Zero-rating in European emissions trading as a decarbonisation option

Zero emissions: The revised Monitoring and Reporting Regulation allows emitters to apply an emission factor of zero to the use of various energy sources. 

The revision of the Monitoring and Reporting Regulation (EU) 2018/2066 (MRR for short) effective from 1 January 2025, which applies retroactively in significant parts from 1 January 2024, serves to further simplify how greenhouse gases emitted through the consumption of fuels are calculated and is also intended to provide an incentive to use fuels that meet defined requirements for their climate-friendly production. For these fuels, the MRR includes the option of applying an emission factor of zero, called a zero-rating, so that the calculated greenhouse gas emissions are lower and the emitters therefore require fewer emission allowances. Of particular practical relevance here is the possible use within the balance sheet of fuels connected to natural gas, meaning that the actual use of natural gas can even be given a zero-rating under the conditions described below.

The background to this is as follows: The European Commission's MRR governs the monitoring and reporting of greenhouse gas emissions as part of the European Emissions Trading System (EU ETS). The revised MRR is linked to the objectives of the EU Green Deal, in particular with regard to achieving the European target of reducing net greenhouse gas emissions by at least 55 % by 2030 compared to 1990 levels.

The EU ETS is based on Directive 2003/87/EC, which created a system for greenhouse gas emission allowance trading within the European Union. According to this directive, emitters of greenhouse gas emissions in the energy and industry sectors must hold a corresponding number of allowances for the quantity of greenhouse gases they emit. The MRR adds specificity to this directive by laying down detailed rules for monitoring and reporting these emissions. 

Zero-rated fuels

According to Article 3 no. 23d MRR, the following fuels can be given an emission factor of zero:

• biofuels, defined in Article 3 no. 23 MRR as liquid fuels for transport produced from biomass;
• bioliquids, defined in Article 3 no. 22 MRR as liquid fuel for energy purposes other than for transport, including electricity, heating and cooling, produced from biomass;
• biomass fuels, defined in Article 3 no. 21a MRR as gaseous and solid fuels produced from biomass;
• synthetic low-carbon fuels (SLCFs), defined in Article 3 no. 23h MRR as gaseous and liquid fuels, the energy content of which is derived from low-carbon hydrogen as defined in Article 2 (13) Directive (EU) 2024/1788, which meet the greenhouse gas emission reduction threshold of 70 % compared to the fossil fuel comparator for renewable fuels of non-biological origin set out in the methodology adopted according to Article 29a(3) Directive (EU) 2018/2001 (Renewable Energy Directive; RED for short), as certified in accordance with Article 9 Directive (EU) 2024/1788;
• renewable fuels of non-biological origin (RFNBOs), defined in Article 3 no. 23f MRR as renewable fuels of non-biological origin within the meaning of Article 2 no. 36 RED;
• recycled carbon fuels (RCFs), defined in Article 3 no. 23e MRR as recycled carbon fuels within the meaning of Article 2 no. 35 RED; 
• fractions of mixed fuels or materials which comply with the criteria specified in Article 38 (5), Article 39a (3) or Article 39a (4) MRR.

Provisions for zero-rating

The following shows how the assessment of the fuels mentioned as having an emission factor of zero is regulated in the MRR.

Fuels, biofuels, bioliquids and biomass fuels

The assessment of the emission factor as zero with regard to fuels, biofuels, bioliquids and biomass fuels is based on Articles 38 and 39 MRR. According to Article 38 (5) subparagraph 1 MRR, these fuels must fulfil the sustainability criteria and the criteria for greenhouse gas emission savings previously laid down in Article 29 (2) to (7) and (10) RED to be counted towards the zero-rated biomass fraction of a source stream. The assessment of compliance with these criteria is also based on the requirements of the RED pursuant to Article 38 (5) subparagraph 6 MRR, meaning that proof of compliance in particular can be provided via a mass balance system and national databases or via the Union database (Articles 30 and 31a RED). If the biomass used does not meet the sustainability criteria and the criteria for greenhouse gas emission savings or if this cannot be proven, its carbon content will be considered to be fossil carbon pursuant to Article 38 (5) subparagraph 7 MRR.

Under the requirements specified in Article 39 (3) and (4) MRR, biogas (gaseous fuels produced from biomass in accordance with Article 3 no. 21b MRR) that has been fed into a natural gas grid can also be given an emission factor of zero. According to Article 39 (4) subparagraph 1 MRR, one particular requirement for this is that the same quantity of biogas is not counted twice and that the facility operator and the producer of the biogas are connected to the same gas grid. To provide evidence of these requirements, Article 39 (4) subparagraph 2 MRR provides for the submission of evidence from a Union database set up pursuant to Article 31a RED or in a national database set up by the Member State pursuant to Article 31a (5) RED for the purchase of a quantity of biogas in connection with the cancellation of the quantity in question.

Renewable fuels of non-biological origin (RFNBOs) and recycled carbon fuels (RCFs)

For the carbon content of fuels that are considered RFNBOs or RCFs within the meaning of the RED and that fulfil the criteria for greenhouse gas emission savings pursuant to Article 29a RED, the emission factor is zero pursuant to Article 39a (3) subparagraph 1 MRR. For this purpose, the greenhouse gas emission savings achieved by using these fuels must be at least 70 % according to the currently regulated values compared to a reference value of 94 g CO₂ eq/MJ. Here too, the assessment of compliance with the criteria set out in Article 29a (3) RED is based on Article 30 and Article 31 (1) RED and proof can also be provided via the Union database in accordance with Article 31a RED. If the RFNBO or RCF does not fulfil the criteria specified in Article 39a (3) subparagraph 1 MRR, its carbon content is deemed to be fossil carbon.

Similarly to biogas, Article 39a (5) MRR provides for use within the balance sheet of RFNBOs and RCFs connected to the natural gas grid. Article 39a (5) subparagraph 1 MRR allows an operator to determine the RFNBO or RCF fraction and the identical zero-rated RFNBO or RCF fraction of natural gas, if these fractions have been injected into a natural gas grid, by using purchase records of RFNBO or RCF with equivalent energy content, provided that the operator proves to the competent authority that the same quantity of RFNBO or RCF is not double-counted and that the operator and the producer of the RFNBO or RCF are connected to the same gas grid. Similarly to biogas, Article 39a (5) subparagraph 2 MRR provides for the submission of evidence from a Union database set up pursuant to Article 31a RED or in a national database set up by the Member State pursuant to Article 31a (5) RED for the purchase of a quantity of gaseous RFNBOs or RCFs in connection with the cancellation of the quantity in question.

Synthetic low-carbon fuels (SLCFs)

In accordance with Article 39a (4) subparagraph 1 MRR, SLCFs are to be assigned an emission factor of zero if allowances have previously been surrendered for their carbon content in accordance with Directive 2003/87/EC, unless the CO₂ captured is zero-rated carbon within the meaning of Article 3 (38f) MRR, i.e. carbon contained in a fuel or material that belongs to the zero-rated carbon fraction of that fuel or material.

Compliance with the criteria set out in Article 29a (3) RED is to be assessed in accordance with Article 30 and Article 31 (1) RED; alternatively, Article 39a (4) subparagraph 2 MRR provides for the submission of corresponding evidence via the Union database or a national database. In all other cases, the carbon content of SLCFs will be deemed to be fossil carbon in accordance with Article 39a (4) subparagraph 3 MRR.

In contrast to biogas, RFNBOs and RCFS, the MRR does not provide for the option to use SLCFs within the balance sheet when they are fed into the natural gas grid.

MRR provides versatile decarbonisation options

As the price of CO₂ is expected to continue to rise in the future, companies covered by the EU ETS should examine the decarbonisation options available to them under the regulatory framework. Depending on the nature of the facility, an initial decarbonisation option may be to use zero-rated fuels according to the revised MRR. For companies that are connected to the natural gas grid, the use of fuels within the balance sheet as a decarbonisation option under the revised MRR is of particular interest.