What is benchmarking?
The term ‘’benchmark’’ is defined by the European Commission as ‘’a reference value for the greenhouse gas (GHG) emissions, in tonnes CO2, relative to a production activity’’.
The benchmarking approach to calculate free allocations was implemented at the beginning of Phase III (that began in 2013). Product benchmarks are determined by the GHG emissions performance of the 10% most efficient installations producing that product. Once set the benchmark ensures all installations within a sector receive the same allocation of allowances per unit of activity.
Benchmark calculation
To calculate product benchmarks, the EU collected the GHG emissions data of ETS installations over the period 2007 to 2008. The ‘’benchmarking curve’’ for every sector was established in 2011. Once set, the benchmark ensures all installations within a sector receive the same allocation of allowances per unit of activity. There are 52 product benchmarks in total and 3 fallback approaches.
In essence; GHG-intensive installations receive less free allowances relative to their production compared to highly efficient installations. Benchmarking is designed to incentivise inefficient installations to take action to cover their excess emissions.
Phase IV changes
Before Phase IV starts (2021), the European Commission will update the benchmark rates ‘in order to avoid windfall profits and reflect technological progress in the sectors concerned’.
The benchmark rates will be updated twice for Phase IV, once in 2021 and again in 2026. The benchmark will be set by measuring the performance of the 10% most efficient installations of every sector, based on recent activity levels, and then comparing that to the 2007 – 2008 values to ascertain an improvement rate.
For the free allocation calculations between 2021-2025, the benchmark values will be adjusted on an annual basis by their relevant improvement rate, subject to a minimum of 0.2% and a maximum of 1.6%, from 2008 to the middle of that period (i.e. 2023). This translates into a total efficiency improvement range of 3% -24% compared to the value applicable in Phase III. For the period 2026-2030, the total improvement range will be between 4%-32%.
Understanding the impact on your installation
The updated benchmarks will have a big impact on the Phase IV free allocation received by an installation – there are unlikely to be many free allocation ‘winners’. To discuss how we can help you understand and manage the risks you face, including free allocation calculations for Phase IV, please get in touch with the Redshaw Advisors team on +44 203 637 1055.
