Phase III of the European Union Emissions Trading Scheme (EU ETS), spanning from 2013 to 2020, introduced significant changes to the program. One crucial adjustment is the implementation of a Linear Reduction Factor of 1.74% per year, ensuring the EU's achievement of the 20% greenhouse gas reduction target. Additionally, Phase III included aviation as a newly integrated sector in the EU ETS since 2012, with a specific secondary cap.
The allocation methodology underwent a notable shift from predominantly grandfathering to an increased focus on auctioning. In Phases I and II, free allocation was widespread, and auctioning of allowances was minimal or non-existent. However, in Phase III, free allocation decreased at a faster pace compared to the overall emissions cap, resulting in a higher proportion of allowances being auctioned. In 2013, over 40% of allowances were auctioned, and this figure rose to approximately 57% by the end of the phase. The auction volume distribution is divided as follows: 88% to member states based on their 2005 emissions, 10% among the least wealthy EU member states, and 2% functioning as a Kyoto bonus.
Phase III introduced an exception for electricity generators. Unless their country of origin has a GDP below 60% of the EU average, electricity generators receive no free allocation. However, those in countries meeting the GDP threshold are entitled to a derogation volume. This derogation volume aims to assist the power sector in these countries in managing the costs associated with transitioning to less carbon-intensive electricity generation.
The New Entrants Reserve (NER) operates as a pool of allowances set aside to provide free allocation to new installations or installations that increase capacity. The NER represents approximately 5% of the total allowances allocated for Phase III of the EU ETS (2013-2020).
Phase III also witnessed the introduction of backloading as a structural reform to address the issue of oversupply and low prices in the market. Backloading involved withdrawing 900 million tonnes (mt) from the auction volumes between 2014 and 2016. Initially, these allowances were scheduled to be reintroduced to the auctioning pot in 2019 and 2020. However, the Market Stability Reserve (MSR), a long-term structural reform slated to begin in 2019, altered this plan. The backloaded auction volumes will now be directly placed into the MSR instead of entering the market in 2019 and 2020.
