(1)

The Paris Agreement, adopted in December 2015 under the United Nations Framework Convention on Climate Change (UNFCCC) entered into force in November 2016 (‘the Paris Agreement’) (3). Its Parties have agreed to hold the increase in the global average temperature well below 2 oC above pre-industrial levels and to pursue efforts to limit the temperature increase to 1,5  oC above pre-industrial levels.

(1)

The Paris Agreement, adopted in December 2015 under the United Nations Framework Convention on Climate Change (UNFCCC) entered into force in November 2016 (‘the Paris Agreement’) (3). Its Parties have agreed to hold the increase in the global average temperature well below 2 oC above pre-industrial levels and to pursue efforts to limit the temperature increase to 1,5  oC above pre-industrial levels. By adopting the Glasgow Climate Pact, the Parties to the Paris Agreement recognised that limiting the increase in the global average temperature to 1,5  oC above pre-industrial levels would significantly reduce the risks and impacts of climate change, and they committed to strengthening their 2030 targets by the end of 2022 to close the ambition gap, in line with the findings of the Intergovernmental Panel on Climate Change (IPCC). This should be done in a manner that is equitable and respects the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances. The revision of the European Union Emissions Trading System (EU ETS), including of its market stability reserve, is a unique opportunity.

(1a)

The urgency of the need to keep the Paris Agreement goal of 1,5  oC alive has become more significant following the findings of the IPCC in its report of 7 August 2021 entitled ‘Climate Change 2021: The Physical Science Basis’. The IPCC found that global temperature will reach or exceed the 1,5  oC mark earlier than previously anticipated, namely within the next 20 years. It also found that unless there are immediate and ambitious reductions in greenhouse gas emissions, it will no longer be possible to limit global warming to close to 1,5  oC or even 2 oC. In addition, in its report of 28 February 2022 entitled ‘Climate Change 2022: Impacts, Adaptation and Vulnerability’, the IPCC stated, with very high confidence, that climate change is a threat to human well-being and planetary health. Any further delay in concerted anticipatory global action on adaptation and mitigation will miss a brief and rapidly closing window of opportunity to secure a liveable and sustainable future for all.

(1b)

The need for urgent action is further intensified by the increase in the frequency and intensity of extreme weather conditions as a direct result of climate change. According to the United Nations Office for Disaster Risk Reduction, the number of disasters recorded worldwide and the scale of global economic losses have nearly doubled in the last 20 years, much of which increase corresponds to the significant rise in the number of climate-related disasters.

(1c)

The Union should therefore address this urgency by stepping up its efforts and establishing itself as an international leader in the fight against climate change, while reflecting the principles of equity and of common but differentiated responsibilities and respective capabilities, as laid down in Article 2(2) of the Paris Agreement.

(1d)

In its resolution of 28 November 2019 on the climate and environment emergency  (1a) , the European Parliament urged the Commission to take immediate and ambitious action to limit global warming to 1,5  oC and to avoid massive biodiversity loss, including by addressing inconsistencies of current Union policies on the climate and environment emergency and by ensuring that all relevant future legislative and budgetary proposals are fully aligned with the objective of limiting global warming to under 1,5  oC and that they do not contribute to biodiversity loss.

(2)

Tackling climate and environmental-related challenges and reaching the objectives of the Paris Agreement are at the core of the Communication on ‘The European Green Deal’, adopted by the Commission on 11 December 2019 (4).

(2)

Tackling climate and environmental-related challenges and reaching the objectives of the Paris Agreement are therefore at the core of the Communication on ‘The European Green Deal’, adopted by the Commission on 11 December 2019 (4).

(3)

The European Green Deal combines a comprehensive set of mutually reinforcing measures and initiatives aimed at achieving climate neutrality in the EU by 2050, and sets out a new growth strategy that aims to transform the Union into a fair and prosperous society, with a modern, resource-efficient and competitive economy, where economic growth is decoupled from resource use . It also aims to protect, conserve and enhance the Union's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. At the same time, this transition affects women and men differently and has a particular impact on some disadvantaged groups, such as older people, persons with disabilities and persons with a minority racial or ethnic background. It must therefore be ensured that the transition is just and inclusive , leaving no one behind.

(3)

The European Green Deal provides the starting point for the achievement of the Union’s climate-neutrality objective by 2050, at the latest, and the aim to achieve negative emissions thereafter, as laid down in Article 2(1) of Regulation (EU) 2021/1119 of the European Parliament and of the Council  (1a) . It sets out a new growth strategy that aims to transform the Union into a fair and prosperous society, with a modern, resource-efficient and competitive economy, while leaving no one behind in a just transition that also addresses energy poverty . It also aims to protect, conserve and enhance the Union's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts. This transition affects workers from various sectors and each gender differently and has a particular impact on some disadvantaged and vulnerable groups, such as older people, persons with disabilities, persons with a minority racial or ethnic background and low and lower-middle income individuals and households. It also imposes greater challenges on certain regions, in particular structurally disadvantaged and peripheral regions, as well as islands . It must therefore be ensured that the transition is just and inclusive.

(3a)

The EU ETS is a cornerstone of the Union’s climate policy and constitutes its key tool for reducing greenhouse gas emissions in a cost-effective way. In line with the commitments made in COP26 in Glasgow to review the nationally determined contributions on an annual basis, the Commission should revise its nationally determined contribution to account for all the sectors included in the EU ETS during this revision of Directive 2003/87/EC of the European Parliament and of the Council  (1a) .

(4)

The necessity and value of the European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on the health, living and working conditions and well-being of the Union’s citizens, which have shown that our society and our economy need to improve their resilience to external shocks and act early to prevent or mitigate them. European citizens continue to express strong views that this applies in particular to climate change (5).

(4)

The necessity and value of a well-implemented European Green Deal have only grown in light of the very severe effects of the COVID-19 pandemic on the health, living and working conditions and well-being of the Union’s citizens, which have shown that our society and our economy need to improve their resilience to external shocks and act early to prevent or mitigate them in a manner that is just and results in no one being left behind, including those at risk of energy poverty . European citizens continue to express strong views that this applies in particular to climate change (5).

(4a)

Delivering on the European Green Deal should ensure quality job creation and social progress for all. To be socially acceptable, the climate ambition proposed in this Directive should be matched by an equivalent social ambition, in line with the European Pillar of Social Rights. The European Green Deal agenda should be an opportunity to maintain and create quality jobs, promote decent work, raise labour standards, strengthen social dialogue and collective bargaining, tackle discrimination at work and promote gender equality. In order to achieve those objectives, just transition mechanisms should complement all proposed actions in the framework of the European Green Deal and the ‘Fit for 55’ package.

(4b)

Considering that the transition towards a sustainable economy needs to be combined with upholding Europe's competitiveness and creating jobs, it is crucial to the success of the European Green Deal that the single market is not overburdened with additional costs for companies to adjust to a new regulatory environment.

(6)

In Regulation (EU) 2021/1119 of the European Parliament and of the Council  (7) the Union has enshrined the target of economy-wide climate neutrality by 2050 in legislation . That Regulation also establishes a binding Union domestic reduction commitment of net greenhouse gas emissions (emissions after deduction of removals) of at least 55 % below 1990 levels by 2030.

(6)

In Regulation (EU) 2021/1119 the Union has enshrined in legislation the target of economy-wide climate neutrality by 2050 , at the latest, and the aim to achieve negative emissions thereafter . That Regulation also establishes a binding Union domestic reduction commitment of net greenhouse gas emissions (emissions after deduction of removals) of at least 55 % below 1990 levels by 2030.

(7)

All sectors of the economy need to contribute to achieving those emission reductions. Therefore, the ambition of the EU Emissions Trading System (EU ETS), established by Directive 2003/87/EC of the European Parliament and of the Council  (8) to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner, should be increased in a manner commensurate with this economy-wide net greenhouse gas emissions reduction target for 2030.

(7)

All sectors of the economy need to contribute to achieving those emission reductions. Therefore, the ambition of the EU Emissions Trading System (EU ETS), established by Directive 2003/87/EC to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner, should be increased in a manner commensurate with this economy-wide net greenhouse gas emissions reduction target for 2030 , the Union’s climate-neutrality objective to be achieved by 2050, at the latest, and the aim to achieve negative emissions thereafter, as laid down in Article 2(1) of Regulation (EU) 2021/1119 .

(8)

The EU ETS should incentivise production from installations that partly or fully reduce greenhouse gas emissions. Therefore, the description of some categories of activities in Annex I to Directive 2003/87/EC should be amended to ensure an equal treatment of installations in the sectors concerned. In addition, free allocation for the production of a product should be independent of the nature of the production process. It is therefore necessary to modify the definition of the products and of the processes and emissions covered for some benchmarks to ensure a level playing field for new and existing technologies. It is also necessary to decouple the update of the benchmark values for refineries and for hydrogen to reflect the increasing importance of production of hydrogen outside the refineries sector.

(8)

The EU ETS should incentivise production from installations that partly or fully reduce greenhouse gas emissions. Therefore, the description of some categories of activities in Annex I to Directive 2003/87/EC should be amended to ensure an equal treatment of installations in the sectors concerned. In addition, free allocation for the production of a product should be independent of the nature of the production process. It is therefore necessary to modify the definition of the products and of the processes and emissions covered for some benchmarks to ensure a level playing field for new and existing technologies. It is also necessary to decouple the update of the benchmark values for refineries and for hydrogen to reflect the increasing importance of production of green hydrogen outside the refineries sector.

(8a)

When defining the principles for setting ex-ante benchmarks in individual sectors and subsectors, the Commission should consult the relevant stakeholders, including in the sectors and subsectors concerned, civil society representatives and the European Scientific Advisory Board on Climate Change referred to in Article 3 of Regulation (EU) 2021/1119.

(13)

Greenhouse gases that are not directly released into the atmosphere should be considered emissions under the EU ETS and allowances should be surrendered for those emissions unless they are stored in a storage site in accordance with Directive 2009/31/EC of the European Parliament and of the Council (13), or they are permanently chemically bound in a product so that they do not enter the atmosphere under normal use. The Commission should be empowered to adopt implementing acts specifying the conditions where greenhouse gases are to be considered as permanently chemically bound in a product so that they do not enter the atmosphere under normal use, including obtaining a carbon removal certificate, where appropriate, in view of regulatory developments with regard to the certification of carbon removals.

(13)

Greenhouse gases that are not directly released into the atmosphere should be considered emissions under the EU ETS and allowances should be surrendered for those emissions unless they are stored in a storage site in accordance with Directive 2009/31/EC of the European Parliament and of the Council (13), or they are permanently chemically bound in a product so that they do not enter the atmosphere under normal use and disposal. The Commission should be empowered to adopt delegated acts specifying the conditions where greenhouse gases are to be considered as permanently chemically bound in a product so that they do not enter the atmosphere under normal use and disposal , including obtaining a carbon removal certificate, where appropriate, in view of regulatory developments with regard to the certification of carbon removals.

(13a)

The EU ETS should avoid, as much as possible, undue exemptions and distortive measures. In the long-term, all sectors should play a role in contributing to the achievement of climate neutrality within the Union by 2050 and all CO2 emissions should be covered by the appropriate Union policy instruments. The inclusion of municipal waste incineration installations in the EU ETS would contribute to the circular economy by encouraging recycling, reuse and repair of products, while also contributing to economy-wide decarbonisation. Since recycling and regeneration activities are already covered by the EU ETS, the inclusion of municipal waste incineration installations would reinforce incentives for sustainable management of waste in line with the waste hierarchy. It would complement other elements of Union waste legislation. Moreover, integrating waste incineration into the EU ETS would create a level playing field between the regions that have included municipal waste incineration under the scope, reducing the risk of tax competition between regions. However, to avoid deviation of waste from municipal waste incineration installations towards landfills in the Union, which create methane emissions, and exports of waste to third countries, with a potentially hazardous impact on the environment, the inclusion of municipal waste incineration installations within the scope of Directive 2003/87/EC from 1 January 2026 should be preceded by an impact assessment to be conducted by 31 December 2024, which, where appropriate, should be accompanied by a legislative proposal to prevent such deviation of waste and such exports.

(13b)

All greenhouse gas emissions captured and transferred for utilisation through carbon capture and utilisation (‘CCU’) processes that are not permanently chemically bound in a product such that they do not enter the atmosphere under normal use and disposal should be accounted for. In the absence of all stages of the process, in particular emissions from waste incineration installations, being covered by carbon pricing, reliance on accounting for emissions at the point of their release into the atmosphere would result in emissions being undercounted. In order to regulate the capture of carbon in a way that reduces net emissions, ensures that all emissions are accounted for and that double counting is avoided, while generating economic incentives, the Commission should assess how to account for emissions of greenhouse gases which are considered to have been captured and utilised to become chemically bound in a product based on a life-cycle assessment of the product, for example where these are used for the manufacture of a product or where such proportionate reduction contributes to innovative national policies approved by the competent authority in the Member State concerned to ensure and incentivise cooperation between sectors, and should, where appropriate, present a legislative proposal to include a transparent, comparable and reliable methodology.

(13c)

In line with Regulation (EU) 2021/1119, priority should be given to direct emissions reductions, which will have to be complemented by increased CO2 removals in order to achieve climate neutrality. In the medium-term, CO2 removals could already help to increase the ambition above the Union 2030 climate target as laid down in Regulation (EU) 2021/1119. Therefore, the Commission should examine how negative emissions resulting from greenhouse gases that are removed from the atmosphere and safely and permanently stored, for example through direct air capture, can be accounted for and incentivised in emissions trading, including by proposing a clear scope and strict criteria and safeguards to ensure that such removals do not offset necessary emissions reductions but are genuine and permanent.

(13d)

According to the communication of the Commission of 14 October 2020 on an EU strategy to reduce methane emissions, 26 % of the continent’s methane emissions come from waste. Worldwide, landfills and dumpsites are predicted to account for 8 to 10 % of all anthropogenic greenhouse gas emissions by 2025. The Union should aim at significantly reducing landfilling in the Union and should in any case avoid the future inclusion of waste incineration in the EU ETS creating an uneven playing field and leading to increased landfilling. Therefore, the Commission should also assess the possibility and feasibility of including all waste management processes, such as landfills, fermentation, composting and mechanical-biological treatment, in the EU ETS.

(14)

International maritime transport activity, consisting of voyages between ports under the jurisdiction of two different Member States or between a port under the jurisdiction of a Member State and a port outside the jurisdiction of any Member State, has been the only means of transportation not included in the Union's past commitments to reduce greenhouse gas emissions. Emissions from fuel sold in the Union for journeys that depart in one Member State and arrive in a different Member State or a third country have grown by around 36 % since 1990. Those emissions represent close to 90 % of all Union navigation emissions as emissions from fuel sold in the Union for journeys departing and arriving in the same Member State have been reduced by 26 % since 1990. In a business-as-usual scenario, emissions from international maritime transport activities are projected to grow by around 14 % between 2015 and 2030 and 34 % between 2015 and 2050. If the climate change impact of maritime transport activities grows as projected, it would significantly undermine reductions made by other sectors to combat climate change.

(14)

International maritime transport activity, consisting of voyages between ports under the jurisdiction of two different Member States or between a port under the jurisdiction of a Member State and a port outside the jurisdiction of any Member State, has been the only means of transportation not included in the Union's past commitments to reduce greenhouse gas emissions. Emissions from fuel sold in the Union for journeys that depart in one Member State and arrive in a different Member State or a third country have grown by around 36 % since 1990. Those emissions represent close to 90 % of all Union navigation emissions as emissions from fuel sold in the Union for journeys departing and arriving in the same Member State have been reduced by 26 % since 1990. In a business-as-usual scenario, emissions from international maritime transport activities are projected to grow by around 14 % between 2015 and 2030 and 34 % between 2015 and 2050. If the climate change impact of maritime transport activities grows as projected, it would significantly undermine reductions made by other sectors to combat climate change and therefore to achieve the economy-wide net greenhouse gas emissions reduction target for 2030, the Union’s climate-neutrality objective by 2050, at the latest, and the aim of achieving negative emissions thereafter as laid down in Article 2(1) of Regulation (EU) 2021/1119 and the goal of the Paris Agreement .

(14a)

International maritime transport is the only means of transportation that has not been included in the Union's commitment to reduce greenhouse gas emissions, despite the fact that the European Parliament has repeatedly called for all sectors of the economy to contribute to the joint effort to complete the transition to net-zero greenhouse gas emissions as soon as possible and by 2050 at the latest, in line with the Union's commitments under the Paris Agreement. CO2 remains the dominant cause of maritime transport’s climate impact when calculated on a global warming-potential 100-year basis, accounting for 98 %, or, if black carbon is included, 91 %, of total international greenhouse gas emissions in CO2 equivalents. However, according to a report entitled ‘Fourth IMO Greenhouse Gas Study’ of the International Maritime Organization (IMO), published in 2020, there was an 87 % increase of methane (CH4) over the period from 2012 to 2018. Therefore, and in line with the amendments adopted by the European Parliament on 16 September 2020 on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 2015/757, in order to take appropriate account of the global data collection system for ship fuel oil consumption data, both CO2 and CH4 emissions, as well as nitrous oxides (N2O), should be included in the extension of the EU ETS to maritime transport activities. Consequently, an administering authority should ensure that shipping companies monitor and report aggregated emissions data including the release of CO2, CH4 and N2O to ensure consistency with Regulation (EU) …/… [FuelEU Maritime]. Furthermore, the Commission should by 31 December 2024 assess, and report to the European Parliament and to the Council on, the impact on the global climate of greenhouse gas emissions other than CO2, N2O and CH4 and of particles with a global warming potential, and, where appropriate, submit a legislative proposal on the inclusion of those emissions and particles from maritime transport activities in the scope of the EU ETS.

(15)

In 2013, the Commission adopted a strategy for progressively integrating maritime emissions into the Union's policy for reducing greenhouse gas emissions. As a first step in this approach, the Union established a system to monitor, report and verify emissions from maritime transport in Regulation (EU) 2015/757 of the European Parliament and of the Council (14), to be followed by the laying down of reduction targets for the maritime sector and the application of a market based measure. In line with the commitment of the co-legislators expressed in Directive (EU) 2018/410 of the European Parliament and of the Council (15), action by the International Maritime Organization (IMO) or the Union should start from 2023, including preparatory work on adoption and implementation of a measure ensuring that the sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement and due consideration being given by all stakeholders.

(15)

In 2013, the Commission adopted a strategy for progressively integrating maritime emissions into the Union's policy for reducing greenhouse gas emissions. As a first step in this approach, the Union established a system to monitor, report and verify emissions from maritime transport in Regulation (EU) 2015/757 of the European Parliament and of the Council (14), to be followed by the laying down of reduction targets for the maritime sector and the application of a market based measure. In line with the commitment of the co-legislators expressed in Directive (EU) 2018/410 of the European Parliament and of the Council (15), action by the International Maritime Organization (IMO) or the Union should start from 2023, including preparatory work on adoption and implementation of a measure ensuring that the sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement and due consideration being given by all stakeholders. In order to increase the environmental effectiveness of Union measures and avoid unfair competition and incentives for circumvention, the scope of Regulation (EU) 2015/757 should be amended to cover ships of 400 gross tonnage and above from 1 January 2024. In order to ensure there is a proportionate administrative burden, for ships of less than 5 000 gross tonnage, operators should only be required to report the information which is relevant for inclusion from 1 January 2027 of such ships within the scope of the EU ETS, in particular the type of fuel, its carbon factor and energy density.

(16)

Pursuant to Directive (EU) 2018/410, the Commission should report to the European Parliament and to the Council on the progress achieved in the IMO towards an ambitious emission reduction objective, and on accompanying measures to ensure that the maritime transport sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement. Efforts to limit global maritime emissions through the IMO are under way and should be encouraged. However, while the recent progress achieved through the IMO is welcome, these measures will not be sufficient to achieve the objectives of the Paris Agreement.

(16)

Pursuant to Directive (EU) 2018/410, the Commission should report to the European Parliament and to the Council on the progress achieved in the IMO towards an ambitious emission reduction objective, and on accompanying measures to ensure that the maritime transport sector duly contributes to the efforts needed to achieve the objectives agreed under the Paris Agreement. Efforts to limit global maritime emissions through the IMO are under way and should be encouraged. However, the recent developments in the IMO framework are not sufficient to achieve the objectives of the Paris Agreement. Given the international character of shipping, the Commission in collaboration with Member States should further step up diplomatic efforts to make progress on the development of a global market-based measure at the IMO level.

(16a)

Evasive port calls in neighbouring non-EU countries could seriously jeopardise the effectiveness of the EU ETS in relation to maritime transport, as it would not reduce total shipping emissions. Such evasive port calls could even increase overall emissions, in particular where such evasion leads to longer voyages to and from third countries with lower environmental standards. Therefore, the Commission should monitor, and report biennially from … [the year following the entry into force of this amending Directive] on, the implementation of the Chapter on maritime transport and possible trends as regards companies seeking to avoid being bound by the requirements of this Directive and should present, where applicable, a legislative proposal to address any evidence of evasive port calls.

(17)

In the European Green Deal, the Commission stated its intention to take additional measures to address greenhouse gas emissions from the maritime transport sector through a basket of measures to enable the Union to reach its emissions reduction targets. In this context, Directive 2003/87/EC should be amended to include the maritime transport sector in the EU ETS in order to ensure this sector contributes to the increased climate objectives of the Union as well as to the objectives of the Paris Agreement, which requires developed countries to take the lead by undertaking economy-wide emission reduction targets, while developing countries are encouraged to move over time towards economy-wide emission reduction or limitation targets (16). Considering that emissions from international aviation outside Europe should be capped from January 2021 by global market-based action while there is no action in place that caps or prices maritime transport emissions, it is appropriate that the EU ETS covers a share of the emissions from voyages between a port under the jurisdiction of a Member State and port under the jurisdiction of a third country, with the third country being able to decide on appropriate action in respect of the other share of emissions. The extension of the EU ETS to the maritime transport sector should thus include half of the emissions from ships performing voyages arriving at a port under the jurisdiction of a Member State from a port outside the jurisdiction of a Member State, half of the emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State , emissions from ships performing voyages arriving at a port under the jurisdiction of a Member State from a port under the jurisdiction of a Member State, and emissions at berth in a port under the jurisdiction of a Member State. This approach has been noted as a practical way to solve the issue of Common but Differentiated Responsibilities and Capabilities, which has been a longstanding challenge in the UNFCCC context. The coverage of a share of the emissions from both incoming and outgoing voyages between the Union and third countries ensures the effectiveness of the EU ETS , notably by increasing the environmental impact of the measure compared to a geographical scope limited to voyages within the EU, while limiting the risk of evasive port calls and the risk of delocalisation of transhipment activities outside the Union. To ensure a smooth inclusion of the sector in the EU ETS , the surrendering of allowances by shipping companies should be gradually increased with respect to verified emissions reported for the period 2023 to 2025. To protect the environmental integrity of the system, to the extent that fewer allowances are surrendered in respect of verified emissions for maritime transport during those years, once the difference between verified emissions and allowances surrendered has been established each year, a corresponding a number of allowances should be cancelled. As from 2026, shipping companies should surrender the number of allowances corresponding to all of their verified emissions reported in the preceding year.

(17)

Greenhouse gas emissions from the maritime sector account for around 2,5  % of Union emissions. The lack of decisive action within the IMO framework has delayed innovation and introduction of necessary measures to reduce emissions in the sector. In the European Green Deal, the Commission stated its intention to take additional measures to address greenhouse gas emissions from the maritime transport sector through a basket of measures to enable the Union to reach its emissions reduction targets. In this context, Directive 2003/87/EC should be amended to include the maritime transport sector in the EU ETS in order to ensure this sector contributes its fair share to the increased climate objectives of the Union as well as to the objectives of the Paris Agreement, which requires developed countries to take the lead by undertaking economy-wide emission reduction targets, while developing countries are encouraged to move over time towards economy-wide emission reduction or limitation targets (16). The surrendering of allowances by shipping companies should be fully implemented from 2024 and shipping companies should surrender the number of allowances corresponding to all of their verified emissions reported in the preceding year. Considering that emissions from international aviation outside Europe should be capped from January 2021 by global market-based action while there is no action in place that caps or prices maritime transport emissions, it is appropriate that the EU ETS covers such emissions, while providing for derogations under strict conditions if third countries take responsibility for such emissions or an IMO market-based measure is in place to cover a share of the emissions from voyages between a port under the jurisdiction of a Member State and port under the jurisdiction of a third country, with the third country being able to decide on appropriate action in respect of the other share of emissions. From 2027 onwards, the extension of the EU ETS to the maritime transport sector should thus include emissions from voyages to and from third countries, while providing for derogations in relation to half of the emissions from ships performing voyages arriving at a port under the jurisdiction of a Member State from a port outside the jurisdiction of a Member State, half of the emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State under strict conditions, in particular where a third country has a carbon pricing mechanism in place, or has established through a bilateral or multilateral agreement between the Union and one or more third countries a carbon pricing mechanism linked to the EU ETS , pursuant to Article 25 of Directive 2003/87/EC, to cap and reduce emissions to a level at least equivalent to the EU ETS, meaning a binding mechanism to cap, reduce and price maritime greenhouse gas emissions, resulting in an absolute emissions reduction at least equivalent to the case where 100 % of those emissions would be subject to the EU ETS or where a third country is a Least Developed Country or Small Island Developing State that has a GDP per capita not equalling or exceeding the Union average and includes such emissions under its nationally determined contributions under the Paris Agreement.

(17a)

The adverse impacts of climate change affect the respect of human rights, including the right to food, water, sanitation, health, decent housing and life. The Paris Agreement positioned as the third pillar of climate action the damage and loss that disproportionately affect people living in conditions of vulnerability, indigenous peoples, women, children, and people with disabilities. The low-income, lower-middle income and least developed countries are the most vulnerable to the impact of climate change. Although their contributions to the greenhouse gases in the atmosphere are very small or even negligible, they tend to be more heavily exposed to impacts of climate change, notably in view of the state of their infrastructure and their populations’ living conditions. Those countries are now in a calamitous situation because of the combination of the global failure to curb greenhouse gas emissions, which increases their adaptation needs and costs ever higher, and the public finance crises caused by the COVID-19 pandemic and the associated ‘debt pandemic’.

(17b)

The Commission, the Council and the European Parliament should work with third countries in order to facilitate acceptance of the provisions of Directive 2003/87/EC as regards maritime transport activities and to strengthen international cooperation in this area. At the same time, the Commission, the Council and the European Parliament should work to strengthen global measures through the IMO.

(17c)

Significant financial resources are needed to implement the Paris Agreement and the Union remains committed to contributing to the developed countries’ goal of jointly mobilising from different sources USD 100 billion per year, starting from 2020, to support developing countries. The decision taken at COP24 on having a more ambitious target from 2025 onwards, beyond the current commitment, is a step in the right direction, but the actual pledges by developed countries still fall a long way short of the collective goal, and the resulting gap should be filled. The Union and its Member States should step up their efforts to mobilise international climate finance for developing countries and develop an international roadmap outlining each developed country’s fair share of the USD 100 billion financial pledge and the mechanisms to ensure that pledges are turned into deeds. Emerging economies should make a contribution, from 2025 onwards, to the increased amount of international climate financing in the future.

(17d)

The Commission should assist developing countries and step up its support for such countries, including through the EU ETS, in order to strengthen their ability to adapt and their resilience in relation to climate change. Collective pledging of support for climate action in developing countries by the Union would increase its influence in the UNFCCC negotiations, while contributing through the Green Climate Fund would also encourage other countries to contribute a portion of the revenues from their own carbon pricing schemes to that fund. The Commission should submit a report to the European Parliament and to the Council in which it examines the decarbonisation needs in developing countries by assessing greenhouse gas emissions in sectors corresponding to the sectors covered under the EU ETS and CBAM.

(17e)

The Union and its Member States are the largest providers of public climate finance. Financing climate action is essential, as many developing countries have conditional nationally determined contributions, the achievement of which depends on financial support. The Commission should support developing countries with decarbonisation of their industries, in particular in those sectors corresponding to the sectors covered under the EU ETS and CBAM, in order to facilitate their achievement of economy-wide emission reduction targets in line with the Paris Agreement. Particular priority should be given to addressing the needs of least developed countries through the use of EU ETS allowances to fund climate action, in particular adaptation to the impacts of climate change.

(17f)

Renewing fleets of ice-class ships and developing innovative technology that reduces the emissions of such ships while sailing in winter conditions will take time and require financial support. Currently, the design enabling ice-class ships to sail in ice conditions, leads to such ships producing more emissions both in open water and when navigating in ice conditions than ships of similar size designed for sailing only in open water. On average, ice-class ships, when sailing in open water, consume about 2 to 5 % more fuel than ships of similar size designed for sailing in open water only. Therefore, a flag-neutral method to take into account ice conditions in northern parts of the Union should be implemented under this Directive allowing for a reduction of allowances to be surrendered by shipping companies on the basis of their ships’ ice class or navigation in ice conditions, or both, until 31 December 2029. As a result, from 2030 onwards, shipping companies should be liable to surrender allowances corresponding to one hundred percent (100 %) of verified emissions reported for each respective year notwithstanding their ships’ ice class and navigation in ice conditions. There should also be specific support for innovation regarding the decarbonisation of ice-class ships through an Ocean Fund.

(18)

The provisions of Directive 2003/87/EC as regards maritime transport activities should be kept under review in light of future international developments and efforts undertaken to achieve the objectives of the Paris Agreement, including the second global stocktake in 2028, and subsequent global stocktakes every five years thereafter, intended to inform successive nationally determined contributions. In particular, the Commission should report any time before the second global stocktake in 2028 — and therefore no later than by 30 September 2028 — to the European Parliament and to the Council on progress in the IMO negotiations concerning a global market-based measure. In its report, the Commission should analyse the International Maritime Organization instruments and, assess, as relevant, how to implement those instruments in Union law through a revision of Directive 2003/87/EC. In its report , the Commission should include proposals as appropriate .

(18)

The provisions of Directive 2003/87/EC as regards maritime transport activities should be kept under review in light of future international developments and efforts undertaken to achieve the objectives of the Paris Agreement, including the second global stocktake in 2028, and subsequent global stocktakes every five years thereafter, intended to inform successive nationally determined contributions. In particular, the Commission should report any time before the second global stocktake in 2028 — and therefore no later than by 30 September 2028 — to the European Parliament and to the Council on progress in the IMO negotiations concerning a global market-based measure. In its report, the Commission should analyse the International Maritime Organization instruments and, assess, as relevant, how to implement those instruments in Union law through a revision of Directive 2003/87/EC. In the event that a global market-based measure has been adopted at IMO level leading to greenhouse gas emission reductions which are in line with the Paris Agreement and at least comparable to those resulting from the Union measures , the Commission should consider a proportionate reduction of the scope of application of the Union measures to avoid the creation of a double burden, while maintaining in the scope of the EU ETS at least fifty percent (50 %) of the emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State, and fifty percent (50 %) percent of the emissions from ships performing voyages departing from a port outside the jurisdiction of a Member State and arriving at a port under the jurisdiction of a Member State, while recognising the Union’s sovereignty to regulate its share of emissions from international shipping voyages in line with the obligations of the Paris Agreement. However, in the event that there has been insufficient progress at IMO level or that global measures have been adopted at IMO level which are not in line with the Paris Agreement and at least comparable to those resulting from the Union measures, the Commission should keep the Union measures to cover one hundred percent (100 %) of the emissions from ships performing voyages departing from a port under the jurisdiction of a Member State and arriving at a port outside the jurisdiction of a Member State and one hundred percent (100 %) of the emissions from ships performing voyages departing from a port outside the jurisdiction of a Member State and arriving at a port under the jurisdiction of a Member State, through an amendment of Directive 2003/87/EC.

(19)

The Commission should review the functioning of Directive 2003/87/EC in relation to maritime transport activities in the light of experience of its application, including in relation to possible evasive practices, and should then propose measures to ensure its effectiveness.

(19)

The Commission should review the functioning of Directive 2003/87/EC in relation to maritime transport activities in the light of experience of its application, including in relation to possible evasive practices, and should then propose measures to ensure its effectiveness aligned with the Union’s climate-neutrality objective by 2050, at the latest, and the aim to achieve negative emissions thereafter as laid down in Article 2(1) of Regulation(EU) 2021/1119 and the objectives of the Paris Agreement .

(20)

The person or organisation responsible for the compliance with the EU ETS should be the shipping company, defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention. This definition is based on the definition of ‘company’ in Article 3, point (d) of Regulation (EU) 2015/757, and in line with the global data collection system established in 2016 by the IMO. In line with the polluter pays principle , the shipping company could, by means of a contractual arrangement, hold the entity that is directly responsible for the decisions affecting the CO2 emissions of the ship accountable for the compliance costs under this Directive. This entity would normally be the entity that is responsible for the choice of fuel , route and speed of the ship.

(20)

The person or organisation responsible for the compliance with the EU ETS should be the shipping company, defined as the shipowner or any other organisation or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention. This definition is based on the definition of ‘company’ in Article 3, point (d) of Regulation (EU) 2015/757, and in line with the global data collection system established in 2016 by the IMO. However, the shipping company is not always responsible for purchasing the fuel or taking operational decisions that affect the greenhouse gas emissions of the ship. Those responsibilities can be assumed by an entity other than the shipping company under a contractual arrangement. In that case, in order to ensure that the polluter pays principle is fully respected and to encourage the adoption of efficiency measures and cleaner fuels, a binding clause should be included in such arrangements for the purpose of passing on the costs so that the entity that is ultimately responsible for the decisions affecting the greenhouse gas emissions of the ship is held accountable for covering the compliance costs paid by the shipping company under this Directive. That entity would normally be the entity that is responsible for the choice and purchase of the fuel used by the ship , or for the operation of the ship, as regards, for example, the choice of the cargo carried by, or the route and speed of, the ship.

(20a)

The successful transition to zero emission shipping requires an integrated approach and the appropriate enabling environment to stimulate innovation, both as regards ships and in ports. That enabling environment involves public and private investment in research and innovation, technological and operational measures to improve the energy efficiency of ships and ports, and the deployment of sustainable alternative fuels, such as hydrogen and ammonia, that are produced from renewable energy sources, including through carbon contracts for difference (‘CCDs’), and of zero emission propulsion technologies, including the necessary refuelling and recharging infrastructure in ports. An Ocean Fund should be established from revenues generated from the auctioning of allowances in respect of maritime transport activities under the EU ETS, in order to improve the energy efficiency of ships and support investment aimed at facilitating the decarbonisation of maritime transport, including as regards short sea shipping and ports, and training and re-training of the workforce. In addition, the revenues generated from penalties imposed under Regulation (EU) … /… [FuelEU Maritime] should be allocated to the Ocean Fund as external assigned revenue in accordance with Article 21(5) of Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council  (1a) and Article 3gab(1) of Directive 2003/87/EC. The Commission should ensure that due consideration is given to supporting innovative projects contributing to the deployment and implementation of Regulation (EU) …/… [FuelEU Maritime] as well as projects that have a positive effect on biodiversity and help reduce the risk of noise, air and maritime pollution.

(21)

In order to reduce the administrative burden on shipping companies, one Member State should be responsible for each shipping company. The Commission should publish an initial list of shipping companies that performed a maritime activity falling within the scope of the EU ETS, which specifies the administering authority in respect of each shipping company. The list should be updated at least every two years to reattribute shipping companies to another administering authority as relevant. For shipping companies registered in a Member State, the administering authority should be that Member State. For shipping companies registered in a third country, the administering authority should be the Member State in which the shipping company had the greatest estimated number of port calls from voyages falling within the scope of Directive 2003/87/EC in the last two monitoring years. For shipping companies registered in a third country and which did not perform any voyage falling within the scope of Directive 2003/87/EC in the last two monitoring years, the administering authority should be the Member State from where the shipping company started its first voyage falling within the scope of that Directive. The Commission should publish and update on a  biennial basis a list of shipping companies falling within the scope of Directive 2003/87/EC specifying the administering authority for each shipping company. In order to ensure equal treatment of shipping companies, Member States should follow harmonised rules for the administration of shipping companies for which they have responsibility, in accordance with detailed rules to be established by the Commission.

(21)

In order to reduce the administrative burden on shipping companies, one Member State should be responsible for each shipping company. The Commission should publish an initial list of shipping companies that performed a maritime activity falling within the scope of the EU ETS, which specifies the administering authority in respect of each shipping company. The list should be updated regularly and at least every year to reattribute shipping companies to another administering authority as relevant. For shipping companies registered in a Member State, the administering authority should be that Member State. For shipping companies registered in a third country, the administering authority should be the Member State in which the shipping company had the greatest estimated number of port calls from voyages falling within the scope of Directive 2003/87/EC in the last two monitoring years. For shipping companies registered in a third country and which did not perform any voyage falling within the scope of Directive 2003/87/EC in the last two monitoring years, the administering authority should be the Member State from where the shipping company started its first voyage falling within the scope of that Directive. The Commission should publish and update on a  yearly basis a list of shipping companies falling within the scope of Directive 2003/87/EC specifying the administering authority for each shipping company. In order to ensure equal treatment of shipping companies, Member States should follow harmonised rules for the administration of shipping companies for which they have responsibility, in accordance with detailed rules to be established by the Commission.

(24)

Based on experience from similar tasks related to environmental protection, the European Maritime Safety Agency (EMSA) or another relevant organisation should, as appropriate and in accordance with its mandate, assist the Commission and the administering authorities in respect of the implementation of Directive 2003/87/EC. Owing to its experience with the implementation of Regulation (EU) 2015/757 and its IT tools, EMSA could assist the administering authorities notably as regards the monitoring, reporting and verification of emissions generated by maritime activities under the scope of this Directive by facilitating the exchange of information or developing guidelines and criteria.

(24)

Based on experience from similar tasks related to environmental protection, the European Maritime Safety Agency (EMSA) or another relevant organisation should, as appropriate and in accordance with its mandate, assist the Commission and the administering authorities in respect of the implementation of Directive 2003/87/EC. Owing to its experience with the implementation of Regulation (EU) 2015/757 and its IT tools, EMSA should assist the administering authorities notably as regards the monitoring, reporting and verification of emissions generated by maritime activities under the scope of this Directive by facilitating the exchange of information or developing guidelines and criteria.

(26)

Achieving the Union’s emissions reduction target for 2030 will require a reduction in the emissions of the sectors covered by the EU ETS of 61 % compared to 2005 . The Union-wide quantity of allowances of the EU ETS needs to be reduced to create the necessary long-term carbon price signal and drive for this degree of decarbonisation. To this end, the linear reduction factor should be increased, also taking into account the inclusion of emissions from maritime transport. The latter should be derived from the emissions from maritime transport activities reported in accordance with Regulation (EU) 2015/757 for 2018 and 2019 in the Union, adjusted, from year 2021, by the linear reduction factor.

(26)

Achieving the Union’s emissions reduction target for 2030 , while at the same time pursuing the goal of the Paris Agreement to limit global warming to 1,5  oC, will require a  significant reduction in the emissions of the sectors covered by the EU ETS. The Union-wide quantity of allowances of the EU ETS needs to be reduced progressively to create the necessary long-term carbon price signal and drive for this degree of decarbonisation. To this end, the annual reduction factor should be increased, also taking into account the inclusion of emissions from maritime transport. The latter should be derived from the emissions from maritime transport activities reported in accordance with Regulation (EU) 2015/757 for 2018 and 2019 in the Union, adjusted, from year 2021, by the linear reduction factor.

(27)

Bearing in mind that this Directive amends Directive 2003/87/EC in respect of a period of implementation that has already started on 1 January 2021, for reasons of predictability, environmental effectiveness and simplicity, the steeper linear reduction pathway of the EU ETS should be a straight line from 2021 to 2030, such as to achieve emission reductions in the EU ETS of 61 % by 2030, as the appropriate intermediate step towards Union economy-wide climate neutrality in 2050. As the increased linear reduction factor can only apply from the year following the entry into force of this Directive, a one-off reduction of the quantity of allowances should reduce the total quantity of allowances so that it is in line with this level of annual reduction having been made from 2021 onwards.

(27)

Bearing in mind that this Directive amends Directive 2003/87/EC in respect of a period of implementation that has already started on 1 January 2021, for reasons of predictability, environmental effectiveness and simplicity, the steeper reduction pathway of the EU ETS should provide a clear direction towards achieving the goal of the Paris Agreement and Union economy-wide climate neutrality in 2050 at the latest . As the increased reduction factor can only apply from the year following the entry into force of this Directive, a one-off reduction of the quantity of allowances should reduce the total quantity of allowances so that it is in line with this level of annual reduction having been made from 2021 onwards.

(28)

Achieving the increased climate ambition will require substantial public resources in the EU as well as national budgets to be dedicated to the climate transition. To complement and reinforce the substantial climate-related spending in the EU budget, all auction revenues that are not attributed to the Union budget should be used for climate-related purposes. This includes the use for financial support to address social aspects in lower- and middle-income households by reducing distortive taxes. Further, to address distributional and social effects of the transition in low-income Member States , an additional amount of 2,5  % of the Union-wide quantity of allowances from [year of entry into force of the Directive] to 2030 should be used to fund the energy transition of the Member States with a gross domestic product (GDP) per capita below 65 % of the Union average in 2016-2018, through the Modernisation Fund referred to in Article 10d of Directive 2003/87/EC.

(28)

Achieving the increased climate ambition will require substantial public and private resources in the EU as well as national budgets to be dedicated to the climate transition. To complement and reinforce the substantial climate-related spending in the EU budget, all auction revenues that are not attributed to the Union budget in the form of own resources should be used for climate-related purposes , while ensuring a just transition and environmental integrity of action taken . This includes the use for financial support to address social aspects in lower- and middle-income households by reducing distortive taxes. To ensure compliance and public scrutiny, the Member States should adopt ex-ante plans on how they intend to use EU ETS revenues in accordance with their respective climate and energy targets, and they should annually report on the use of auctioning revenues in accordance with Article 19 of Regulation (EU) 2018/1999 of the European Parliament and of the Council  (1a) . Further, to address distributional and social effects of the transition in the most affected territories , an additional amount of 2,5  % of the Union-wide quantity of allowances from [year of entry into force of the Directive] to 2030 should be used to fund the energy transition of the Member States with a gross domestic product (GDP) per capita below 65 % of the Union average in 2016-2018, through the Modernisation Fund referred to in Article 10d of Directive 2003/87/EC.

(28a)

Since 2013, electricity producers have been obliged to purchase all the allowances they need to generate electricity. However, some Member States have retained the option of being able to continue to provide transitional free allocation for the modernisation of the energy sector in the periods from 2013 to 2020 and from 2021 to 2030. For the period from 2021 to 2030, only three Member States would continue to have that option. However, in its Special Report 18/2020 entitled ‘The EU’s Emissions Trading System: free allocation of allowances needed better targeting’, the European Court of Auditors found that that transitional free allocation did not contribute to the reduction of carbon intensity in the energy sector for countries eligible for such free allocation of allowances in the period from 2013 to 2020. Given the need for rapid decarbonisation, especially in the energy sector, and the limited effectiveness of that transitional free allocation, the option of transitional free allocation for the modernisation of the energy sector no longer seems fit for purpose. Therefore, that option should cease to be available and any allowances resulting from the exercise of that option which have not been allocated to operators in the Member States concerned by 31 December 2023 should be added to the total quantity of allowances that the Member State concerned receives for auctioning, or should be used to support investments within the framework of the Modernisation Fund.

(28b)

A well-defined share of the auctioning revenue of the reformed and extended EU ETS should be used as an own resource to finance the Union budget as general income, in accordance with the legally binding Interinstitutional Agreement of 16 December 2020 on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources  (1a) , which contains a roadmap towards the introduction of a basket of new own resources, including, inter alia, own resources based on the EU ETS and based on the Carbon Border Adjustment Mechanism (CBAM) and Pillar One of the OECD/G20 Agreement. Under that Agreement, such new own resources are envisaged to be introduced by 1 January 2023. New own resources would link the Union budget with the Union’s policy priorities such as the European Green Deal and the Union’s contribution to fair taxation, thus adding value and contributing to the climate mainstreaming objectives, the repayment of Next Generation EU debts and the resilience of the Union budget as a tool for investments and guarantees that respect the ‘do no significant harm’ criteria and the fundamental values enshrined in Article 2 of the Treaty on European Union.

(28c)

In accordance with Council Decision (EU, Euratom) 2020/2053 of the European Parliament and of the Council  (1a) , the Union is legally bound to repay all liabilities incurred by the exceptional and temporary empowerment to borrow funds under Next Generation EU by 31 December 2058 at the latest. Therefore, in order to respect the legally binding Interinstitutional Agreement and its roadmap for the introduction of a basket of new own resources destined to repay the Union’s debt, a share of the EU ETS revenues should accrue to the Union budget to help cover the borrowing costs as enshrined in [Council Decision (EU, Euratom) …/… amending Decision (EU, Euratom) 2020/2053 on the system of own resources of the European Union] and prevent substantial decreases that would jeopardize Union programmes in future Multiannual Financial Frameworks.

(28d)

The substantial amounts of revenue generated by the reinforced EU ETS, which Member States, apart from the share attributed to the Union budget, retain, should be used for purposes of the climate transition. However, the broader scope of application and the more diverse array of interventions should not be to the detriment of the unity, effectiveness, integrity and democratic control of the Union budget.

(29)

Further incentives to reduce greenhouse gas emissions by using cost-efficient techniques should be provided. To that end, the free allocation of emission allowances to stationary installations from 2026 onwards should be conditional on investments in techniques to increase energy efficiency and reduce emissions . Ensuring that this is focused on larger energy users would result in a substantial reduction in burden for businesses with lower energy use, which may be owned by small and medium sized enterprises or micro-enterprises. [Reference to be confirmed with the revised EED]. The relevant delegated acts should be adjusted accordingly .

(29)

Further incentives to reduce greenhouse gas emissions by using cost-efficient techniques should be provided. To that end, a bonus-malus system should be introduced for determining the share of free allocation. For installations whose greenhouse gas emissions are above the relevant benchmark values, the amount of free allocation of emission allowances from 2026 onwards should vary in line with the implementation of a duly established decarbonisation plan. Conversely, installations whose greenhouse gas emissions are below the relevant benchmark values should receive an incentive in the form of an additional free allocation .

(30)

The Carbon Border Adjustment Mechanism (CBAM), established under Regulation (EU) […./..] of the European Parliament and of the Council (51), is an alternative to free allocation to address the risk of carbon leakage. To the extent that sectors and subsectors are covered by that measure, they should not receive free allocation. However, a transitional phasing-out of free allowances is needed to allow producers, importers and traders to adjust to the new regime. The reduction of free allocation should be implemented by applying a factor to free allocation for CBAM sectors, while the CBAM is phased in. This percentage (CBAM factor) should be equal to 100 % during the transitional period between the entry into force of [CBAM Regulation] and 2025, 90 % in 2026 and should be reduced by 10 percentage points each year to reach 0 % and thereby eliminate free allocation by the tenth year . The relevant delegated acts on free allocation should be adjusted accordingly for the sectors and subsectors covered by the CBAM. The free allocation no longer provided to the CBAM sectors based on this calculation (CBAM demand) must be auctioned and the revenues will accrue to the Innovation Fund, so as to support innovation in low carbon technologies, carbon capture and utilisation (‘CCU’), carbon capture and geological storage (‘CCS’), renewable energy and energy storage, in a way that contributes to mitigating climate change. Special attention should be given to projects in CBAM sectors. To respect the proportion of the free allocation available for the non-CBAM sectors, the final amount to deduct from the free allocation and to be auctioned should be calculated based on the proportion that the CBAM demand represents in respect of the free allocation needs of all sectors receiving free allocation.

(30)

The Carbon Border Adjustment Mechanism (CBAM),established under Regulation (EU) […./..] of the European Parliament and of the Council (51), intends to gradually offer an alternative to free allocation to address the risk of carbon leakage without undermining the Union’s competitiveness . To the extent that sectors and subsectors are covered by that measure, they should not receive free allocation. However, a transitional phasing-out of free allowances is needed to allow producers, importers and traders to adjust to the new regime. The reduction of free allocation should be implemented by applying a factor to free allocation for CBAM sectors, while the CBAM is phased in. This percentage (CBAM factor) should be equal to 100 % during the transitional period between the entry into force of [CBAM Regulation] and the end of 2026, and, contingent upon the application of Article 36(3), point (d), of Regulation (EU) …/… [CBAM Regulation], should be reduced by 7 percentage points in 2027, 9 percentage points in 2028, 15 percentage points in 2029, 19 percentage points in 2030, 25 percentage points in 2031 and 25 percentage points in 2032, thereby eliminating free allocation by 2032. In order to protect the competitiveness of Union exports, the production in the Union of products listed in Annex I to Regulation [CBAM] should continue to receive free allocation, provided such products are produced for export to third countries without carbon pricing mechanisms similar to the EU ETS. By [one year before the end of the transitional period as set out in Regulation [CBAM]], the Commission should present a report with an assessment of the effects of the EU ETS and CBAM on the production in the Union of products listed in Annex I to Regulation [CBAM] that are produced for export to third countries and on the development of global emissions, as well as an assessment of the WTO compatibility of the derogation for exports, assessing in particular potential export adjustment mechanisms for installations belonging to the 10 % most efficient installations in the light of WTO compatibility or any other proposals the Commission deems appropriate, and should, where appropriate, submit a proposal for any appropriate and WTO-compliant legislation and measures that equalize the costs of CO2 with the different pricing schemes of those third countries . The relevant delegated acts on free allocation should be adjusted accordingly for the sectors and subsectors covered by the CBAM. The free allocation no longer provided to the CBAM sectors based on this calculation (CBAM demand) must be auctioned and the revenues will accrue to the Climate Investment Fund, so as to support innovation in low carbon technologies, carbon capture and utilisation (‘CCU’), carbon capture and geological storage (‘CCS’), renewable energy and energy storage, in a way that contributes to mitigating climate change. Special attention should be given to projects in CBAM sectors. To respect the proportion of the free allocation available for the non-CBAM sectors, the final amount to deduct from the free allocation and to be auctioned should be calculated based on the proportion that the CBAM demand represents in respect of the free allocation needs of all sectors receiving free allocation.

(30a)

The Carbon Border Adjustment Mechanism (CBAM) is a mechanism that addresses the risk of carbon leakage through the application of a uniform price on emissions embedded in goods imported into the customs territory of the Union. It is important to monitor, prevent and address the risk of goods produced in the Union intended for export to third countries being replaced on the global market by more carbon-intensive goods. Hence, the Commission should continuously monitor and assess the effectiveness of the CBAM in light of the carbon leakage risk on export markets, including the development of Union exports in CBAM sectors and the developments as regards trade flows and the embedded emissions of those goods on the global market. Where a risk of carbon leakage is detected, the Commission should, where appropriate, present a legislative proposal to address that carbon leakage risk on export markets in a manner that is compliant with WTO rules. In addition, the Union should actively pursue the establishment of an international ‘carbon club’ and continuously engage in international cooperation with regard to the introduction of carbon pricing mechanisms. The success of the European carbon market is critical from a global perspective and will encourage more countries to introduce market driven carbon pricing. The Commission should further analyse how linkages with other carbon markets could be established while ensuring that the Union’s own economy-wide climate target is achieved.

(31)

In order to better reflect technological progress and adjust the corresponding benchmark values to the relevant period of allocation while ensuring emission reduction incentives and properly rewarding innovation, the maximum adjustment of the benchmark values should be increased from 1,6  % to 2,5  % per year. For the period from 2026 to 2030, the benchmark values should thus be adjusted within a range of 4 % to 50 % compared to the value applicable in the period from 2013 to 2020.

(31)

In order to better reflect technological progress and adjust the corresponding benchmark values to the relevant period of allocation while ensuring emission reduction incentives and properly rewarding innovation, the maximum adjustment of the benchmark values should be increased from 1,6  % to 2,5  % per year. For the period from 2026 to 2030, the benchmark values should thus be adjusted within a range of 8  % to 50 % compared to the value applicable in the period from 2013 to 2020. The adjusted benchmark values should be published as soon as the necessary information becomes available, and no later than … [six months after the date of entry into force of this amending Directive] in order for those benchmark values to apply from 2026.

(31a)

The significant indirect costs that are incurred from greenhouse gas emission costs passed on in electricity prices cause a risk of carbon leakage to certain sectors. To mitigate that risk, Member States should adopt financial measures for indirect cost compensation. The measures should be in accordance with State aid rules, and should not cause undue distortions of competition in the internal market.

(32)

A comprehensive approach to innovation is essential for achieving the European Green Deal objectives. At EU level, the necessary research and innovation efforts are supported, among others, through Horizon Europe which include significant funding and new instruments for the sectors coming under the ETS. Member States should ensure that the national transposition provisions do not hamper innovations and are technologically neutral.

(32)

A comprehensive approach to innovation is essential for achieving the European Green Deal objectives. At EU level, the necessary research and innovation efforts are supported, among others, through Horizon Europe which include significant funding and new instruments for the sectors coming under the ETS. Consequently, the Climate Investment Fund should seek synergies with Horizon Europe and, where relevant, with other Union funding programmes . Member States should ensure that the national transposition provisions do not hamper innovations, facilitate the putting of innovative scientific results into practice and are technologically neutral , while the Commission should ensure the availability and efficiency of the necessary technical and advisory assistance .

(32a)

In order to achieve climate neutrality by 2050 at the latest, as laid down in Regulation (EU) 2021/1119, the Union needs to close a significant investment gap as provided for in the communication of the Commission of 6 July 2021 entitled ‘Strategy for Financing the Transition to a Sustainable Economy’. To reach our decarbonisation objective, breakthrough innovation, upscaling of already existing relevant technologies and certified natural carbon removals are needed. To support the in-depth and economy-wide decarbonisation in the Union each of these three pillars should be addressed by the Innovation Fund, which should be renamed as the Climate Investment Fund.

(33)

The scope of the Innovation Fund referred to in Article 10a(8) of Directive 2003/87/EC should be extended to support innovation in low-carbon technologies and processes that concern the consumption of fuels in the sectors of buildings and road transport . In addition, the Innovation Fund should serve to support investments to decarbonise the maritime transport sector, including investments in sustainable alternative fuels, such as hydrogen and ammonia that are produced from renewables, as well as zero-emission propulsion technologies like wind technologies. Considering that revenues generated from penalties raised in Regulation xxxx/xxxx [FuelEU Maritime]  (19) are allocated to the Innovation Fund as external assigned revenue in accordance with Article 21(5) of the Financial Regulation, the Commission should ensure that due consideration is given to support for innovative projects aimed at accelerating the development and deployment of renewable and low carbon fuels in the maritime sector , as specified in Article 21(1) of Regulation xxxx/xxxx [FuelEU Maritime] . To ensure sufficient funding is available for innovation within this extended scope, the Innovation Fund should be supplemented with 50 million allowances, stemming partly from the allowances that could otherwise be auctioned, and partly from the allowances that could otherwise be allocated for free, in accordance with the current proportion of funding provided from each source to the Innovation Fund.

(33)

The scope of the Climate Investment Fund referred to in Article 10a(8) of Directive 2003/87/EC should be extended to support installation of non-breakthrough technologies in industrial processes that have a large greenhouse gas-saving potential but are not market-ready as well as innovation in low-carbon technologies and processes that concern the consumption of fuels in the sectors of buildings and road transport , including collective forms of transport. It should also be possible to use the Climate Investment Fund to support break-through innovative technologies in the waste sector. To ensure sufficient funding is available for innovation within this extended scope, the Climate Investment Fund should be supplemented with 50 million allowances, stemming partly from the allowances that could otherwise be auctioned, and partly from the allowances that could otherwise be allocated for free, in accordance with the current proportion of funding provided from each source to the Climate Investment Fund . To foster innovation in breakthrough technologies as soon as possible, the Commission should ensure that a share of the financing made available through the Climate Investment Fund is ‘frontloaded’ during the first years of implementation of this Directive .

(33a)

The acceleration of the roll out of domestic sustainable renewable energy sources plays a major role in the Union’s plan to become independent from Russian fossil fuels well before 2030. In addition, the availability of large quantities of sustainable renewable energy is necessary to ensure the reduction of greenhouse gas emissions in industrial processes and in the overall economy. A substantial increase of the Union renewable energy target for 2030 and of the relative national contributions is necessary. At least 12 % of the allowances made available to the Climate Investment Fund should therefore be used for the further development and deployment of sustainable renewable energy sources in the Union, in line with the energy efficiency-first principle. Priority should be given to develop local self-production, storage and sharing, in particular through renewable energy communities.

(33b)

By supporting projects through public financing, the Climate Investment Fund would provide companies with substantial advantages to develop their products or services. Consequently, projects funded by the Climate Investment Fund should share knowledge with other relevant projects as well as with Union-based researchers having a legitimate interest.

(35)

Carbon Contracts for Difference ( CCDs) are an important element to trigger emission reductions in industry, offering the opportunity to guarantee investors in innovative climate-friendly technologies a price that rewards CO2 emission reductions above those induced by the current price levels in the EU ETS. The range of measures that the Innovation Fund can support should be extended to provide support to projects through price-competitive tendering, such as CCDs. The Commission should be empowered to adopt delegated acts on the precise rules for this type of support.

(35)

CCDs are an important element to trigger emission reductions in industry by up-scaling new technologies , offering the opportunity to guarantee investors in innovative climate-friendly technologies a price that rewards CO2 emission reductions above those induced by the current price levels in the EU ETS. The range of measures that the Climate Investment Fund can support should be extended to provide support to projects through technology-neutral, price-competitive tendering, such as CCDs , and should respect the principle of geographical balance . CCDs would be an important mechanism for supporting the development of decarbonisation technologies, such as CCS and CCU, and optimising the use of available resources. CCDs would also offer certainty to investors in technologies, such as carbon capture technologies. The Commission should conduct an impact assessment focusing in particular on the options for the provision of support through competitive bidding, including on the levels of funding provided. Based on the results of that assessment, the Commission should be empowered to adopt delegated acts on the precise rules for this type of support.

(38)

The scope of the Modernisation Fund should be aligned with the most recent climate objectives of the Union by requiring that investments are consistent with the objectives of the European Green Deal and Regulation (EU) 2021/1119, and eliminating the support to any investments related to fossil fuels. In addition, the percentage of the Modernisation Fund that needs to be devoted to priority investments should be increased to 80 %; energy efficiency should be targeted as a priority area at the demand side; and support of households to address energy poverty, including in rural and remote areas, should be included within the scope of the priority investments.

(38)

The scope of the Modernisation Fund should be aligned with the most recent climate objectives of the Union by requiring that investments are consistent with the objectives of the European Green Deal and Regulation (EU) 2021/1119, and eliminating the support to any investments related to fossil fuels. Support from the Modernisation Fund should only be granted to Member States that have adopted legally binding targets for achieving climate neutrality by 2050 at the latest, as well as measures for the phasing out of all fossil fuels in a timeframe consistent with the targets set out in Regulation (EU) 2021/1119. In order to guarantee the efficient use of Union funds, access to the Modernisation Fund should also be conditional on respect for the rule of law. In addition, the percentage of the Modernisation Fund that needs to be devoted to priority investments should be increased to 100 %; energy efficiency should be targeted as a priority area at the demand side; and support of households to address energy poverty, including in rural and remote areas, should be included within the scope of the priority investments.

(38a)

With the increase of EU ETS prices, revenues from the EU ETS for Member States and the Union have increased substantially. To acknowledge the contribution of EU ETS revenues to the transition of Union industry as well as to provide support to vulnerable people in the Union to enable them to switch to environmentally friendly alternatives, an EU ETS label should be introduced. Member States and the Commission should ensure that funding is clearly indicated as coming from EU ETS revenues by displaying an appropriate label for all projects and activities supported at national level or through Union funds.

(39)

Commission Implementing Regulation (EU) 2018/2066 (21) lays down rules on the monitoring of emissions from biomass which are consistent with the rules on the use of biomass laid down in the Union legislation on renewable energy. As the legislation becomes more elaborate on the sustainability criteria for biomass with the latest rules established in Directive (EU) 2018/2001 of the European Parliament and of the Council (22) , the conferral of implementing powers in Article 14(1) of Directive 2003/87/EC should be explicitly extended to the adoption of the necessary adjustments for the application in the EU ETS of sustainability criteria for biomass, including biofuels, bioliquids and biomass fuels. In addition, the Commission should be empowered to adopt implementing acts to specify how to account for the storage of emissions from mixes of zero-rated biomass and biomass that is not from zero-rated sources.

(39)

Commission Implementing Regulation (EU) 2018/2066 (21) lays down rules on the monitoring of emissions from biomass which are consistent with the rules on the use of biomass laid down in the Union legislation on renewable energy. As the legislation becomes more elaborate on the sustainability criteria for biomass with the latest rules established in Directive (EU) 2018/2001 of the European Parliament and of the Council (22), the conferral of implementing powers in Article 14(1) of Directive 2003/87/EC should be explicitly extended to the adoption of the necessary adjustments for the application in the EU ETS of sustainability criteria for biomass, including biofuels, bioliquids and biomass fuels. In addition, the Commission should be empowered to adopt delegated acts to specify how to account for the storage of emissions from mixes of zero-rated biomass and biomass that is not from zero-rated sources.

(40)

Renewable liquid and gaseous fuels of non-biological origin and recycled carbon fuels can be important to reduce greenhouse gas emissions in sectors that are hard to decarbonise. Where recycled carbon fuels and renewable liquid and gaseous fuels of non-biological origin are produced from captured carbon dioxide under an activity covered by this Directive, the emissions should be accounted under that activity . To ensure that renewable fuels of non-biological origin and recycled carbon fuels contribute to greenhouse gas emission reductions and to avoid double counting for fuels that do so, it is appropriate to explicitly extend the empowerment in Article 14(1) to the adoption by the Commission of implementing acts laying down the necessary adjustments for how to account for the eventual release of carbon dioxide and how to avoid double counting to ensure appropriate incentives are in place, taking also into account the treatment of these fuels under Directive (EU) 2018/2001.

(40)

Renewable liquid and gaseous fuels of non-biological origin and recycled carbon fuels can be important to reduce greenhouse gas emissions in sectors that are hard to decarbonise. To ensure that renewable fuels of non-biological origin and recycled carbon fuels contribute to greenhouse gas emission reductions and to avoid double counting for fuels that do so, it is appropriate to explicitly extend the empowerment in Article 14(1) to the adoption by the Commission of delegated acts laying down the necessary adjustments for how to account for the eventual release of carbon dioxide , in a way that ensures that all emissions are accounted for, including where such fuels are produced from captured carbon dioxide outside the Union and are used in an activity covered by this Directive, while avoiding double counting and ensuring appropriate incentives are in place for capturing emissions , taking also into account the treatment of these fuels under Directive (EU) 2018/2001.

(42)

The exclusion of installations using exclusively biomass from the EU ETS has led to situations where installations combusting a high share of biomass have obtained windfall profits by receiving free allowances greatly exceeding actual emissions. Therefore, a threshold value for zero-rated biomass combustion should be introduced above which installations are excluded from the EU ETS. The threshold value of 95 % is in line with the uncertainty parameter set out in Article 2(16) of Commission Delegated Regulation (EU) 2019/331  (23) .

(42a)

Increasing energy prices are a major concern for citizens, especially low-income families, and businesses, especially small and medium-sized enterprises (‘SMEs’). The main cause of rising energy prices is our dependency on fossil fuels. The ‘Fit for 55’ package should address and seek to reduce such dependencies, including by improving the design of the EU ETS. Strengthening market integrity and transparency can also play a role in limiting volatility of the EU ETS market prices.

(42b)

The European Securities and Markets Authority (ESMA) published its final report on emission allowances and associated derivatives on 28 March 2022. The Commission should, where appropriate and as soon as possible, present a legislative proposal to follow up on the recommendations in that report in order to improve the level of transparency, monitoring and reporting on the European emission allowance markets as well as related derivative markets. However, to continuously monitor market integrity and transparency, avoid misinformation and guide any potential rapid action, ESMA should on a regular basis publish a report on the integrity and transparency of those markets and, where relevant, issue further recommendations for targeted improvements. ESMA should in particular examine the functioning of the markets in light of any volatility and price evolution, the operation of the auctions and trading operations on the markets, liquidity and the volumes traded, and the categories and trading behaviour of market participants. Targeted improvements could, for example, include measures to enhance the information available to market participants and the public at large on the functioning of the emission allowance markets and related derivative markets, improve regulatory reporting and market monitoring in emission allowance markets and related derivative markets, including by making individual transactions publicly available, require each market participant to publicly disclose their holdings and positions broken down by motive and horizon, promote the prevention and detection of market abuse and help in maintaining orderly markets for emission allowances and related derivative markets, for example through a fluctuating penalty based on the previous year’s average auction price, the withholding of allowances, adjustment of the quantity of subsequent auctions, or a combination thereof. The Commission should assess ESMA’s recommendations within six months following the publication of ESMA’s report and should, where appropriate, present a legislative proposal to address those recommendations.

(42c)

Unexpected or sudden market volatility or excessive price shocks on the Union carbon market, for example, as a result of sudden changes in market behaviour or excessive speculation, negatively affect market predictability and the stable investment climate which is essential for the planning of decarbonisation and innovation investments. Therefore, the measures that apply in the event of excessive price fluctuations should be strengthened in a careful manner to improve the assessment of and reaction to unwarranted price evolutions. Such targeted improvements should ensure the continued proper functioning of the carbon market, including the role of intermediaries and financial actors in providing liquidity to the market and market access for compliance actors, in particular SMEs, while addressing unexpected or sudden volatility or price shocks not related to market fundamentals.

(43a)

In order to ensure that a level playing field exists and to close any remaining gaps between the existing EU ETS and the new emissions trading system, the new emissions trading system should also cover other fuels released for consumption, such as those used for process heating in activities not covered under Annex I to Directive 2003/87/EC, while avoiding or addressing any double counting. Moreover, such an approach would simplify the implementation, monitoring, reporting and verification of the new emissions trading system for regulated entities.

(44)

In order to establish the necessary implementation framework and to provide a reasonable timeframe for reaching the 2030 target, emissions trading in the two new sectors should start in 2025. During the first year, the regulated entities should be required to hold a greenhouse gas emissions permit and to report their emissions for the years 2024 and 2025 . The issuance of allowances and compliance obligations for these entities should be applicable as from 2026 . This sequencing will allow starting emissions trading in the sectors in an orderly and efficient manner. It would also allow the EU funding and Member State measures to be in place to ensure a socially fair introduction of the EU emissions trading into the two sectors so as to mitigate the impact of the carbon price on vulnerable households and transport users.

(44)

In order to establish the necessary implementation framework and to provide a reasonable timeframe for reaching the 2030 target, emissions trading in the new sectors should start in 2025. During the first year, the regulated entities should be required to hold a greenhouse gas emissions permit and to report their emissions for the years 2023 and 2024 . The issuance of allowances and compliance obligations for these entities should be applicable as from 2025 in respect of fuels released for consumption in commercial applications and other fuels, such as for process heating not covered by the existing EU ETS. Subject to an assessment by 1 January 2026 and if the conditions are right, the Commission should aim to extend this to fuels released for consumption in private road transport and private heating and cooling of residential buildings from 1 January 2029 and should, where appropriate, present a targeted review to this effect. This sequencing will allow starting emissions trading in the sectors in an orderly and efficient manner. It would also allow the EU funding and Member State measures to be in place to ensure a socially fair introduction of the EU emissions trading into the two sectors so as to mitigate the impact of the carbon price on vulnerable households and transport users.

(46)

The regulated entities in the two new sectors and the point of regulation should be defined in line with the system of excise duty established by Council Directive (EU) 2020/262 (25), with the necessary adaptations, as that Directive already sets a robust control system for all quantities of fuels released for consumption for the purposes of paying excise duties. End-users of fuels in those sectors should not be subject to obligations under Directive 2003/87/EC.

(46)

The regulated entities in the new sectors and the point of regulation should be defined in line with the system of excise duty established by Council Directive (EU) 2020/262 (25), with the necessary adaptations, as that Directive already sets a robust control system for all quantities of fuels released for consumption for the purposes of paying excise duties. End-users of fuels in those sectors should not be subject to obligations under Directive 2003/87/EC.

(47)

The regulated entities falling within the scope of the emissions trading in the sectors of buildings and road transport should be subject to similar greenhouse gas emissions permit requirements as the operators of stationary installations. It is necessary to establish rules on permit applications, conditions for permit issuance, content, and review, and any changes related to the regulated entity. In order for the new system to start in an orderly manner, Member States should ensure that regulated entities falling within the scope of the new emissions trading have a valid permit as of the start of the system in 2025 .

(47)

The regulated entities falling within the scope of the emissions trading in the new sectors should be subject to similar greenhouse gas emissions permit requirements as the operators of stationary installations. It is necessary to establish rules on permit applications, conditions for permit issuance, content, and review, and any changes related to the regulated entity. In order for the new system to start in an orderly manner, Member States should ensure that regulated entities falling within the scope of the new emissions trading have a valid permit as of the start of the system in 2024 .

(48)

The total quantity of allowances for the new emissions trading should follow a linear trajectory to reach the 2030 emissions reduction target, taking into account the cost-efficient contribution of buildings and road transport of 43 % emission reductions by 2030 compared to 2005. The total quantity of allowances should be established for the first time in 2026 , to follow a trajectory starting in 2024 from the value of the 2024 emissions limits (1 109 304 000 CO2t), calculated in accordance with Article 4(2) of Regulation (EU) 2018/842 of the European Parliament and of the Council (26) on the basis of the reference emissions for these sectors for the period from 2016 to 2018. Accordingly, the linear reduction factor should be set at 5,15  %. From 2028, the total quantity of allowances should be set on the basis of the average reported emissions for the years 2024, 2025 and 2026, and should decrease by the same absolute annual reduction as set from 2024, which corresponds to a 5,43  % linear reduction factor compared to the comparable 2025 value of the above defined trajectory. If those emissions are significantly higher than this trajectory value and if this divergence is not due to small-scale differences in emission measurement methodologies, the linear reduction factor should be adjusted to reach the required emissions reduction in 2030.

(48)

The total quantity of allowances for the new emissions trading should follow a linear trajectory to reach the 2030 emissions reduction target, taking into account the cost-efficient contribution of buildings and road transport of 43 % emission reductions by 2030 compared to 2005. The total quantity of allowances should be established for the first time in 2025 , to follow a trajectory starting in 2024 from the value of the 2024 emissions limits (1 109 304 000 CO2t), calculated in accordance with Article 4(2) of Regulation (EU) 2018/842 of the European Parliament and of the Council (26) on the basis of the reference emissions for these sectors for the period from 2016 to 2018. Accordingly, the linear reduction factor should be set at 5,15  %. From 2028, the total quantity of allowances should be set on the basis of the average reported emissions for the years 2024, 2025 and 2026, and should decrease by the same absolute annual reduction as set from 2024, which corresponds to a 5,43  % linear reduction factor compared to the comparable 2025 value of the above defined trajectory. If those emissions are significantly higher than this trajectory value and if this divergence is not due to small-scale differences in emission measurement methodologies, the linear reduction factor should be adjusted to reach the required emissions reduction in 2030.

(50)

In order to ensure a smooth start to emissions trading in the buildings and road transport sectors and taking into account the need of the regulated entities to hedge or buy ahead allowances to mitigate their price and liquidity risk, a higher amount of allowances should be auctioned early on. In 2026 , the auction volumes should therefore be 30 % higher than the total quantity of allowances for 2026 . This amount would be sufficient to provide liquidity, both if emissions decrease in line with reduction needs, and in the event emission reductions only materialise progressively. The detailed rules for this front-loading of auction volume are to be established in a delegated act related to auctioning, adopted pursuant to Article 10(4) of Directive 2003/87/EC.

(50)

In order to ensure a smooth start to emissions trading in the new sectors and taking into account the need of the regulated entities to hedge or buy ahead allowances to mitigate their price and liquidity risk, a higher amount of allowances should be auctioned early on. In 2025 , the auction volumes should therefore be 30 % higher than the total quantity of allowances for 2025 . This amount would be sufficient to provide liquidity, both if emissions decrease in line with reduction needs, and in the event emission reductions only materialise progressively. The detailed rules for this front-loading of auction volume are to be established in a delegated act related to auctioning, adopted pursuant to Article 10(4) of Directive 2003/87/EC.

(52)

The introduction of the carbon price in road transport and buildings should be accompanied by effective social compensation, especially in view of the already existing levels of energy poverty. About 34 million Europeans reported an inability to keep their homes adequately warm in 2018, and 6,9  % of the Union population have said that they cannot afford to heat their home sufficiently in a 2019 EU-wide survey (27). To achieve an effective social and distributional compensation, Member States should be required to spend the auction revenues on the climate and energy-related purposes already specified for the existing emissions trading, but also for measures added specifically to address related concerns for the new sectors of road transport and buildings, including related policy measures under Directive 2012/27/EU of the European Parliament and of the Council (28). Auction revenues should be used to address social aspects of the emission trading for the new sectors with a specific emphasis in vulnerable households, micro-enterprises and transport users. In this spirit, a new Social Climate Fund will provide dedicated funding to Member States to support the European citizens most affected or at risk of energy or mobility poverty. This Fund will promote fairness and solidarity between and within Member States while mitigating the risk of energy and mobility poverty during the transition. It will build on and complement existing solidarity mechanisms. The resources of the new Fund will in principle correspond to 25 % of the expected revenues from new emission trading in the period 2026-2032, and will be implemented on the basis of the Social Climate Plans that Member States should put forward under Regulation (EU) 20…/nn of the European Parliament and the Council (29). In addition, each Member State should use their auction revenues inter alia to finance a part of the costs of their Social Climate Plans.

(52)

The introduction of the carbon price in road transport and buildings should be accompanied by effective social compensation, especially in view of the already existing levels of energy poverty. About 34 million Europeans reported an inability to keep their homes adequately warm in 2018, and 6,9  % of the Union population have said that they cannot afford to heat their home sufficiently in a 2019 EU-wide survey (27). To achieve an effective social and distributional compensation, Member States should be required to spend the auction revenues on the climate and energy-related purposes already specified for the existing emissions trading, but also for measures added specifically to address related concerns for the new sectors of road transport and buildings, including related policy measures under Directive 2012/27/EU of the European Parliament and of the Council (28). Auction revenues should be used to address social aspects of the emission trading for the new sectors with a specific emphasis in vulnerable households, micro-enterprises and transport users. In this spirit, a new Social Climate Fund will provide dedicated funding to Member States to support the European citizens most affected or at risk of energy or mobility poverty . The Social Climate Fund should be an integral part of the Union budget in order to preserve the unity of the budget and coherence with Union policies and to ensure effective control by the budgetary authority, composed of the European Parliament and the Council . This Fund will promote fairness and solidarity between and within Member States while mitigating the risk of energy and mobility poverty during the transition. It will build on and complement existing solidarity mechanisms. The resources of the new Fund will in principle correspond to 25 % of the expected revenues from new emission trading in the period 2026-2032, and will be implemented on the basis of the Social Climate Plans that Member States should put forward under Regulation (EU) 20…/nn of the European Parliament and the Council (29) . The programmed baseline allocation in the Union budget should be increased annually by a supplementary reinforcement in the event of an increase of carbon price to a level higher than the initial assumption, as it would raise the burden on vulnerable households and traffic users. To ensure that the impact of carbon price increases on the most vulnerable is adequately and fairly mitigated, such annual reinforcements should be accommodated within the Multiannual Financial Framework by means of an automatic ‘carbon price fluctuation adjustment’ of the ceiling of Heading 3 and the payment ceiling, the mechanism for which is to be provided for in the Multiannual Financial Framework Regulation in accordance with Article 312 TFEU . In addition, each Member State should use their auction revenues inter alia to finance a part of the costs of their Social Climate Plans.

(52a)

Since the transport sector is currently the only sector that has failed to deliver any reductions of greenhouse gas emissions, a significant level of investment in sustainable transport options is required to achieve the Union climate goals and support a modal shift to environmentally friendly forms of transport. Therefore, at least 10 % of the expected revenues from the increased trading of emissions to arise as a result of the extension of the scope of the EU ETS and the introduction of a new EU ETS for heating, transport and other fuels pursuant to this Directive, including 10 % of the national revenues to be allocated by Member States as well as 10 % of the revenues under the Climate Investment Fund, should be allocated to the further development of public transport, in particular climate friendly railway and bus systems.

(52b)

In order to achieve greater coherence and efficiency in the management and use of Union funds and resources, the Commission should carry out an assessment and, where appropriate, present a legislative proposal for the integration of the Climate Investment Fund and the Modernisation Fund in the Union budget, that could be submitted in the context of the proposals for the next Multiannual Financial Framework.

(54)

Innovation and development of new low-carbon technologies in the sectors of buildings and road transport are crucial for ensuring the cost-efficient contribution of these sectors to the expected emission reductions. Therefore, 150 million allowances from emissions trading in the buildings and road transport sectors should also be made available to the Innovation Fund to stimulate the cost-efficient emission reductions .

(54)

150 million allowances from emissions trading in the buildings and road transport sectors should also be made available to the Social Climate Fund to support social climate measures .

(55)

Regulated entities covered by the buildings and road transport emissions trading should surrender allowances for their verified emissions corresponding to the quantities of fuels they have released for consumption. They should surrender allowances for the first time for their verified emissions in 2026 . In order to minimise the administrative burden, a number of rules applicable to the existing emissions trading system for stationary installations and aviation should be made applicable to emissions trading for buildings and road transport , with the necessary adaptations. This includes, in particular, rules on transfer, surrender and cancellation of allowances, as well as the rules on the validity of allowances, penalties, competent authorities and reporting obligations of Member States.

(55)

Regulated entities covered by the new emissions trading should surrender allowances for their verified emissions corresponding to the quantities of fuels they have released for consumption. They should surrender allowances for the first time for their verified emissions in 2025 . In order to minimise the administrative burden, a number of rules applicable to the existing emissions trading system for stationary installations and aviation should be made applicable to the new emissions trading, with the necessary adaptations. This includes, in particular, rules on transfer, surrender and cancellation of allowances, as well as the rules on the validity of allowances, penalties, competent authorities and reporting obligations of Member States.

(59a)

In order to achieve the objectives laid down in this Directive and other Union legislation, particularly those in Regulation (EU) 2021/1119, the Union and its Member States should make use of the latest scientific evidence while implementing policies. Therefore, the advice of the European Scientific Advisory Board on Climate Change should be considered when implementing this Directive. Furthermore, the European Scientific Advisory Board on Climate Change should be able, on its own initiative, to provide scientific advice in relation to this Directive to ensure that policies are aligned with the objectives of Regulation (EU) 2021/1119 and the Paris Agreement.

(59b)

In order to set a long-term vision, the Commission, supported by the European Scientific Advisory Board on Climate Change, should prepare indicative roadmaps for the activities covered by Annex I to this Directive for the achievement of the Union’s climate-neutrality objective by 2050, at the latest, and the aim to achieve negative emissions thereafter, as laid down in Article 2(1) of Regulation (EU) 2021/1119. The roadmaps should be prepared in a transparent manner with close engagement of the stakeholders such as individuals, civil society, social partners, academia, industry and policy makers. The roadmaps are an essential tool for providing long-term insight and stability for stakeholders and for identifying common interests, possible inconsistencies and conflicts in policy development. The roadmaps should be updated every five years in order to take into account the latest scientific developments, in close engagement with the stakeholders.

(61)

A well-functioning, reformed EU ETS comprising an instrument to stabilise the market is a key means for the Union to reach its agreed target for 2030 and the commitments under the Paris Agreement. The Market Stability Reserve seeks to address the imbalance between supply and demand of allowances in the market. Article 3 of Decision (EU) 2015/1814 provides that the reserve is to be reviewed three years after it becomes operational, paying particular attention to the percentage figure for the determination of the number of allowances to be placed in the Market Stability Reserve, the threshold for the total number of allowances in circulation (TNAC) that determines the intake of allowances, and the number of allowances to be released from the reserve.

(61)

A well-functioning, reformed EU ETS comprising an instrument to stabilise the market is a key means for the Union to reach its agreed target for 2030 , its climate-neutrality objective by 2050 at the latest, and fulfil the aim of achieving negative emissions thereafter as laid down in Article 2(1) of Regulation (EU) 2021/1119  and the commitments under the Paris Agreement. The Market Stability Reserve seeks to address the imbalance between supply and demand of allowances in the market. Article 3 of Decision (EU) 2015/1814 provides that the reserve is to be reviewed three years after it becomes operational, paying particular attention to the percentage figure for the determination of the number of allowances to be placed in the Market Stability Reserve, the threshold for the total number of allowances in circulation (TNAC) that determines the intake of allowances, and the number of allowances to be released from the reserve.

(62)

Considering the need to deliver a stronger investment signal to reduce emissions in a cost-efficient manner and with a view to strengthening the EU ETS, Decision (EU) 2015/1814 should be amended so as to increase the percentage rate for determining the number of allowances to be placed each year in the Market Stability Reserve. In addition, for lower levels of the TNAC, the intake should be equal to the difference between the TNAC and the threshold that determines the intake of allowances. This would prevent the considerable uncertainty in the auction volumes that results when the TNAC is close to the threshold, and at the same time ensure that the surplus reaches the volume bandwidth within which the carbon market is deemed to operate in a balanced manner.

(62)

Considering the need to deliver a stronger investment signal to reduce emissions in a cost-efficient manner and with a view to strengthening the EU ETS, Decision (EU) 2015/1814 should be amended so as to increase the percentage rate for determining the number of allowances to be placed each year in the Market Stability Reserve. In addition, for lower levels of the TNAC, the intake should be equal to the difference between the TNAC and the threshold that determines the intake of allowances. This would prevent the considerable uncertainty in the auction volumes that results when the TNAC is close to the threshold, and at the same time ensure that the surplus reaches the volume bandwidth within which the carbon market is deemed to operate in a balanced manner. Such adjustment should be made without resulting in any reduced ambition compared to the current market stability reserve.

(66a)

To ensure that there is predictability for operators and avoid disincentivising best performers and innovation as a result of additional and unforeseen costs, it is crucial to avoid the application of the cross-sectoral correction factor for frontrunners.

(67)

It is necessary to amend Regulation (EU) 2015/757 to take into account the inclusion of the maritime transport sector in the EU ETS. Regulation (EU) 2015/757 should be amended to oblige companies to report aggregated emissions data at company level and to submit for approval their verified monitoring plans and aggregated emissions data at company level to the responsible administering authority. In addition, the Commission should be empowered to adopt delegated acts to amend the methods for monitoring CO2 emissions and the rules on monitoring, as well as any other relevant information set out in Regulation (EU) 2015/757, to ensure the effective functioning of the EU ETS at administrative level and to supplement Regulation (EU) 2015/757 with the rules for the approval of monitoring plans and changes thereof by administering authorities, with the rules for the monitoring, reporting and submission of the aggregated emissions data at company level and with the rules for the verification of the aggregated emissions data at company level and for the issuance of a verification report in respect of the aggregated emissions data at company level. The data monitored, reported and verified under Regulation (EU) 2015/757 might also be used for the purpose of compliance with other Union law requiring the monitoring, reporting and verification of the same ship information.

(67)

It is necessary to amend Regulation (EU) 2015/757 to take into account the inclusion of the maritime transport sector in the EU ETS. Regulation (EU) 2015/757 should be amended to oblige companies to report aggregated emissions data at company level and to submit for approval their verified monitoring plans and aggregated emissions data at company level to the responsible administering authority. In addition, the Commission should be empowered to adopt delegated acts to amend the methods for monitoring CO2 , CH4 and N2O emissions and the rules on monitoring, as well as any other relevant information set out in Regulation (EU) 2015/757, to ensure the effective functioning of the EU ETS at administrative level and to supplement Regulation (EU) 2015/757 with the rules for the approval of monitoring plans and changes thereof by administering authorities, with the rules for the monitoring, reporting and submission of the aggregated emissions data at company level and with the rules for the verification of the aggregated emissions data at company level and for the issuance of a verification report in respect of the aggregated emissions data at company level. The data monitored, reported and verified under Regulation (EU) 2015/757 might also be used for the purpose of compliance with other Union law requiring the monitoring, reporting and verification of the same ship information.

(67a)

In addition to effective carbon pricing based on a well-functioning EU ETS, market transparency is of key importance for enabling swift and cost-efficient emission reductions in all sectors of the economy. To allow consumers and all actors along the supply chain to make informed choices concerning the emissions embedded in products, a European system for robust carbon footprint labelling of products should be developed.

(-1)

(va)

‘voyage’ means a voyage as defined in Article 3, point (c), of Regulation (EU) 2015/757 of the European Parliament and of the Council  (*2) ;

(wa)

‘non-EU transhipment port’ means a transhipment port in a non-EU neighbouring country at a distance of less than 300 nautical miles from a port under the jurisdiction of a Member State, where the movement of one type of cargo by way of transhipment operations exceeds 60 % of the total traffic of that port;

(wb)

‘transhipment operation’ means an operation in which any cargo, container or good is unloaded from a ship to the port for the sole purpose of loading it onto another ship;

(wc)

‘port of call’ means the port where a ship stops to load or unload cargo or to embark or disembark passengers; consequently, stops for the sole purposes of refuelling, obtaining supplies, relieving the crew, going into dry-dock or making repairs to the ship or its equipment, stops in port because the ship is in need of assistance or in distress, ship-to-ship transfers carried out outside ports, stops in a non-EU transhipment port and stops for the sole purpose of taking shelter from adverse weather or rendered necessary by search and rescue activities are excluded from this definition;

(y)

‘fuel’ for the purposes of Chapter IVa shall mean any fuel listed in Table-A and Table-C of Annex I to Directive 2003/96/EC, as well as any other product offered for sale as motor fuel or heating fuel as specified in Article 2(3) of that Directive;

(y)

‘fuel’ for the purposes of Chapter IVa shall mean any fuel listed in Table-A and Table-C of Annex I to Directive 2003/96/EC, as well as any other product intended for use, offered for sale or used as motor fuel or heating fuel as specified in Article 2(3) of that Directive;

(2a)

(a)

20 % of verified emissions reported for 2023;

(b)

45 % of verified emissions reported for 2024;

(c)

70 % of verified emissions reported for 2025;

(d)

100 % of verified emissions reported for 2026 and each year thereafter .

(a)

a third country has a carbon pricing mechanism in place to cap and reduce emissions that is at least equivalent to that of the EU ETS;

(b)

a carbon pricing mechanism to cap and reduce emissions that is at least equivalent to that of the EU ETS has been established through a bilateral or multilateral agreement between the Union and one or more third countries and it has been decided to link it to the EU ETS pursuant to Article 25; or

(c)

a third country is a Least Developed Country or Small Island Developing State that has a GDP per capita not equalling or exceeding the Union average and includes emissions under its nationally determined contributions under the Paris Agreement.

(a)

improvement of the energy efficiency of ships and ports;

(b)

innovative technologies and infrastructure for decarbonising the maritime transport sector, including as regards short sea shipping and ports, including connections to electricity grids in ports;

(c)

deployment of sustainable alternative fuels, such as hydrogen, e-fuels and ammonia, that are produced from renewable energy, including through carbon contracts for difference (CCDs);

(d)

zero-emission propulsion technologies, including wind technologies;

(e)

research and development and the first industrial application of technologies and designs reducing greenhouse gas emissions, including innovative technologies and fuels for ice-class ships and winter navigation in frozen areas;

(f)

priority shall be given to projects that promote innovation in the sector, such as technologies that not only lead to decarbonisation but, inter alia, also reduce the risk of noise, air and maritime pollution;

(g)

contributing to a just transition in the maritime sector through training, upskilling and reskilling of the existing workforce and preparation of the next generation maritime workforce.

(a)

the ‘do no significant harm’ criteria as set out in Article 17 of Regulation (EU) 2020/852 of the European Parliament and of the Council  (*) ;

(b)

minimum safeguards as set out in Article 18 of Regulation (EU) 2020/852.

(ba)

in paragraph 3, first subparagraph, points (b) to (f) are replaced by the following:

(b)

to develop renewable energies to meet the commitment of the Union to renewable energies, as well as to develop other technologies that contribute to the transition to a safe and sustainable low-carbon economy, and to help to meet the commitment of the Union to increase energy efficiency, at the levels agreed in relevant legislative acts

‘(b)

to develop renewable energies and grids for electricity transmission to meet the commitment of the Union to renewable energies and the Union targets on interconnectivity , as well as to develop other technologies that contribute to the transition to a safe and sustainable low-carbon economy, and to help to meet the commitment of the Union to increase energy efficiency, at the levels agreed in relevant legislative acts , including the production of electricity from renewables self-consumers and renewable energy communities;

(ba)

to support the deep and staged deep renovation of buildings in accordance with Article 2, points (19) and (20), of Directive (EU) …/… [Recast EPBD], starting with the renovation of the worst-performing buildings;

(c)

measures to avoid deforestation and increase afforestation and reforestation in developing countries that have ratified the international agreement on climate change, to transfer technologies and to facilitate adaptation to the adverse effects of climate change in these countries;

(c)

measures to avoid deforestation and support the protection and restoration of peatland, forests and other land or marine based ecosystems, and increase biodiversity-friendly afforestation and reforestation in developing countries that have ratified the international agreement on climate change, to transfer technologies and to facilitate adaptation to the adverse effects of climate change in these countries;

(d)

forestry sequestration in the Union;

(d)

forestry and soil sequestration in the Union;

(da)

climate adaptation in the Union;

(e)

the environmentally safe capture and geological storage of CO2 , in particular from solid fossil fuel power stations and a range of industrial sectors and subsectors, including in third countries;

(e)

the environmentally safe capture and geological storage of CO2 , in particular from solid fossil fuel power stations and a range of industrial sectors and subsectors, including in third countries , and innovative technological carbon removal methods, such as Direct Air Capture (“DAC”) and its storage ;

(f)

to encourage a shift to low-emission and public forms of transport;

(f)

to invest in and accelerate the shift to forms of transport which contribute significantly to the decarbonisation of the sector, including the development of climate-friendly passenger and freight rail transport and bus services and technologies, and to finance measures to support airports’ decarbonisation in accordance with Regulation (EU) …/… [deployment of alternative fuels infrastructure], and Regulation (EU) …/… [ensuring a level playing field for sustainable air transport];’

(h)

measures intended to improve energy efficiency, district heating systems and insulation, or to provide financial support in order to address social aspects in lower- and middle-income households, including by reducing distortive taxes;

(h)

measures intended to improve energy efficiency, district heating systems and insulation, efficient and renewable heating and cooling systems , or to provide financial support in order to address social aspects in lower- and middle-income households, including by reducing in particular taxes , duties and charges for renewable electricity ;

(ca)

in paragraph 3, first subparagraph, the following point is inserted:

(cb)

in paragraph 3, first subparagraph, point (k) is replaced by the following:

(k)

to promote skill formation and reallocation of labour in order to contribute to a just transition to a  low carbon economy, in particular in regions most affected by the transition of jobs, in close coordination with the social partners.

(cc)

in paragraph 3, the following subparagraphs are inserted after the first subparagraph:

(cd)

in paragraph 3, the second subparagraph is replaced by the following:

(ce)

the following paragraphs are inserted:

(a)

the “do no significant harm” criteria as set out in Article 17 of Regulation (EU) 2020/852;

(b)

minimum safeguards as set out in Article 18 of Regulation (EU) 2020/852; and

(c)

the Member State’s integrated national energy and climate plan submitted in accordance with Regulation (EU) 2018/1999 and, if relevant, the territorial just transition plan prepared in accordance with Article 11 of Regulation (EU) 2021/1056 of the European Parliament and of the Council  (*5) .

(da)

paragraph 5 is replaced by the following:

(db)

the following paragraph is added:

(dc)

the following paragraph is added:

(-i)

(a)

measures and related financial and investment plans for each installation to reach the necessary emission reductions consistent with the climate-neutrality objective set out in Article 2(1) of Regulation (EU) 2021/1119 and any relevant sectoral roadmaps prepared in accordance with Article 10 of that Regulation at installation level, excluding the use of carbon offset credits;

(b)

intermediate targets and milestones to measure, by 31 December 2025 and by 31 December of each subsequent year until 2050, progress made towards reaching climate-neutrality as set out in point (a);

(c)

an estimate of the impact of each of the measures and related financial and investment plans referred to in point (a) as regards the reduction of greenhouse gas emissions and the targets and milestones referred to in point (b);

(d)

measures to address the implications for re- and up-skilling of the workforce, including through social dialogue, in accordance with national law and practice, in order to ensure a just transition.

(a)

50 % for the installations whose greenhouse gas emission levels are above the average of the 10 % least efficient installations in a sector or subsector in the Union for the relevant product benchmarks;

(b)

30 % for installations whose greenhouse gas emission levels are below the average of the 10 % least efficient installations in a sector or subsector in the Union for the relevant product benchmarks and above the average of the 50 % most efficient installations in that sector or subsector;

(c)

25 % for installations whose greenhouse gas emission levels are above the average of the 10 % most efficient installations in a sector or subsector in the Union for the relevant product benchmarks and below the average of the 50 % most efficient installations in that sector or subsector.

(ba)

the following paragraph is inserted:

(c)

For the period from 2026 to 2030, the benchmark values shall be determined in the same manner as set out in points (a) and (d) on the basis of information submitted pursuant to Article 11 for the years 2021 and 2022 and on the basis of applying the annual reduction rate in respect of each year between 2008 and 2028.;

(c)

For the period from 2026 to 2030, the benchmark values shall be determined in the same manner as set out in points (a) and (d) on the basis of information submitted pursuant to Article 11 for the years 2021 and 2022 , excluding from the determination of the benchmark values data of the three least emission-intensive installations that either started operating after 2017 or received free allocation based on another benchmark, and on the basis of applying the annual reduction rate in respect of each year between 2008 and 2028.;

(d)

Where the annual reduction rate exceeds 2,5  % or is below 0,2 %, the benchmark values for the period from 2026 to 2030 shall be the benchmark values applicable in the period from 2013 to 2020 reduced by whichever of those two percentage rates is relevant, in respect of each year between 2008 and 2028.

(d)

Where the annual reduction rate exceeds 2,5  % or is below 0,4 %, the benchmark values for the period from 2026 to 2030 shall be the benchmark values applicable in the period from 2013 to 2020 reduced by whichever of those two percentage rates is relevant, in respect of each year between 2008 and 2028.

(da)

paragraph 5 is replaced by the following:

(a)

the ‘do no significant harm’ criteria as set out in Article 17 of Regulation (EU) 2020/852;

(b)

minimum safeguards as set out in Article 18 of Regulation (EU) 2020/852.

(13)

in Article 10c , paragraph 7 is replaced by the following:

(13)

Article 10c is deleted;

(13a)

(aa)

the generation of energy by hydrogen generators;