Law 9/2020 of 16 December amending Law 1/2005 of 9 March on the greenhouse gas emission allowance trading scheme to intensify cost-effective emission reductions

OFFICIAL JOURNAL OF THE STATE No. 328 Thursday 17 December 2020 Sec. I. Page 115662 I. GENERAL PROVISIONS HEAD OF STATE 16347 Law 9/2020, of 16 December, amending Law 1/2005, of 9 March, regulating the greenhouse gas emission allowance trading scheme, to intensify emission reductions in a cost-effective manner. FELIPE VI KING OF SPAIN To all who shall see and understand this, Know ye: That the General Courts have approved and I hereby sanction the following law:

PREAMBLE I 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 established the European Union emissions trading scheme with the aim of promoting the reduction of these gases in a cost-effective and economically efficient manner. This directive was transposed into Spanish law by Law 1/2005, of 9 March, regulating the greenhouse gas emission allowance trading scheme. The European Council of 24 October 2014 committed to reducing the European Union's total greenhouse gas emissions by at least 40% by 2030 compared to 1990 levels. To achieve this, all sectors of the economy must contribute to this emission reduction, and the objective must be achieved in the most cost-effective manner possible. It also confirmed that the main European instrument to achieve this objective is a reformed and properly functioning European Union emissions trading scheme (hereinafter EU ETS), along with a market stability reserve. The target for sectors covered by the EU ETS was set at a 43% reduction by 2030 below 2005 levels. On 12 December 2015, under the United Nations Framework Convention on Climate Change, the Paris Agreement was adopted, entering into force generally on 4 November 2016. Spain signed the agreement on 22 April 2016 and ratified it on 23 December 2016. It was published in the "Boletín Oficial del Estado" on 2 February 2017 and entered into force on 11 February 2017. The main objective of the Paris Agreement is to keep the global average temperature increase well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above those levels. The European Union submitted its Union Determined Contribution to the Secretariat of the United Nations Framework Convention on Climate Change on 6 March 2015. In 2018, Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to intensify emission reductions in a cost-effective manner and facilitate investments in low-carbon technologies was adopted, as well as Decision (EU) 2015/1814, which entered into force on 8 April 2018. cve: BOE-A-2020-16347 Verifiable at https://www.boe.es

OFFICIAL JOURNAL OF THE STATE No. 328 Thursday 17 December 2020 Sec. I. Page 115663 This Directive constitutes the European Union's legislative framework for the 2021-2030 trading period (Phase IV) of the EU ETS and is configured as one of the EU's main instruments to achieve its 2030 emission reduction objectives, in line with commitments undertaken by the European Council in 2014 and as part of the EU's contribution to the Paris Agreement. To this end, Directive (EU) 2018/410 of 14 March 2018 introduces a series of measures aimed at strengthening the EU ETS. Among these, the increase in the linear reduction factor stands out – rising from 1.74% in Phase III (2013-2020 period) to 2.2% in Phase IV, from 2021 onwards – auction as the primary method of allowance allocation, the continuity of free allocation with improved provisions on carbon leakage, more focused on sectors at risk of leakage, as well as the creation of various funds to finance the transition to a low-carbon economy. In Phase IV, the 2021-2030 trading period is divided, for the purposes of free allowance allocation and in relation to fixed installations, into two allocation periods covering the years 2021-2025 and 2026-2030 respectively. Alongside Directive (EU) 2018/410 of 14 March 2018, the European Union has adopted various delegated and implementing acts aimed at ensuring the effectiveness and robustness of the EU ETS for the 2021-2030 period. Thus, regarding the monitoring and reporting of emissions and the accreditation and verification of verifiers, which are key pillars supporting the EU ETS, Commission Implementing Regulation (EU) 2018/2066 of 19 December 2018 on the monitoring and reporting of greenhouse gas emissions pursuant to Directive 2003/87/EC of the European Parliament and of the Council and amending Commission Regulation (EU) No 601/2012 was approved; and Commission Implementing Regulation (EU) 2018/2067 of 19 December 2018 on the verification of data and the accreditation of verifiers in accordance with Directive 2003/87/EC of the European Parliament and of the Council was approved. Changes have also been introduced to the regulation of the Union Register via Commission Regulation (EU) 2018/208 of 12 February 2018, which amends Regulation (EU) No 389/2013 establishing the Union Register. Regarding the aviation sector, Regulation (EU) 2017/2392 of the European Parliament and of the Council of 13 December 2017 amending Directive 2003/87/EC to maintain the current scope limitations for aviation activities and prepare for the implementation of a global market-based measure from 2021 was adopted. This regulation extends the validity of the reduced scope of the EU ETS in aviation until 2023. Also noteworthy is Delegated Decision (EU) 2019/708 of the Commission of 15 February 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council regarding the determination of sectors and subsectors considered at risk of carbon leakage for the 2021-2030 period. As for the rules on how the transitional free allocation of emission allowances between 2021 and 2030 should be carried out, Commission Delegated Regulation (EU) 2019/331 of 19 December 2018 determining European Union transitional rules for the harmonisation of free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of the European Parliament and of the Council was adopted. Commission Implementing Regulation (EU) 2019/1842 of the Commission of 31 October 2019 establishing implementing provisions for Directive 2003/87/EC of the European Parliament and of the Council regarding additional provisions for the adjustment of free allocation of emission allowances due to changes in activity levels was also adopted. Furthermore, rules on the determination of reference parameters for free allocation are currently under negotiation within the European Union. The need to incorporate into Spanish law the updates affecting the EU ETS in the new trading period starting 1 January 2021, introduced by Directive (EU) 2018/410 of 14 March 2018; to introduce the related elements of the other rules adopted at the EU level; to provide sufficient coherence and effectiveness to the EU ETS in Spain and align it with EU legislation, which has been deeply modified in the last two years, justify the amendment of Law 1/2005, of 9 March. As occurred in previous amendments, certain key issues in the configuration of Phase IV of the EU ETS are not covered in this law, as they are aspects subject to management at the EU level and therefore either do not require transposition or are addressed through a general reference to EU legislation, without prejudice to the need for the law to include a complete and coherent overview of Phase IV of the EU ETS. Directive (EU) 2018/410 of 14 March 2018 states that Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with it by 9 October 2019 at the latest. An exception to this deadline applies to Article 1, point 14(f), which amends Article 10a(6) of Directive 2003/87/EC, which was to be in force by 31 December 2018 at the latest and was introduced into our legal system through the third final provision of Royal Decree 18/2019, of 25 January, developing aspects relating to the application of the greenhouse gas emission allowance trading scheme for the 2021-2030 period. This amendment to Law 1/2005, of 9 March, is accompanied by other regulatory changes at the regulatory level that ensure the correct implementation of the EU ETS in Phase IV. Among the already adopted rules, the approval of the aforementioned Royal Decree 18/2019, of 25 January, as well as Royal Decree 317/2019, of 26 April, defining the mitigation measure equivalent to participation in the emission allowance trading scheme for the 2021-2025 period and regulating certain aspects related to the exclusion of low-emission installations from the greenhouse gas emission allowance trading scheme, stand out. Likewise, a draft Royal Decree developing aspects relating to the adjustment of the free allocation of greenhouse gas emission allowances for the 2021-2030 period is currently being processed, which will transpose points (m) and (n) of paragraph 14, and the final clause of paragraph 17, of Article 1 of Directive (EU) 2018/410 of 14 March 2018. This law, therefore constituting a partial transposition, consists of a single article, a transitional provision, and three final provisions. In drafting the bill, the jurisprudence of the Constitutional Court regarding the competences of the State and the autonomous communities in climate change matters was taken into account, particularly Judgment 87/2019 of 20 June 2019. II The modifications introduced in Chapter I of Law 1/2005, of 9 March, include updating the scope of the law in accordance with Directive 2018/410 of 14 March 2018 and the inclusion of new definitions, notably the definition of "new entrant" for each of the two allocation periods. Furthermore, Article 2bis is introduced to deepen cooperation and collaboration relations between the General State Administration and the autonomous communities on climate change matters, including equivalent measures adopted for small excluded installations referred to in the report of Article 21 of Directive 2003/87/EC of 13 October 2003. The regulation of the Climate Change Policy Coordination Commission, a key body for coordination and collaboration between the General State Administration and the autonomous communities for the application of the EU ETS in Spain, is adapted through a more flexible formulation. cve: BOE-A-2020-16347 Verifiable at https://www.boe.es

OFFICIAL JOURNAL OF THE STATE No. 328 Thursday 17 December 2020 Sec. I. Page 115665 Finally, a new paragraph is added to Article 3bis regarding Social Dialogue Tables, guaranteeing the participation of trade union organisations and business associations in monitoring the impact of legislation related to climate change mitigation and ecological transition policies on competitiveness, employment, and social and territorial cohesion. III Chapter II regulates the greenhouse gas emission authorisation regime that installations subject to the scope of the law must hold, with granting corresponding to the competent authority designated by the autonomous community where the installation is located. Notably, the obligation for the regional authority to review the greenhouse gas emission authorisation every five years is eliminated. IV For reasons of systematic structure and expository clarity, given its general nature, Chapter III contains the regulation of emission allowances, which until now was contained in Chapter V of the law. As a novelty, it is specified that emission allowances issued from 1 January 2013 onwards will have indefinite validity. Emission allowances and derivatives thereof are considered financial instruments in accordance with applicable national and EU legislation, including, among others, Section C of Annex I of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments. In turn, the duration of emission allowance trading periods may cover more than one allocation period, in relation to free allocation. Thus, Phase IV of the EU ETS is divided, for fixed installations, into two allocation periods covering the years 2021-2025 and 2026-2030 respectively. V Chapter IV regulates the allocation of emission allowances and is divided into two sections. In the first section, among general principles, auction remains enshrined as the basic allocation method in accordance with EU legislation, which will determine, among other things, the percentage of allowances to be auctioned. The State Secretariat for the Environment is designated as the authority responsible for organising greenhouse gas emission allowance auctions and ensuring they are conducted in accordance with EU legislation and, where applicable, its implementing regulations. Among other novelties, it is established that the holder of said State Secretariat shall exercise the function of auctioneer. It is also indicated that, in the event of cessation of electricity generation capacity as a result of additional national measures, the State Secretariat for the Environment may proceed to cancel a maximum quantity of allowances to be auctioned up to the average of verified emissions from the installation in question over the five years preceding the cessation of capacity of the affected installation. Subsequently, in the second section of this chapter, provisions relating to transitional free allocation that installations may receive for Phase IV of the EU ETS are updated. The amount of allowances allocated free of charge is maintained at 100% of the amount determined in accordance with EU rules for sectors or subsectors exposed to a significant risk of carbon leakage. Sectors or subsectors exposed to a significant risk of carbon leakage are those in which the application of the EU ETS would cause an increase in emissions in third countries that have not imposed comparable carbon emission obligations on their industry. Conversely, for installations that do not belong to sectors or subsectors exposed to a significant risk of carbon leakage and are eligible for free allocation, the amount of allowances allocated free of charge will be subject to reduction. Thus, in 2021 and until 2026, the percentage is reduced to 30% of the amount determined in accordance with harmonised EU rules. From 2026 onwards, the percentage will be reduced annually by the same amount in order to reach a situation in 2030 where no allowances are allocated free of charge, with the exception of district heating, which will maintain until 2030 the percentage of 30% of the amount determined in accordance with harmonised EU rules. From 2021 onwards, as was the case in the 2013-2020 period, no allowances will be allocated free of charge for electricity generation, carbon capture installations, transport pipelines, or carbon dioxide storage sites. Likewise, as in the 2013-2020 period, a quantity of allowances will be reserved as free allocation for new entrants in Phase IV. This reserve is common and unique for the entire Union and will be governed by EU legislation. The main novelty regarding the procedure for applying for free allocation of emission allowances is that certain aspects, such as the deadline for submitting applications, their content, format, and required documentation, will be developed through regulations. In this regard, regarding installations, Royal Decree 18/2019, of 25 January, has been approved, which has already anticipated some issues for the 2021-2025 allocation period. VI A new Chapter V is dedicated to regulating the adjustments and return of free allocation of emission allowances, responding to the need to incorporate into our legal system one of the most significant novelties introduced by Directive (EU) 2018/410 of 14 March 2018, as well as the need to provide greater legal certainty and agility to procedures developed to date, whose volume will likely increase very notably in Phase IV of the EU ETS as a consequence of the introduced novelties. Thus, it is established that the amount allocated free of charge to each installation must be adjusted according to the installation's activity level determined on the basis of a two-year moving average, when the variation of said activity level, whether up or down, exceeds fifteen percent compared to the activity level initially used to determine the free allocation in the allocation period. Note that, in accordance with EU regulation, the adjustment in allocation is carried out using sub-installation level data provided in the verified activity level report. In the event that the difference between a sub-installation's activity level and its historical activity level is greater than fifteen percent, the installation's allocation will be adjusted. The obligation to return excess free allowances issued is also enshrined. Both aspects relating to adjustments, the circumstances motivating the return, and the procedure governing it, are subject to regulatory development, in accordance with EU legislation. VII Chapter VI regulates the monitoring and reporting obligations for emissions for fixed installations and activity levels, as well as data verification and verifier accreditation, incorporating the novelties established at the EU level in this field. This chapter is divided into two sections and affects exclusively fixed installations. The applicable legislation for air operators regarding this matter is included in Chapter IX dedicated to aviation for expository clarity. In the first section, alongside the obligation to monitor emissions, which must continue to be carried out based on the emissions monitoring plan included in the greenhouse gas emission authorisation approved by the competent regional authority, a novelty for Phase IV of the EU ETS is established: the obligation to monitor activity levels of the sub-installations into which each installation is divided. This new obligation, affecting installations receiving free allocation of emission allowances, must be carried out based on a methodological monitoring plan, which will be approved by the Spanish Office of Climate Change, in accordance with EU legislation and regulations adopted at the regulatory level, in addition to the provisions already contained in Royal Decree 18/2019, of 25 January. Likewise, alongside the existing obligation in previous EU ETS phases to submit the corresponding verified report for the previous year's emissions, the installation holder must also submit, by 28 February each year, a verified annual report on the previous year's activity level data corresponding to the sub-installations into which the installation is divided. This report will be assessed by the Spanish Office of Climate Change, in accordance with EU legislation, and will allow for the adjustment of free allocation, where applicable. In the second section, a new provision is introduced regarding the accreditation of verifiers carrying out verification activities under the EU ETS, who must be accredited in accordance with the requirements established in EU legislation. VIII Chapter VII refers to the regulation of the Union Register and the obligations to surrender emission allowances. Specifically, the regulation of the Spanish area of the Union Register of emission allowances is presented, whose administration is attributed to the Spanish Office of Climate Change, in which holders of fixed installations and air operators administered by Spain must open a credit account to comply with the obligation to surrender emission allowances in an amount equivalent to emissions produced in the previous year. Regarding the issuance of emission allowances, the circumstances under which the transfer of free emission allowances will not be proposed will be determined by regulation.