EU ETS Phase 3 Benchmarks – Implications and Potential Flaws

In Phase 3 (2013-20) of the European Union Emissions Trading Scheme, the allocation methodology has shifted from grandfathering to a combination of auctioning and benchmark-based free allocation in the framework of Community-wide rules. Free allocation will apply mainly to non-electricity generators, and will decrease linearly throughout the phase with a view of ending free allocation by 2027. Benchmark-based free allocation is intended to reward the least CO2-intensive installations and thus provide an incentive to reduce greenhouse gas emissions. This policy note describes the concrete changes implied by this shift in allocation methodology, and identifies potential flaws in the new transitional Community-wide rules for free allocation, thereby contributing to the discussion on the need for structural reforms in the ETS.
Keywords: EU ETS, Benchmarks, Preliminary amounts, Carbon leakage, Historical Activity Level