Improving Benchmark Values for Free Allocation in the EU ETS Phase IV

In the European Union Emissions Trading Scheme (EU ETS), a benchmark is utilized to determine the free allocation of allowances for installations. During Phase III (2013-2020), the product benchmark was established based on the average greenhouse gas emissions performance of the top 10% of most efficient installations producing that product. This benchmark was calculated using the CO2 emissions per tonne of product. Consequently, only the most efficient installations could receive all their necessary allowances for free, while inefficient installations had to compensate for any shortfall they experienced. It is important to note that product benchmarks did not differentiate based on technology, fuel mix, size, age, climatic circumstances, or raw material quality of the installations.

The European Commission’s Review of the EU ETS for Phase IV (2021-2030) expresses the intention to continue with a similar approach used during Phase III while improving benchmark values in accordance with the agreement reached by EU leaders in October 2014.

The current benchmark values are determined using data from 2007-2008, which does not reflect advancements in production techniques and technology. In Phase IV, benchmark values will be updated twice. The emissions baseline of 2013-2017 will be used for the first half (2021-2025), and the baseline emissions of 2018-2022 will be used for the second half (2025-2030).

The European Commission aims to reflect technological possibilities by reducing all benchmarks by 1% per year. However, in cases where advancements in technology are considered less or more feasible, reductions may vary between 0.5% and 1.5%. If most sectors will fall within the 1% reduction bracket, the cumulative reduction they will face over the entire Phase IV amounts to 17.5%, irrespective of their carbon leakage status.

Currently, installations exposed to carbon leakage receive 100% of their benchmark allocation for free, while those considered not at risk receive 80% in 2013, decreasing to 30% in 2020. Both categories are also subject to the potential implementation of the Cross Sectoral Correction Factor.