Emission trading system in Europe: support for the member states

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The European Union has disbursed about €3 billion via the Modernisation Fund in order to finance about forty energy developing projects in 10 EU member states. These investments will support the modernisation of energy systems, reducing greenhouse gas emissions in the energy, industry and transport sectors, and improving energy efficiency.  

Present financial support is the largest ever disbursement through the Modernisation Fund, bringing the total spending to €12.65 billion since January 2021. These investments help several EU states to meet their climate and energy targets and contribute to the EU’s long-term target of reaching climate neutrality by 2050.
The EU states benefiting from the first disbursement in 2024 are: Bulgaria (€65.2 million), Croatia (€52 million), Czechia (€835.2 million), Estonia (€24.1 million), Hungary (€76.8 million), Latvia (€26.8 million), Lithuania (€59 million), Poland (€697.5 million), Romania (€1.095 billion) and Slovakia (€35 million).
The projects supported presently are focusing on renewable electricity generation, use and deployment of renewable energy sources, modernisation of energy networks and energy efficiency; they are funded by revenues from the EU’s Emissions Trading System.
The allowances are coming from the auctioning of emissions under the EU’s Emissions Trading System, EU ETS which is a cornerstone of the EU’s policy to combat climate change and a vital tool for reducing greenhouse gas emissions cost-effectively. Besides, the EU represent the world’s first major carbon market and remains so far the biggest one.
More on delivering “green deal” in: https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en

The EU Modernisation Fund
The EU Modernisation Fund aims to support thirteen lower-income member states in their transition to climate neutrality: thus, the beneficiary states are Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia; additionally, there are three other states – Greece, Portugal and Slovenia – which became eligible for Modernisation Fund support as of January 2024, under the revised EU Emissions Trading System (EU ETS).
The Modernisation Fund, MF supports investments in the generation and use of energy from renewable sources, energy efficiency, energy storage, modernisation of energy networks, including district heating, pipelines and grids, as well as just transition in carbon-dependent regions.
More in the overview of previous disbursements: https://modernisationfund.eu/documents-2/disbursement-decisions/

The MF complements other EU investment instruments such as Cohesion policy and the Just Transition Fund in order to mobilise significant resources, which can help eligible countries support investments in line with the REPowerEU Plan and the ”Fit For 55” package.
The MF operates under the responsibility of the beneficiary countries in close cooperation with the European Commission and the European Investment Bank, EIB.
The EIB acts as the auctioneer for the sale of EU allowances and receives the proceeds of each auction, on behalf of the beneficiary member states; additionally, it manages the proceeds in a single portfolio according to mutually agreed asset management guidelines and fully transfers the revenues to the member states.
More on MF, as well as on number of allowances and share of revenues in: https://modernisationfund.eu/how-it-works/

Modernisation Fund’s revenues
The Modernisation Fund is financed by revenues from the auctioning of emission allowances under the EU Emissions Trading System (EU ETS):
= Revenues from the auctioning of 2% of the total quantity of the EU ETS allowances auctioned between 2021 and 2030.
= Revenues from the auctioning of 2.5 % of the total quantity of EU ETS allowances auctioned between 2024 and 2030.
= Revenues from the auctioning of EU ETS allowances that the EU member states have decided to transfer to the Modernisation Fund. Those transfers come from the allowances distributed for the purposes of solidarity, growth and interconnections or the allowances allocated for free to electricity generators.

ETS2: a revised system
In 2023, a new and separate emissions trading system was created, so-called Emissions Trading System 2 (ETS2). A new emissions trading system named ETS2 was created as part of the 2023 revisions of the ETS Directive, separate from the existing EU ETS.
This new system is covering and addressing the CO2 emissions from fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing EU ETS).
The ETS2 will complement other policies of the European Green Deal in the covered sectors, helping the EU member states to achieve their emission reduction targets under the Effort Sharing Regulation, ESR.
So far, emission reductions in those sectors have been insufficient to put the EU on a firm path towards its 2050 climate neutrality goal. The carbon price set by the ETS2 will provide a market incentive for investments in building renovations and low-emissions mobility.
The ETS2 will become fully operational in 2027. Although it will be a ‘cap and trade’ system like the existing EU ETS, the ETS2 will cover emissions upstream. It will be fuel suppliers, rather than end consumers such as households or car users, that will be required to monitor and report their emissions. These entities will be regulated under the ETS2, which means they will be required to surrender sufficient allowances to cover their emissions. Regulated entities will purchase these allowances at auctions. The ETS2 cap will be set to bring emissions down by 42% by 2030 compared to 2005 levels.
All emission allowances in the ETS2 will be auctioned, and a share of the revenues will be used to support vulnerable households and micro-enterprises through a dedicated Social Climate Fund (SCF). EU states will be required to use the remaining ETS2 revenues for climate action and social measures, and they will report on how this money is spent.
More in the consolidated text: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02003L0087-20230605

Examples of proposals for receiving EU funding
The following proposals from the member states have been supported by the EU-wide funding; they included, for example:
– reinforcement of the electricity transmission grid to support renewables integration in Bulgaria;
– deployment of photovoltaic and energy storage capacity for public water service providers in Croatia;
– support to households for the acquisition and installation of new photovoltaic systems in Czechia;
– improving energy efficiency and promoting renewable energy use in public sector buildings in Estonia;
– modernisation and development of renewable energy-based district heating systems in Hungary;
– use of renewable energy sources in multi-apartment buildings, public buildings and energy communities in Latvia;
– development of storage capacities to balance energy systems in Lithuania;
– upgrading of heavy-duty transport charging infrastructure in Poland;
– contract-for-difference support schemes for the production of electricity from renewable sources in Romania;
– production of renewable hydrogen and highly efficient co-generation in Slovakia.

The next deadlines for the EU states to submit investment proposals for potential support by the Modernisation Fund are: - 13 August 2024 (for non-priority proposals), and – 10 September 2024 for priority proposals.
Source: https://ec.europa.eu/commission/presscorner/detail/en/IP_24_3436

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