KEF, Alm.del - 2020-21 - Bilag 219: Orientering om regeringens høringssvar til Europa-Kommissionens offentlige høringer om revision af hhv. EU’s kvotehandelsdirektiv (ETS), byrdefordelingsforordning, LULUCF-forordning og forordning om CO2-standarder for lette køretøjer

Klima-, Energi- og Forsyningsudvalget 2020-21
KEF Alm.del Bilag 219
Offentligt

The Danish Government’s position paper on an ambitious and cost-effective

EU climate policy architecture

–

a response to the European Commission’s

public consultations on the EU Emissions Trading System Directive, Effort

Sharing Regulation and the Land Use, Land Use Change and Forestry (LU-

LUCF) Regulation

The Danish Government’s key priorities for EU’s future climate policy architecture



A strengthened EU Emissions Trading System (ETS)

–

ETS should be the central driver for

future emission reductions.

Extension of the ETS to road transport and heating in buildings

–

a more uniform price

signal across sectors and the EU.

An Agriculture, Forestry and Other Land Use (AFOLU) pillar with ambitious EU sector

regulation providing incentives for effective, climate-friendly, and competitive land sector

across the EU and ensuring delivery of an EU-wide climate target.

A new architecture should be backed by ambitious and cost effective enabling regulation

and supporting policies across sectors.



A new climate policy architecture

to deliver on EU’s

net 2030 climate target

The European Council reached an important decision in December 2020 on a new

net EU GHG target of at least 55 percent in 2030 compared to 1990 that will set the

EU on the right track to become climate neutral by 2050. However, increasing the

EU’s climate ambitions

is about more than setting an ambitious target. It is equally

important to decide how to deliver on the increased ambition in the most cost-effi-

cient way.

The European Commissions

“Fit for 55 package” presents

a unique opportunity to

rethink and modernize

the design and overall architecture of the EU’s energy and

climate policy. While the revision should ensure that the EU delivers the necessary

reductions and removals by 2030, it should also enable the EU to deliver higher

levels of climate ambition towards net zero GHG emissions by 2050 in an economi-

cally sustainable way. In addition, it will be equally important to implement the new

policy framework in a timely way so it can contribute to a cost effective implementa-

tion of the 2030 target.

This will require a significant reform of the current policy architecture, which will

take time and efforts to implement. The

Commission’s

package must therefore en-

sure that

the EU’s climate regulation

is set on the right track for a new policy archi-

tecture already now. Such a reform is a precondition for achieving both climate

neutrality in a cost efficient manner to the benefit of Europe’s citizens and busi-

nesses as well as the broader objectives of the European Green Deal to transform

the EU to an even more sustainable and prosperous society.

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KEF, Alm.del - 2020-21 - Bilag 219: Orientering om regeringens høringssvar til Europa-Kommissionens offentlige høringer om revision af hhv. EU’s kvotehandelsdirektiv (ETS), byrdefordelingsforordning, LULUCF-forordning og forordning om CO2-standarder for lette køretøjer

The transition also brings multiple benefits in terms of well-being of citizens such as

cleaner air, reduced pollution, and future-proof employment opportunities in green

sectors and industries. It is a key task of EU’s future climate policy to ensure that all

Member States move forward and are able to reap the benefits of the green transi-

tion.

Higher climate ambition in 2030 should be implemented through equally ambitious

and cost effective EU regulation that provides incentives to reduce emissions of

greenhouse gases across all Member States and sectors of the European econ-

omy. The EU therefore needs a climate policy architecture that:



Delivers a stronger and uniform CO

price signal across Member States and sectors

in the EU to ensure cost-effective reductions.

Creates incentives for substantial carbon removal to get the EU on the right pathway

towards climate neutrality by 2050 and to reverse the decreasing land carbon sink to-

wards 2030.



Ensures a level playing field and reduces the risk of carbon leakage.

Generates revenue streams to finance the green transition and address distributional

effects.

Tackles market imperfections and support the development of new and innovative

low and zero emission technologies and solutions.

The current EU climate policy architecture creates large differences in the marginal

reduction costs between the ETS and the 27 different national regimes in the Effort

Sharing Regulation (ESR). Implementing an increased 2030 climate target by main-

taining the current scope of the ETS and ESR would likely exacerbate these differ-

ences and result in unnecessarily high costs of climate mitigation in the EU. This is

neither beneficial for the climate nor the European economy.

In this light, the current EU climate policy is not only unfit to deliver on the in-

creased target, the climate architecture is also not

fit for delivering the EU’s in-

creased climate target in accordance with the objectives of the Green Deal.

The Danish Government therefore encourages the Commission to present an im-

proved EU climate policy architecture

in the “Fit for 55 package”

through the ele-

ments listed below. In creating such a new modernised policy framework, it will be

important to take into account the effect of a strong CO

price across sectors and

thereby ensure the right balance between a strong CO

price and regulatory instru-

ments as well as making sure that they serve the same end goal.

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A strengthened EU Emissions Trading System

–

the central driver for future

emission reductions

The EU Emissions Trading System (ETS) has

demonstrated its worth as the EU’s

flagship climate policy instrument. Following the 2018 revision of the ETS directive,

it has succeeded in establishing an effective EU-wide carbon price signal that has

improved incentives to reduce emissions cost-effectively across Member States. In

2019, emissions covered by the ETS fell by 9 percent compared to 2018 levels.

The Danish Government strongly supports

the Commission’s approach to

strength-

ening the ETS as the key tool for reducing EU GHG

and achieving the EU’s climate

targets.

An effective and predictable carbon price is the most cost-effective instrument to

deliver an enhanced EU climate target and to incentivise market-driven deployment

of zero-carbon technologies and the phasing-out of fossil fuels across Europe. The

rapid cost reductions of renewable energy technologies in particular wind and solar

enables the sectors currently covered by the ETS to deliver a substantially in-

creased contribution to

the EU’s 2030

climate target at low costs. The Danish Gov-

ernment thus encourages the Commission to ensure that the new EU 2030 climate

target will be reached by as much CO

reduction through the ETS as possible.

Adjusting the emissions cap to deliver the EU target

For the ETS to deliver the reductions needed as well as the necessary it needs to

be upgraded and strengthened significantly. This means addressing both existing

structural issues that have led to a build-up of a large amount of surplus allowances

as well as increasing the overall ambition level through a two-tiered approach:



Setting a binding emissions cap to ensure a sufficient level of emission reduc-

tion. The current emissions cap trajectory is set far above actual emission lev-

els, leading to a continued build-up of a surplus of allowances that is set to con-

tinue well into the ETS phase IV period. Therefore, the Commission is encour-

aged to propose a one-off rebasing of the starting point of the emissions cap

that reflects the level of the average actual emissions along with an increased

linear reduction factor reflecting an ambitious contribution from the ETS to the

EU’s climate target

in the year 2030. A one-off rebasing should be set as early

as possible in the new period.

Improving the ability of the Market Stability Reserve to limit the surplus of allow-

ances. Even with the above proposals for strengthening the emissions cap, the

surplus of allowances in circulation could remain at a level that would allow

emissions in the ETS potentially to go far above an emissions cap aligned with

the 2030 climate target. The Commission is therefore encouraged to present a

proposal to change the MSR rules and design features to address the build-up

of surplus of allowances. This could include both maintaining the 24% with-

drawal rate and reducing the MSR thresholds to a lower level.



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Ensuring an effective CO

price signal at a minimum level

A substantial reduction of the level of allowances available to the market should be

the main instrument to strengthen the ETS. While the EU has succeeded in creat-

ing a credible carbon market, experience shows that the effectiveness of the ETS

has been challenged by changing economic circumstances, the effect of overlap-

ping policies and unforeseen technology developments. With the expansion of the

ETS to new sectors, it will be important to preserve the credibility of the ETS as an

effective tool to reduce emissions against new and unforeseen developments. The

ETS should thus be able to withstand future shocks, which affect the demand for

allowances. In this light, the Commission is encouraged to explore options for en-

suring a CO

price signal at a minimum level to provide certainty for green invest-

ments such as for example an auction reserve price.

Integrating negative emissions technologies in the ETS

Substantial removals of CO

from the atmosphere are needed to reach national cli-

mate targets, the 2030 climate

target of at least 55 pct. as well as the EU’s objec-

tive of climate neutrality by 2050. While natural sinks can deliver significant remov-

als, it is likely that technological solutions for carbon capture and storage (CCS) de-

livering so-called negative emissions will also play a significant role in the efforts to

achieve climate neutrality by 2050. Consequently, the Commission is encouraged

to present policy options for further incentivising the development and deployment

of these technologies.

This could be achieved by including negative emissions technologies in the ETS

–

for example by allocating allowances to installations that generate negative emis-

sions certificates based on the development of robust and transparent carbon ac-

counting or other similar measures.

Review of the rules on free allocation of allowances in the ETS

It is important to ensure a level playing field and thereby avoid leakage risks

through effective and focussed measures. The Commission is encouraged to as-

sess the adequacy of carbon leakage measures and review the level of free alloca-

tion of allowances in the ETS in light of the proposal for an EU Carbon Border Ad-

justment Mechanism (CBAM).

It is essential that the EU’s future

framework for addressing carbon leakage is con-

sistent and fully compatible with the WTO rules, avoiding double compensation.

Therefore, a phasing in of a CBAM for specific sectors should result in a simultane-

ous phase-out of free allocation of allowances for these sectors. Furthermore, to

ensure a level playing field, a CBAM should reflect the EU CO

price and seek to

take into account emissions involved in production and any carbon costs already

incurred by imports from jurisdictions with their own carbon pricing regimes.

The Danish Government

welcomes the Commission’s intention to present options

for adjusting the share of allowances auctioned for aircraft operators with a view to

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ensure further reductions of greenhouse gas emissions and a level playing field

with other modes of transport.

ETS state aid

The ETS State Aid Guidelines for ETS phase IV has just been adopted. The possi-

bility to use state aid was, however, in ETS phase III designed as a transitional

measure only and was never intended as an opportunity to delay the efforts that

Member States should put in place in the transition to energy supplies based on re-

newable energy. For that reason, it is important for the Commission to make sure

that the ETS state aid is phased out by the end of ETS phase IV in 2030 or soonest

possible thereafter.

Extension of the ETS to road transport and heating in buildings to deliver

emissions reductions through a more uniform price signal across sectors

While the EU ETS has reduced emissions effectively, there is still a considerable

untapped reduction potential in the sectors covered by the Effort Sharing Regula-

tion. EU road transport emissions have increased by more than a quarter since

1990, while EU emissions from heating of buildings have decreased but with sub-

stantial variation across EU Member States.

The Danish Government therefore encourages the Commission to follow through

with the intention presented in its 2030 Climate Target Plan and Renovation Wave

to extend the ETS to road transport and heating in buildings to create one single

system covering all emissions from combustion of fuels in these sectors. Extending

the ETS to these sectors brings several advantages:



Increases certainty of delivering sufficient GHG emissions reductions. The fi-

nancial penalties under the EU ETS in case of non-compliance apply directly to

the emitting entities and therefore ensure high certainty to deliver the environ-

mental outcome.

Increases cost-effectiveness. Creating a uniform price signal across these sec-

tors incentivising both a switch of fuels for heating in buildings and uptake of

low carbon mobility technologies, while improving the overall cost-effectiveness

of the EU’s climate efforts.

Addresses distributional effects effectively. While carbon pricing in heating in

buildings and road transport is expected to have distributional effects, an exten-

sion will significantly increase the revenue from auctioning of allowances and

thereby create a significant and predictable revenue stream to support the tran-

sition in Member States. Revenues could be used to tackle distributional effects

caused by increasing costs for households related to carbon pricing. In compar-

ison, alternative types of regulation and policies can also have considerable im-

plicit distributional impacts, without generating the financial means to tackle

such challenges. The distributional effects should also be seen in the context of



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the significant funds in the Multiannual Financial Framework and the Next Gen-

eration EU that can contribute to the Renovation Wave.



Strengthens the joint effect of carbon pricing and complementary policies. Ex-

tension of the ETS is likely to strengthen the joint effect of carbon pricing and

complementary policies such as standards by enhancing efficiency and focus-

sing attention on how to target standards and other regulatory measures to

challenges where carbon pricing alone could be insufficient. As an example, it

supports overall intensification of energy efficiency measures, notably by put-

ting a price on carbon emissions incentivizing cost-efficient building renova-

tions. EU eco-design standards for energy use in electrical appliances have

worked effectively in combination with the EU ETS.

An extension of the ETS to heating in buildings and road transport will conse-

quently reduce the role of the Effort Sharing Regulation significantly and it should

therefore be phased out.

Extension of the ETS to the maritime sector

Shipping accounts for approximately 2% of the world’s

greenhouse gas emissions.

There is both a need and a real potential to decarbonise the sector. The Danish

Government supports a safer, smarter and more sustainable future for shipping,

and like all other sectors, the maritime sector needs to reduce its GHG emissions

and contribute to the transition towards a climate neutral economy.

It will require the right mix of policy action to trigger the necessary innovation and

investments in infrastructure. Carbon pricing on shipping has to be combined with a

suite of other policy tools to ensure a sustainable transition of shipping. The Danish

Government looks forward to discussing the initiatives expected by the Commission

in 2021 e.g. as part of its Strategy on Smart and Sustainable Mobility.

When it comes to an EU level measure for shipping, including ETS, the Danish

Government finds that it must adhere to the following principles in order to ensure

the best possible outcome for the European maritime industry and to ensure actual

emission reductions from shipping based on the principles mentioned below:

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

Carbon leakage has to be avoided.

A global level-playing field must be maintained. Consequently, an EU measure must be

flag neutral and enforceable.

EU measures should support global level measures within the IMO, avoid double regula-

tion and not stand in the way of any future global solutions.

EU measures should incentivize further innovation, promote first-movers and ensure an

accurate baseline.

EU measures should take the international nature of shipping and the low predictability

in the sector from year to year into account.

EU measures should consider shipping within the context of an energy efficient Euro-

pean transport system.

The attached Annex I contains an elaboration of preliminary suggestions for an EU

ETS for shipping, which the Danish Government has also submitted as part of the

Commission's targeted "Stakeholder consultation on the revision of the Emissions

Trading System in

relation to maritime transport”.

A strong and coherent enabling framework with sectoral regulations and poli-

cies

As the Commission states in its 2030 Target Plan, policy measures interacts and

these interactions are likely to intensify when the intensity and scope of the climate

policy changes. A strengthened and extended ETS will be a strong legislative tool,

but a carbon price needs to be complemented by an ambitious and cost effective

enabling framework with coherent policies and regulations not least to address

market failure such as barriers to the deployment of low and zero carbon technolo-

gies etc.

The Commission is encouraged to make sure that the update of this enabling

framework is carried out in a consistent manner, which creates a policy mix where

all relevant regulation serves the same end goal and complements an effective car-

bon pricing. It will be equally important to ensure that the instruments underpin the

same incentives and utilises synergies across the legislative instruments, while

avoiding overlaps.

This includes for instance strengthening CO

emission performance standards for

light and heavy-duty vehicles to drive the technological development of zero-emis-

sion vehicles as well as strengthening EU legislation to enable renewable heating

in buildings, energy renovations in buildings as well as an ambitious large scale ex-

pansion of renewables. In addition, a revised Energy Taxation Directive should be

designed to complement a revised ETS and thereby also the phasing out of fossil

fuels.

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There is also a need to obtain a coherent approach on creating the right incentives

to further develop and deploy sustainable and renewable fuels across the regula-

tion and initiatives of the “Fit for 55” package, including through the ETS. The Dan-

ish Government see a particular potential in renewable hydrogen in achieving cli-

mate neutrality in sectors where abatement costs are high. Therefore, in the con-

text of the ETS revision the Commission is invited to consider solutions to over-

come the disincentive to invest in renewable hydrogen due to the free allocation of

allowances to fossil-based hydrogen with the purpose of creating a level playing

field for green technologies.

A new monitoring, reporting and verification system

–

limiting administrative im-

pacts of an extended ETS

The Commission is encouraged to ensure that the new monitoring reporting and

verification system followed by an extension of the ETS to new sectors is imple-

mented in a way, which to the extent possible limits additional administrative costs

for national administrations and enterprises. As the Commission mentions there

seems to be an obvious advantage in using the existing ETS administrative infra-

structure already in place for an extended ETS system.

In order to achieve a coherent and compatible approach to monitoring emissions

from transport of CO

for utilisation or storage,

the definition of “CO

transport” in

the Monitoring and Reporting Regulation could be broadened accordingly. The es-

tablishment of an activity-specific monitoring methodology for CO

transportation by

water, road and rail is considered a necessary addition to the existing suite of

guidelines for capture, transport by pipelines and geological storage. This will en-

sure a more robust and consistent framework and set a clear price signal to inves-

tors and create a market for these types of technologies that does not exist today.

AFOLU pillar with an ambitious sectoral climate regulation to provide incen-

tives for an effective, climate-friendly and competitive land sector across the

EU and ensuring delivery of an EU-wide climate target

An extension of the ETS to road transport and heating in buildings would leave ag-

riculture as the primary sector regulated through national targets under the ESR

and thus have major impact for the ESR in its current form. Agriculture will account

for an increasing share of EU emissions as the rest of the economy decarbonises.

Efforts to reduce emissions from agriculture vary considerably between Member

States due to differentiated national reduction targets, and an extension of the cur-

rent architecture would come with unnecessarily high costs. The Danish Govern-

ment therefore encourages the Commission to propose a combined AFOLU pillar

with an EU-wide reduction target.

Establishing an AFOLU pillar with an EU-wide climate target accompanied by ambi-

tious and effective sector regulation would contribute to aligning the EU climate ar-

chitecture for land-related emissions and removals of greenhouse gases with the

new EU 2030 climate target and the objective of climate neutrality by 2050. The EU

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should work towards realising the vision of an AFULO pillar with the proper incen-

tives in place for producers to make sustainable decisions. A combined AFOLU

sector would allow for a more integrated and cost-effective mitigation effort with

many significant advantages to the climate as well as the economy.

Please refer to the attached Annex II for an elaboration of these views, which has

also been submitted by the Danish Government in parallel to the European Com-

mission’s public consultation on the review of EU rules concerning Land Use, Land

Use Change & Forestry.

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