigated by the updates of the value of the fuel benchmark and of the multiplier applied to process emissions in accordance with Article 16(2), point (e), of Delegated Regulation (EU) 2019/331.

(11)

In order to minimise the administrative burden for operators, the information on the climate-neutrality plans should be integrated in the existing national implementation measures which serve as the basis for calculating free allocation.

(12)

To reward best performers and innovation, Directive 2003/87/EC exempts installations whose greenhouse gas emission levels are below the average of the 10 % most efficient installations under a given benchmark, from the application of the cross-sectoral correction factor. As benchmarks are defined at sub-installation level, it is appropriate to trigger the exemption if the greenhouse gas emission levels of at least one sub-installation meets the threshold, provided that this sub-installation contributes significantly to the total free allocation for the installation.

(13)

To facilitate the harmonised implementation of allocation adjustments and cessations of operation, excess allowances not duly returned by an operator should be deducted from free allocation to the operator concerned.

(14)

To ensure that operators correct any non-conformities or any errors in baseline data reports that impact on the determination of the historical activity levels, the competent authorities should ensure that those errors or non-conformities are corrected and not only request the corrections.

(15)

To ensure that the historical activity levels are, as far as possible, representative of industry cycles and to reduce the impact of special circumstances, such as economic crises, those levels should be calculated using the median of the activity levels during the baseline period.

(16)

To ensure a harmonised and correct application of the free allocation rules, it is appropriate to clarify the determination of historical activity levels in cases where a sub-installation only started normal operation during the baseline period. In this respect, historical activity levels should be based on activities of full calendar years.

(17)

Free allocation for process emissions not covered by product benchmarks is based on the grandfathering of historical emissions. Since 2013 free allocation has been given at the level of 97 % of the historical emissions. To incentivise the reduction of such process emissions and to ensure better alignment with free allocation for process emissions covered by product benchmarks, it is necessary to reduce the level of free allocation for process emissions not covered by product benchmarks to 91 %, equivalent to an annual reduction of 0,3 % as the minimum update rate applied to product benchmarks in accordance with Article 10a(2) of Directive 2003/87/EC. The reduced multiplication factor should apply from 1 January 2028 to better align with the timeline for the deployment of solutions to abate process emissions, such as carbon capture and storage.

(18)

To ensure the gradual phase-out of free allocation for goods covered by Regulation (EU) 2023/956, the relevant CBAM factor set out in Article 10a(1a), second subparagraph, of Directive 2003/87/EC, should be applied to the preliminary free allocation for the sub-installation concerned. Potential future changes to the CBAM scope and to the relevant CBAM factor introduced in Regulation (EU) 2023/956 should be reflected in the corresponding gradual phase-out of free allocation.

(19)

Directive (EU) 2023/959 removes the concept of electricity generators from 1 January 2026 and their specific treatment in terms of free allocation from the EU ETS. It is therefore necessary to delete related provisions in Delegated Regulation (EU) 2019/331 accordingly.

(20)

To maintain the level playing field between incumbent installations and new entrants, it is necessary to reflect changes in the respective rules for new entrants as regards historical activity levels and free allocation of allowances.

(21)

To provide further incentives to reduce greenhouse gas emissions a provision on conditionality of free allocation on implementation of energy efficiency improvement measures was introduced in Article 10a, third subparagraph, of Directive 2003/87/EC, which needs to be supplemented. Recommendations included in energy audit reports or certified energy management systems, referred to in Article 10a(1), third subparagraph, of that Directive, which are at company-level, require a translation to installation level. To ensure legal certainty, the competent authority should only consider those recommendations as implemented when the implementation has been completed and the verifier has confirmed the completion. In order to safeguard the incentive given by the introduction of the conditionality, an installation should be granted the possibility to recover the reduced free allocation after having implemented the recommended measures as part of the annual activity level report and after the implementation of the recommended measures has been verified. An annual cycle for reviewing the conditionality of non-compliant installations that follows the reporting of the annual activity levels should be established. Operators of non-compliant installations facing the 20 % reduction of free allocation should provide verified evidence to the competent authority on the implementation of all recommended measures to ensure recovery of free allocation reduced due to conditionality.

(22)

Following the introduction of new rules on the conditionality of free allocation on climate neutrality plans pursuant to Article 10a(1) and Article 10b(4) of Directive 2003/87/EC, the procedural steps of the conditionality are to be supplemented. In accordance with Article 10a(1), fifth subparagraph, of that Directive, the operators are to establish climate-neutrality plans by 1 May 2024. In order to align the conditionality with the existing procedure of application for free allocation, the climate-neutrality plans should be submitted by 30 May 2024, or as appropriate depending on the alternative time-limit for the submission of such applications set by Member States. In accordance with Article 10a(1) of Directive 2003/87/EC, the installations concerned by this conditionality are those whose greenhouse gas emission levels are higher than the 80th percentile of emission levels for the relevant product benchmarks in the years 2016 and 2017. For this purpose, the calculation for the determination of the revised benchmark values in accordance with Commission Implementing Regulation (EU) 2021/447 (9) should be used. That determination is based on verified information on the greenhouse gas efficiency of installations reported pursuant to Article 11 of Directive 2003/87/EC for the years 2016 and 2017. As benchmarks are defined at sub-installation level, it is appropriate to introduce a threshold for small sub-installations below which the conditionality does not apply, provided that the sub-installation does not contribute to more than 20 % of the total preliminary free allocation of the installation.

(23)

To incentivise and expedite the reduction of greenhouse gas emissions originated from district heating, Article 10b(4) of Directive 2003/87/EC sets out further rules for the conditionality on climate-neutrality plans in case of district heating installations. As a result, the ETS installations providing heat to district heating systems may apply for additional free allocation in the period from 2026 to 2030. In order to provide operators of district heating sub-installations applying for additional free allocation with certainty on the further conditions regarding significant greenhouse gas emission reduction achievement before 2030, the value of the additional free allowances needs to be fixed for the size of the investment to be made. In order to be consistent, carbon price used in the determination of the monetary value of those allowances should be used similarly to Article 10c(3) of Directive 2003/87/EC. To provide clarity on the level and type of investment required from the operators and to ensure equal treatment of all installations concerned, significant reduction of greenhouse gas emission should be established using a linear trajectory of the average linear reduction factor over the period between the mid-point of the 2019-2023 baseline period, namely 2021, and 2030 in accordance with Article 9 of Directive 2003/87/EC. This methodology leads to the same reduction requirement for all operators of district heating concerned and does not require installation-specific reduction rates to be established.

(24)

In order to safeguard the incentives of the double-conditionality and to avoid unreasonable consequences, the conditionality of free allocation on implementation of energy efficiency improvement measures and the conditionality of free allocation on climate-neutrality plans should not be cumulative. This means that the reduction by 20 % in free allocation should apply if one or both conditionalities are not met under Article 10a(1), third and fifth subparagraphs of Directive 2003/87/EC.

(25)

In accordance with Article 10b(4) of Directive 2003/87/EC, Commission Implementing Regulation (EU) 2023/2441 (10) sets out the minimum content and format of the climate-neutrality plans. It is also appropriate to review the climate-neutrality plans at regular intervals, in order to give the possibility to revise and replace intermediate targets and milestones taking into account new technologies and emission reductions already achieved or not achieved, as defined for each verification period in 2025 and every five years thereafter, as long as they remain suited to the climate-neutrality objective as defined by Article 2 of Regulation (EU) 2021/1119.

(26)

For transparency reasons, climate-neutrality plans should be published by competent authorities. The publication of climate-neutrality plans provides for an increased awareness and understanding of greenhouse gas reduction within the installation. In order to protect commercially sensitive information, operators of installations should be able to request the deletion of certain commercially sensitive elements from the version of the climate-neutrality plans to be made publicly available. Such requests should be duly justified.

(27)

To facilitate implementation of rules for mergers and splits of installations and considering the specificities of the installations concerned in view of free allocation rules, it is appropriate to provide more flexibility to cover justified cases of different allocation levels before and after the merger or split by removing the requirement to have the same level of allocation after the merger or split.

(28)

To avoid unjustified free allocation to installations that no longer operate, no free allocation should be granted for the proportion of the calendar year after the day of cessation of operations.

(29)

To strengthen incentives for reducing greenhouse gas emissions and improving energy efficiency and to ensure a level playing field for new and existing technologies, Directive 2003/87/EC provides for a review of the determined Union-wide ex-ante benchmarks with a view to potentially modifying the definitions and system boundaries of existing product benchmarks. The review has taken place and identified a number of benchmarks where modifications to definitions and system boundaries should be introduced to provide such additional incentives or technical clarifications.

(30)

Following the review, to incentivise low-carbon technologies for the production of agglomerated iron ore products as feed into primary steel production and to consider the needs of green steel technologies, it is appropriate to open the sintered ore benchmark to alternative products. To maximise those incentives, the label of the benchmark and the definitions of products covered and of system boundaries should be kept technology neutral.

(31)

Following the review, to incentivise low- and zero-carbon technologies for the production of primary steel and to create a level playing field for the existing coke-based blast furnace route and the direct reduction technology, the hot metal benchmark should be modified in terms of additions to the definitions of products covered and of the system boundaries.

(32)

Following the review, to incentivise low-carbon technologies for the production of alternative hydraulic binders as substitutes for white and grey cement clinker, it is appropriate to open the grey cement clinker and white cement clinker benchmarks to alternative products. Products covered by other product benchmarks and by-products or waste resulting from other processes should not be considered to avoid undue allocation.

(33)

Following the review, to facilitate harmonised implementation of free allocation rules in terms of treatment of emissions from carbon dioxide reactors, for the soda ash benchmark it should be clarified that those processes are covered by the system boundary of that product benchmark.

(34)

Following the review, to avoid double counting in terms of free allocation to the production of steel from iron sponge and to ensure that the product benchmarks for hot metal, EAF carbon steel and EAF high alloy steel do not overlap, it is necessary to exclude steel produced from iron sponge from the definition of the EAF carbon steel and EAF high alloy steel benchmarks.

(35)

Following the review, to incentivise low- and zero-carbon technologies for the production of hydrogen and to create a level playing field for existing and new technologies such as water electrolysis, Directive (EU) 2023/959 extended the activity description for the production of hydrogen to include the production of green hydrogen and lowered the production threshold. The hydrogen benchmark should be modified accordingly. However, the electrolysis processes where hydrogen is a by-product should not benefit from free allocation under the hydrogen or ammonia benchmark as these technologies are not new and serve a primary purpose other than hydrogen production. To further clarify the free allocation rules, it is appropriate to explicitly exclude hydrogen used for the production of ammonia from the hydrogen product benchmark.

(36)

Following the review, to further harmonise the implementation of free allocation rules for the production of lime and dolime and to ensure consistency with the annual reporting of emissions, it is appropriate to delete the references to conservative estimates for the content of free calcium oxide and magnesium oxide.

(37)

To better reflect the energy intensity of the production of mixes of ethylene oxide and ethylene glycols and of the composition of gas mixes of hydrogen and carbon monoxide, it is appropriate to adjust the calculation of the historical activity levels for the ethylene oxide/ethylene glycol and hydrogen product benchmarks.

(38)

To reflect the changes in allocation rules, including the revision of product benchmarks, the introduction of conditionality of free allocation and the phase-out of free allocation due to the CBAM, the scope for data collection in the context of applications for free allocation should be adjusted accordingly. Similar changes are necessary for the minimum content of the monitoring methodology plans.

(39)

Delegated Regulation (EU) 2019/331 should therefore be amended accordingly.

(40)

The amendments set out in this Regulation should apply to allocations relating to the period from 1 January 2024. However, to reduce undue administrative burden and ensure predictability of free allocation levels, for new entrants whose applications for free allocation were submitted by 31 December 2023 to the Commission and incumbent installations, provisions concerning definitions of benchmarks, waste incinerators, CBAM, small sub-installations, exchangeability of fuel and electricity, recovery of heat from fuel benchmark sub-installations and process emissions sub-installations, historical activity level for incumbent installations, allocation at installation level for incumbent installations, allocation for process emissions not covered by product benchmarks, the removal of the concept of electricity generators, and allocation in respect of steam cracking and vinyl chloride monomer, should apply to allocations relating to the period from 1 January 2026. Free allocation for the period until 31 December 2025 should remain unaffected by the amendments. To ensure equal treatment and a level playing field for new entrants with different dates of applications for allocations, specific application rules should be introduced. For new entrants whose applications for free allocation are submitted on or after 1 January 2024, the amendments to this Regulation should apply to allocations relating to the period from 1 January 2024 while for allocations relating to the period until 31 December 2023 the Regulation in its version applicable on 31 December 2023 applies.

(41)

Given that free allocation is calculated based on full calendar years and that most amendments to Directive 2003/87/EC introduced by Directive (EU) 2023/959 apply from 1 January 2024, this Regulation should apply from 1 January 2024.

(42)

This Regulation should enter into force as a matter of urgency as operators are required to comply with its rules on baseline data reporting as of April, May or June 2024 as required by Article 4(1) of Delegated Regulation (EU) 2019/331,

(1)

Article 2 is amended as follows:

(2)

in Article 4, paragraph 2 is amended as follows:

(3)

Article 6 is replaced by the following:

(4)

Article 10 is amended as follows:

(5)

Article 14 is amended as follows:

(6)

Article 15 is amended as follows:

(7)

Article 16 is amended as follows:

(8)

in Article 17, points (a) to (f) are replaced by the following:

(9)

Article 18(1) is amended as follows:

(10)

Articles 19, 20 and 21 are replaced by the following:

(11)

Article 22 is deleted;

(12)

the following Articles are inserted:

(*2)  Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 315, 14.11.2012, p. 1, ELI: http://data.europa.eu/eli/dir/2012/27/2023-05-04)."

(*3)  Commission Implementing Regulation (EU) 2018/2067 of 19 December 2018 on the verification of data and on the accreditation of verifiers pursuant to Directive 2003/87/EC of the European Parliament and of the Council (OJ L 334, 31.12.2018, p. 94, ELI: http://data.europa.eu/eli/reg_impl/2018/2067/2021-01-01).’ "

(13)

in Article 23, paragraph 4 is replaced by the following:

(14)

Article 25(4) is deleted;

(15)

Article 26 is amended as follows:

(16)

Annex I is amended in accordance with Annex I to this Regulation;

(17)

Annex III is replaced by the text in Annex II to this Regulation;

(18)

Annex IV is amended in accordance with Annex III to this Regulation;

(19)

Annex VI is amended in accordance with Annex IV to this Regulation;

(20)

Annex VII is amended in accordance with Annex V to this Regulation;

(21)

the text set out in Annex VI to this Regulation is added as Annex VIII.