Development and Application of Greenhouse Gas Performance Benchmarks in the European Union Emissions Trading Scheme

In the European Union Emissions Trading Scheme’s third trading period (2013-2020), the free allocation of emission allowances will be based on greenhouse gas performance benchmarks. This policy note describes how the revised rules were developed, how they will be applied in practice, and what they imply for operators of installations subject to the system. It highlights the rationale for changing the rules prevailing under the system’s first two trading periods, explains the principles applied in devising the new allocation methodology, and illustrates the impacts on operators’ business decisions. The author concludes that in a policy setting where free allocation is the chosen means to safeguard the competitiveness of industries subject to emissions trading, basing free allocation on greenhouse gas performance benchmarks supports the “polluter pays” principle by allowing appropriate price signals from differences in emission intensity, forms an equitable way of distributing emission allowances free of charge, and strengthens incentives to reduce greenhouse gas emissions.