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Free allocation based on benchmarks

Questions and Answers on the Commission Decision 2011/278/EU on free allocation rules for the ETS (26/02/2014)

What is the subject matter of this Commission decision?

The revised ETS Directive introduced the concept of an EU-wide, harmonised, approach for the allocation of allowances. It provides that for the third phase of the ETS (2013-2020) full auctioning is the rule for the power sector and that a transitional system for free allocation, based on benchmarks, has been put in place for other sectors.

The Commission Decision 2011/278/EU adopted on 27 April 2011 sets out these rules for free allocation, including the benchmarks. It is an important decision, with direct financial implications for industry, as allowances which companies need to cover their emissions and do not receive for free will have to be bought at market prices. It is also a milestone for climate policy, as it shows that the EU is pressing ahead with the implementation of its ambitious climate agenda, and that it is serious in striving for a low carbon economy where all sectors will need to contribute to emission reductions.

In procedural terms, what were the steps before the Commission adopted the free allocation rules and the benchmarks?

This implementing measure falls under a so-called comitology procedure. This means that the Commission proposal is discussed with the Member States' experts, with a view to reaching a favourable opinion in the Climate Change Committee. Following a favourable vote, there is a 3-month scrutiny period by the European Parliament and the Council. In case there is no rejection by the European Parliament and the Council by the end of the 3-month scrutiny period, the Commission will formally adopt the decision.

The Climate Change Committee voted in favour of the Commission proposal on 15 December 2010. The 3-month scrutiny period commenced after the winter recess period of the EU institutions and ended on 8 April 2011. The Commission Decision 2011/278/EU was adopted on 27 April 2011.

Who has been consulted in the process of determining the free allocation rules and the benchmarks?

The Commission has done an unprecedented amount of consultation for this file. Over the course of the work on this implementing measure over the last two years, the Commission has continuously consulted numerous stakeholders, such as industry (including all relevant EU-level sector associations directly affected by the ETS), NGOs, Member States' representatives, European Parliament representatives and academics.

In 2009 and 2010 the Commission held several large stakeholder meetings on the subject of benchmarking and allocation rules, which involved some 100 participants and gave stakeholders the opportunity to present and discuss their views. The presentations given, lists of participants, and conclusions of the workshops have been published on the Commission's website.

In addition, the Commission services have been in a constant bilateral dialogue with stakeholders since early 2009. To date more than 100 bilateral meetings with stakeholders were held in order to ensure in-depth consultation of their specific views.

What does the methodology for allocating free allowances look like?

In short, the allocation of allowances for an installation will in principle be calculated by multiplying a benchmark value with the historic production data of the installation, for each product falling under the definition of a product benchmark.

If an installation also produces products not covered by a product benchmark, additional allowances will be provided based on heat or fuel use for those products (so-called fallback approaches). For these installations it will also be possible to get allocation for process emissions (not related to energy use). Process emissions are already included in the product benchmarks, but not in the heat or fuel benchmarks.

There are thus four allocation methods – product benchmarks (estimated to cover around 75% of eligible emissions), and three fallback approaches: heat benchmark (estimated to cover around 20% of eligible emissions), fuel benchmark (estimated to cover around 5% of eligible emissions), and process emissions (estimated to cover less than 1% of eligible emissions).

A number of additional factors may be applied to the allocation formula, such as a carbon leakage factor, a linear reduction factor, and the cross-sectoral correction factor.

Which products have been benchmarked and what were the criteria for their selection?

The Commission proposal contains 52 product benchmarks, which are mostly products from activities that are explicitly mentioned in Annex I to the ETS Directive.

The selection of product benchmarks was made in view of having a maximum amount of emissions covered by a feasible number of product benchmarks. Criteria used were emissions, number of installations and homogeneity of products.

How were the benchmark values derived?

In principle, the ETS Directive requires the benchmarks to be set at a level reflecting the average performance of the 10% most efficient installations in a sector or subsector in the EU in the years 2007-2008. To determine the most efficient installations, each installation's greenhouse gas intensity in the years 2007-2008 was collected, i.e. their amount of greenhouse gases emitted per amount of product produced by them.

This data collection was carried out by European industry associations under guidance by the Commission. The collected data was verified by third-parties and further plausibility checks were carried out to ensure its solidity.

Are the benchmarks achievable in practice?

The benchmarks are in most cases based on the average of the 10% most efficient installations in a (sub)sector in the EU, as stipulated in the ETS Directive. Therefore, they are derived from real-life industrial production in recent years (2007-08) and are achievable, by definition. The achievability of the benchmarks in practice has been carefully evaluated by the Commission services.

Are the benchmarks not too demanding?

Being set at the level of the best performers, as required by the ETS Directive, they may represent a challenge for some installations and necessitate a transition to significantly more greenhouse gas- and fuel-efficient production. However, such a transition is necessary for EU industry, in particular with a view to achieving the ambitious cuts in emissions that will be required by 2050.

The benchmarks are very important for the achievement of a low-carbon economy. They provide a strong signal for what is possible in terms of low-carbon production. They have been developed per product where feasible, without differentiating according to the technology, fuels or raw materials used or by geographic location.

Member States can use their revenues from auctioning emission allowances to support infrastructure providers, producers or consumers in making this transition. This can be done through a range of measures to modernise industry and energy systems, improve energy infrastructure, support the use of renewable energy and reduce any social impact on vulnerable citizens, for example.

Is there a special provision for district heating?

A special provision on district heating delivered to households has been included. It will provide district heating installations that have high emissions with a temporary and declining extra allocation.

This is to smoothen the transition to a significantly reduced allocation compared to the current situation and thus to alleviate social effects of potentially increased heat costs for private households.

How and when will the absolute number of free allowances per installation be calculated?

According to Article 11 (1) of the ETS Directive, the absolute number of free allowances to be allocated per installation will be calculated by the Member States on the basis of the free allocation rules. The Member States had to submit these so-called national implementation measures (NIMs) to the Commission by 30 September 2011. Most NIMs were however only submitted in the course of 2012.

To ensure that the Member States apply the rules correctly, the Commission is checking their national implementing measures. In this context, the Commission may reject the lists of installations and their allocations as calculated by the Member States if it deems them not in line with the harmonised rules. In addition, the Commission may launch infringement procedures against any Member State deemed in breach of the harmonised rules.

Once all the planned allocations for installations in all Member States have been checked and no objections have been raised, the legislation allows the Commission to calculate if and as of which year the so called cross-sectoral correction factor will have to be applied. On this basis Member States can take final allocation decisions and issue the allowances for 2013. The allowances allocated for free in 2013 can be used for compliance for 2013 emissions to be reported in 2014, but not for 2012 emissions.

Will the Commission provide guidance on how to apply the free allocation rules?

To help the Member States in applying the free allocation rules, the Commission has provided guidance papers. They are published on this website, under "Documentation". The following guidance documents address the respective issues in the context of the free allocation rules:

  1. General guidance
  2. Allocation methodologies
  3. Data collection
  4. Verification
  5. Carbon leakage
  6. Cross-boundary heat flows
  7. New entrants and closures
  8. Waste gases
  9. Sector-specific guidance

The Commission is also preparing a data collection template that Member States may use to collect from operators the data necessary for calculating the number of free allowances per installation.

Why are there some differences between the amount of allowances handed out for free for 2013 as reported in the Union Registry and in the Status table on free allocation to industry and heat production for 2013?

The 2013 Status table published on the DG Climate Action website gives an overview of the process in which Member States submit their National Allocation Tables (NATs) and the Commission takes its NAT Decisions allowing Member States to actually allocate. This Status table also provides the nominal number of allowances to be allocated for free in each Member State, before any change due to adjustments in operations of installations.

The allocations to individual installations that are actually uploaded to the Union Registry may be different than the ones reported in the Status table because of allocation changes due to adjusted 2012 production for some installations. For example, if an installation in 2012 produced less than 50% of its baseline production, or reduced significantly its capacity to produce, its free allocation is reduced. Similarly, if an installation significantly increased its capacity to produce, or if there is a new installation entitled to receive free allocation, the free allocation increases.

One more reason for the difference between the two values is that for a few installations that did not yet open their accounts in the Union registry, the allowances are not yet uploaded. These allowances will be uploaded as the accounts are being opened.

Can Member States hand out free allowances for 2014 or is there a need to notify a new National Allocation Table for 2014 and for all subsequent years of phase 3 before handing out the yearly free allowances?

Member States for which the National Allocation Tables have been uploaded to the Union Registry may also transfer 2014 allowances for those installations where there is certainty that no reductions in 2014 allocations – due to significant reductions in capacity or operations in 2013 – are required.

In fact, as the initial National Allocation Tables include allocations for all years of phase 3, Member States do not need to notify a new National Allocation Table each year before handing out the free allowances. New notifications from Member States are necessary only if there are changes to the National Allocation Tables resulting from adjustments in operations of installations. In such a case the Member State has to submit a revision to the NAT, a NAT Change. Once the Commission adopts its decision on the NAT Change, the amount of allowances uploaded to the Union Registry for the installations concerned is amended for all the remaining years of phase 3.

Will there be annual changes in the free allocation in the Union Registry during phase 3 of ETS (between 2013 and 2020)?

The amount of free allowances as approved in the NAT and uploaded in the Union Registry per Member State will most likely be subject to limited changes throughout phase 3. These changes are due to any production and capacity adjustment beyond thresholds fixed in the harmonised free allocation rules as outlined above. In addition, changes can occur in case production levels return to normal after having been below the thresholds that lead to reduced allocation. All such changes should be reported by the Member States to the Commission in the form of NAT Changes.

Is there any information available about the progress in handing out 2014 allowances in each Member State?

Member States were invited to inform the public in advance, via their website, on when they will be ready to start handing out 2014 allowances. In addition, a regularly updated overview table with the amount of allowances that have been allocated per Member State will be published in the Climate Action website.