SPAIN - New Rules on Greenhouse Gas Emissions

The Spanish Government has enacted Royal Decree 18/2019, of 25 January, developing aspects relating to the application of the greenhouse gas emission allowance trading scheme for the period 2021-2030.

Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC and intending to intensify the reduction of emissions in a cost-effective manner and to facilitate investments in low-carbon technologies, together with Decision (EU) 2015/1814 was published in the Official Journal of the European Union on 19 March 2018 and entered into force on 8 April 2018.

This Directive constitutes the European Union's legislative framework for the trading period 2021-2030 (fourth phase) of the EU Emissions Trading Scheme (EU ETS) and is configured as one of the Union's main instruments for achieving its objectives of reducing greenhouse gas emissions by at least 40 per cent by 2030 compared to the 1990 levels, in line with the commitments assumed by the European Council in 2014 and as part of the Union's contribution to the Paris Agreement, adopted in 2015.

Article 3 of the Directive obliges Member States to bring into effect, by 9 October 2019 at the latest, those laws, regulations and administrative provisions necessary to comply with the Directive, with the exception of Article 1(14)(f), which redrafts Article 10a(6), Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC which had to be in force by 31 December 2018.

Article 1 point 35 of Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 elaborates in depth on the existing exclusion scheme for small emitters. It opens the possibility for Member States to exclude from the EU ETS those installations which have notified the competent authority of emissions of less than 2 500 tonnes of carbon dioxide equivalents.

For the proper development of the European Union's trading system of emission rights for the trading period 2021-2030, this Directive calls for the implementation of a whole series of delegated and implementing acts at EU level. At the time of publication of this Royal Decree these regulations are at different stages of their enactment processes, at a more or less advanced stage of preparation and approval within the European Union, and will require, in turn, certain adjustments of the Spanish legal system that will be carried out in subsequent phases.

Both the Directive and the delegated and implementing acts specify, at Union level, the milestones in the process whereby free and individualized allocation of allowances is granted to each of the owners of the affected installations. This process starts with the application for free allocation of allowances and the submission of verified information on activity levels collected pursuant to a methodological monitoring plan to be submitted by the operators of the installations. Each Member State, for its part, must compile and aggregate this information, in accordance with the procedures it determines at national level and in accordance with the peculiarities of its own legal system, and submit to the European Commission a list of all the installations in its territory that are within the scope of the EU ETS, accompanied by the data provided by each installation that has applied for a free allocation. This list will be submitted for the first time on 30 September 2019 and will be resubmitted every 5 years thereafter.

The data provided by the operators of the installations for the years 2016-2017 regarding the allocation period 2021-2025, will be the basis for the European Commission to calculate the Benchmarks for each sector and subsector qualifying for free allocation. On the basis of these data, an annual reduction rate will be estimated for the Benchmarks, which reference will be the 10 per cent of the most efficient installations in the sector. This annual reduction rate shall have a value between 1,6 and 0,2. The reference values will be defined by means of an implementing act expected to be adopted in 2020.

On the basis of these reference values, Member States shall calculate the preliminary allocation for each installation. These preliminary allocation data for each eligible installation that may have applied for free allocation shall be forwarded to the European Commission.

The possibility of using two additional free allocation reduction coefficients is also envisaged, to be applied, where appropriate, on a case-by-case basis: (i) the Intersectoral Correction Factor, and (ii) the Linear Reduction Factor. Once the application of the abovementioned factors has been decided, each Member State will be in a position to calculate the final free allocation for each installation, which, at national level, will be approved by the Council of Ministers.

Despite the fact that the Union has not finalized the implementation of the delegated and executive acts implementing Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 for the period 2021-2030, it is necessary to regulate certain aspects at state level before the end of 2018 and, in any case, as soon as possible thereafter. The bulk of the provisions of Directive (EU) 2018/410, of the European Parliament  and the Council, of 14 March 2018, will be incorporated into our legal system in a later year through the amendment of Law 1/2005 of 9 March, which regulates the greenhouse gas emission rights trading scheme in Spain, as well as the necessary regulatory developments.

Thus, this Royal Decree is intended to prepare our legal system for the 2021-2030 emissions trading period, clarifying certain aspects relevant to the free allocation of emission rights and the EU ETS small installations exclusion scheme. These are issues that cannot wait for the transposition of the Directive through the amendment of Law 1/2005, of 9 March, as they impact on the steps that must be taken to prepare the fourth phase of the EU ETS in Spain, which must be carried out immediately.

On the other hand, this Royal Decree regulates other aspects directly related to the transposition of Directive (EU) 2018/410 of the European Parliament and of the Council, of 14 March 2018, regarding publication obligations related to the mechanism to set off indirect costs, as well as various aspects related to the exclusion of small emitters.

Chapter I refers to the object of the royal decree, consisting of the regulation of certain aspects relating to the application in Spain of the greenhouse gas emission allowance trading scheme in the 2021-2030 trading period.

Chapter II deals with the definition of certain aspects related to the free allocation process of greenhouse gas emission allowances for the 2021-2030 trading period which is divided, for the purposes of free allocation of allowances for fixed installations, into two allocation periods, i.e. the 2021-2025 period and the 2026-2030 period. 

Likewise, the Royal Decree also deals with the specification of the system of exclusions in accordance with the provisions introduced by Directive (EU) 2018/410 of 14 March 2018 In this sense, Chapter III regulates issues related to the application for exclusion from the EU ETS for the period 2021-2025, in accordance with the fourth additional provision of Law 1/2005 of 9 March). Thus, installations that were excluded in the trade period 2013-2020 but would wish to continue in the exclusion regime must again apply for exclusion for the period 2021-2030. In addition, Royal Decree 301/2011 of 4 March on mitigation measures equivalent to participation in the emissions trading scheme for the purpose of excluding small installations will be amended so that the measures contemplated therein are applicable to the allocation period 2021-2025 and, should the European Commission issue guidelines in this area, be consistent with them.

In addition, Directive (EU) 2018/410 of 14 March 2018, in Article 1(35), allows Member States to exclude from the EU ETS installations that have reported to the competent authority (in each of the three years preceding the year of application for free allocation of allowances for the period 2021-2025) emissions below 2500 tons of carbon dioxide equivalent, (without taking into account biomass emissions) subject to compliance with certain conditions relating to the deadline for notifying the European Commission of such installations (30 September 2019), the monitoring of emissions, information on the possibility of reintroduction into the EU ETS and the publication of this information. Thus, chapter IV of the Royal Decree excludes from the EU ETS those installations with emissions of less than 2,500 tons of carbon dioxide equivalent and clarifies certain aspects relating to this exclusion regime. Article 1 point 35 of Directive (EU) 2018/410 of 14 March 2018  is thus introduced into our legal system.

Finally, the Royal Decree contains five final provisions. The third final provision is particularly material, as it introduces into our legal system the provisions necessary to comply with the publication obligations laid down in Article 1(14)(f) of Directive 2018/410 of the European Parliament and of the Council of 14 March 2018 relating to Article 10a, paragraph 6 of Directive 2003/87/EC of 13 October 2003 on the mechanism for offsetting indirect costs attributable to greenhouse gas emissions against electricity prices, which should be in force by 31 December 2018.

Article 1(14)(f) of Directive 2018/410 of the European Parliament and of the Council of 14 March 2018 maintains the possibility for Member States to adopt aid in favour of sectors or subsectors which are exposed to a real risk of carbon leakage (due to significant indirect costs borne from the costs of greenhouse gas emissions reflected in electricity prices) provided that they are in conformity with State aid rules and, in particular, do not lead to undue distortions of competition in the internal market. In Spain, the sixth additional provision of Law 1/2005 of 9 March which was introduced by Law 13/2010 of 5 July (amending Law 1/2005 of 9 March, to improve and extend the general emissions trading scheme to include aviation, provided for the possibility to set off indirect emissions costs. Royal Decree 1055/2014, of 12 December creating a mechanism for offsetting the costs of indirect greenhouse gas emissions borne by companies in certain industrial sectors and subsectors that are considered to be exposed to a significant risk of "carbon leakage" and approving the regulatory bases for granting subsidies for 2014 and 2015, Modified by Royal Decree 655/2017, of 23 June created this compensation mechanism, called "Ayudas compensatorias por costes de emisiones indirectas de CO2".

On the other hand, Directive 2018/410 of the European Parliament and of the Council of 14 March 2018 states that Member States shall (i) endeavour  not to devote more than 25 per cent of the revenue generated by the auctioning of allowances to these aids and (ii) when the amount available for such aids exceeds this percentage, the Member State concerned shall state the reasons why this amount was exceeded. It also provides that as of 2018, for any year in which a Member State uses for these purposes more than 25 per cent of the revenues generated by the auctioning of allowances, that Member State shall publish a report indicating the reasons for exceeding that amount. The report shall include relevant information on electricity prices for large industrial consumers benefiting from such financial measures, without prejudice to the requirements relating to the protection of confidential information. The report shall also include information on whether other measures to sustainably reduce indirect carbon costs in the medium and long term have been duly taken into account.

The Directive also states that within three months from the end of each year, Member States which have adopted such aid shall make available to the public - in an easily accessible form - the total amount of compensation granted per sector and sub-sector. In this sense, the Royal Decree introduces into national legislation, on the one hand, the obligation to feature a breakdown, by sector and subsector, of the aids granted in compensation for costs, 

This Royal Decree is issued by virtue of the authorization for the normative development established in the third final provision of Law 1/2005, of 9 March, which regulates the greenhouse gas emission rights trading scheme.

The contents of the Royal Decree are reportedly in compliance with the principles of good regulation foreseen in Article 129 of Law 39/2015 of 1 October 2015 on Common Administrative Procedure for Public Administrations. ////