Funding Mechanisms in the fourth phase of the EU ETS: exploring what is known and identifying issues for clarification and discussion

Date: 19 September 2018

Author(s): Andrei Marcu, Jean-Yves Canneil, Wijnand Stoefs, Domien Vangenechten

The revision for the fourth phase of the EU Emission Trading System (ETS), covering the period 2021 - 2030, introduced a number of important changes concerning the ‘funding mechanisms’ in the system. The existing mechanisms – the Solidarity Provision and the option for transitional free allocation for the modernisation of the energy sector ascaptured in Article 10c – were prolonged and updated, and new mechanisms – the Modernisation Fund and the Innovation Fund – were introduced.

The first objective of this discussion paper is to lay out the components and provide an understanding of the functioning of these different funding mechanisms embedded within the EU ETS, and explore how they are articulated to one another. For each of the mechanisms, this paper discusses, to the extent that it is currently known, the purpose of the mechanism, outline how it is expected to function, discuss the eligibility criteria, and estimate how many allowances or how much money the mechanisms contain.

The second objective of this discussion paper is to identify issues that need to be further understood and clarified in terms of the operationalisation of the four funding mechanisms. While the reviewed Directive sets out the main criteria for the establishment of the different mechanisms, many issues remain to be resolved in the implementation phase. The issues that this paper will raise and discuss by no means represent an exhaustive list. They are some of the key issues, raised in discussions with stakeholders, that are meant to foster debate and discussion.