On March 12th, the European Union (EU) officially adopted the Benchmarks for Phase IV of the EU Emissions Trading Scheme (ETS). These benchmarks play a crucial role in determining the level of protection companies receive against the increasing costs of compliance. Industries identified as being at risk of carbon leakage are eligible for free allowances up to a benchmark based on the top-performing 10% of companies in each sector. This approach aims to incentivize less efficient plants to invest in cleaner technologies. The allocation of free allowances is expected to take place in the second quarter for the UK and potentially as late as the third quarter for EU allocations.
The regulation, which will also apply to UK companies, includes several key elements. Out of the 52 EU ETS-covered product benchmarks, 31 will face the maximum possible tightening, resulting in an average reduction of -24% per tonne of product generated over the period of 2021-2025 compared to their current allocation.
Industries such as coke, lime, paper and pulp, acids, and electric arc furnace steel production will experience the maximum tightening of their free allocation. Primary aluminium, alongside steelmaking, will receive the minimum reduction rate of a 3% allocation cut. Other sectors like grey cement and clinker manufacturers will see their allocations reduced by 17% during the upcoming five-year phase.
While these new rules may lead to higher emissions costs for certain sectors, the prevention of carbon leakage remains a top priority. Discussions on the implementation of a more effective alternative to free allocation, such as the carbon border adjustment mechanism (CBAM), continue to take place. Following the adoption of the benchmarks, the European Commission will assess whether a cross-sectoral correction factor should be applied to allocations, and member states will subsequently submit their final allocation data.
