Effort Sharing Regulation (ESR)

The Effort Sharing Regulation (ESR) or Climate Action Regulation sets legally-binding emission reduction targets for each EU Member State for the sectors not covered by the EU’s Emissions Trading Scheme. These non-ETS sectors are responsible for nearly 60% of the EU’s total emissions and include ground transportation, agriculture, waste and buildings.

The ESR aims to reduce emissions in these sectors by 30% across the EU, compared to 2005 levels, by 2030. This target is broken down into legally-binding national targets. These Member State targets vary from country to country and are based on wealth, measured by its GDP per capita.

The wealthiest Member States need to reduce their emissions by 40% below 2005 levels and the poorest are allowed to maintain their 2005 emission levels (a 0% target for 2030).

This target is unambitious and the ESR will not do enough to protect the climate. Besides a weak overall target, the ESR also allows Member States to use a number of flexibilities which work as de facto loopholes that allow countries to claim more emission reductions on paper than in the real world, buy emission allowances from other countries or use excess emission credits from the EU carbon market and the LULUCF sector to cover their failure to abate in time allowances from the EU carbon market and the land-based sectors.

This has to stop so that all sectors contribute fully to the transition necessary.

EU Emissions Trading System (ETS)

The EU Emissions Trading System (ETS) is a carbon pricing tool that regulates about 45% of the EU’s greenhouse gas emissions and covers the power sector, the industry sector and the aviation sector. The remaining emissions are covered by the Effort-Sharing Regulation. It is the world’s largest carbon market, covering more than 11,000 industrial and power plants in the EU, as well as in Iceland, Liechtenstein and Norway.

The EU ETS sets a limit on the amount of greenhouse gas emissions that can be emitted by all sectors covered by the system. Installations receive or buy pollution permits – called EU allowances. One EU allowance allows for one tonne of CO2 to be emitted. Each year, the limit, or cap, of allowances in the system becomes slightly more stringent. With a decreasing supply of allowances, the price of each permit, the ETS carbon price, should increase, making dirty business unprofitable over time.

Despite being hailed as the flagship of European climate policy, the EU ETS has a notorious history of weak price signals, massive windfall profits for polluting industries and a lack of incentives for sectors, particularly industry to invest into deep decarbonisation. Even a recent revision of the system failed to align the EU ETS with the objectives of the Paris Agreement. Thus, the EU ETS continues to be in dire need of reform.

The European Commission has promised to present a proposal to improve the EU carbon market in summer 2021. In order to turn the EU ETS into a true driver towards climate neutrality, the EU carbon market needs to deliver much more emission cuts, cancel all surplus allowances that drag on the carbon price signal, phase out the massive free handouts of pollution permits to heavy industry and ensure that currently unregulated sectors, such as international aviation and shipping, start paying for their emissions.

Industrial transformation

Industry’s contribution to EU climate ambition targets, especially that of becoming a climate-neutral continent, is an important issue to address at EU level. Industry – including factories, power plants, intensive livestock rearing and refineries – is the source of more than half of the EU’s greenhouse gas emissions and 75% of hazardous waste production.

Large-scale industrial activities are one of the main contributors to air pollution which leads to 456,000 premature deaths in Europe every year. At the same time, industry reports that they release about 4,600 tonnes of heavy metals every year into air, water and soil. That includes ecotoxic arsenic and neurotoxic lead and mercury. Their main source is coal combustion.

The EU’s Emissions Trading System (ETS) and Effort Sharing Regulation (ESR) are the main tools developed so far to address industry greenhouse gas emissions, but more tools are needed to ensure that industry can contribute effectively to the various objectives agreed in the European Green Deal to ‘transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use’.

Our industry work ranges across the ETS and ESR, and more recently has expanded to take in the EU’s Industrial Strategy and Circular Economy Action Plan. This includes the potential introduction of a carbon border adjustment mechanism which is meant to address the threat of industrial production leaving the EU because of the cost differences between EU production because we have the ETS and the rest of the world which does not have a similar carbon pricing mechanism.

Through our industrial transformation work, we aim to ensure that EU policies and tools frame industry’s efforts to go beyond shifting to renewables and climate capture and storage/use, and that industry steps up its efforts to avoid irreversible damage through climate change, biodiversity loss and other interlinked impacts. Industrial transformation means developing and strengthening synergies on actions to address multiple environmental and social challenges.

Climate and energy governance framework

In 2015, European leaders endorsed the European Commission’s proposal for an Energy Union with a forward-looking climate policy based on “five mutually-reinforcing and closely interrelated dimensions”:

1. Energy security
2. A fully integrated energy market
3. Moderating energy demand
4. Decarbonising the economy
5. Research & innovation

The Energy Union also provides a framework for cooperation with countries beyond the EU, particularly in South East Europe.

The Energy Union also provides opportunities for improvements in climate and energy governance. Under current climate and energy policies countries have a huge number of separate planning and reporting obligations. These require streamlining in order to provide a better basis for the transition to a zero carbon economy.

Governance of the Energy Union Regulation

In November 2016 the Commission published a proposal for the Governance of the Energy Union Regulation in its ‘Clean Energy for All Europeans’ package.

The Governance of the Energy Union Regulation brings together policies on energy efficiency, renewables, and governance of climate and energy targets by requesting that Member States develop National Energy and Climate Plans (NECPs) and long term low emission strategies.

Putting these conditions in place offers a unique opportunity to increase climate ambition and speed up the energy transition in Europe – if the legislation is done right.

CAN Europe published a first analysis of the draft NECP, just before the Commission issued their recommendations to Member States on how to improve these for the final version. To analyse the extent to which the Member States took these recommendations into account CAN Europe and ZERO published a report in June 2020.

With the Commission’s analysis on NECPs published in October 2020, Climate Action Network Europe and ZERO published a new briefing “National Climate and Energy Plans: Building block for implementing the EU’s increased climate ambition” describing how NECPs can pave the way to implementing higher climate and energy targets in the EU. This new briefing that includes an assessment of opportunities and gaps for the final Bulgarian, German and Irish NECPs, builds on the country assessments of the NECPs published in June 2020. In this briefing, we highlight that with the new increased 2030 climate target proposal and while Member States are discussing this proposal, it becomes even more important for NECPs to be updated and not become irrelevant even before they are implemented.

European Climate Law

The European Climate Law, the cornerstone of the European Green Deal, aiming to enshrine the climate neutrality objective into law, will shape all new climate legislation. CAN Europe has worked to influence this new framework and urged the European Parliament to include several key elements, including an at least 65% emission reduction target compatible with science and with the Paris Agreement commitment; an independent scientific body able to monitor and assess the progress of the Member States to achieve climate neutrality by 2050 and for this to be for each Member State individually; a phase out date for fossil fuel subsidies by 2025 and access to justice at EU level for every EU citizen affected by the climate crisis.

On Tuesday 6th of September 2020, the European Parliament adopted the draft report on the European Climate Law, including a more ambitious target of 60% emission reductions. While science requires an at least 65% reduction target, the European Parliament made a very welcome step towards the Paris Agreement. Other important battles were also won on the creation of the European Climate Change Council (ECCC), the phase out of fossil fuels subsidies and access to justice at national level (while access to justice at EU level is still missing).

In the next European Council meeting in October and in December 2020, Member States will discuss the Climate Law and the new reduction target. CAN Europe urges Member States to refuse the net target proposed by the European Commission in its Impact Assessment. Then, the European Parliament and the Council will have to agree on the final text of the law in so-called Trilogues negotiations which will lead to a final adoption probably in Q1 2021.