On 14 July 2021, the European Commission adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport and land use legislation, setting out in real terms the ways in which the Commission intends to reach EU climate targets under the European Green Deal.
Manufacturing industries will continue to receive a share of their emission allowances for free beyond 2020. This allocation is based on benchmarks that reward most efficient installations in each sector.
Manufacturing industry received 80% of its allowances for free in 2013. This proportion will decrease gradually year-on-year, down to 30% in 2020.
The provision of some free allowances limits costs for those industries participating in the EU ETS in relation to competitors outside the EU. Sectors and sub-sectors facing competition from industries outside the EU that are not subject to comparable climate legislation will receive more free allowances than those which are not at risk of carbon leakage.
Allocation based on benchmarks
From phase 3 (2013-2020) onwards, a benchmarking approach is used for the free allocation of allowances.
The free allocation for each installation is calculated using greenhouse gas emission benchmarks developed for each product, where possible.
The current 54 benchmarks (52 product and 2 so-called fallback approaches based on heat and fuel) were elaborated based on extensive technical work and consultations with various stakeholders.
A product benchmark is based on the average greenhouse gas emissions of the best performing 10% of the installations producing that product in the EU and EEA-EFTA states.
The benchmarks are based on the principle of 'one product = one benchmark'. This means that the methodology does not vary according to the technology or fuel used, the size of an installation or its geographical location.
Installations that meet the benchmarks and are therefore among the most efficient in the EU will, in principle, receive all the allowances they need to cover their emissions.
Installations that do not reach the benchmarks will receive fewer allowances than they need. They will have to:
- reduce their emissions,
- buy additional allowances or credits to cover their emissions, or
- combine these two options.
How free allocation is calculated
EU-wide harmonised rules for free allocation are set out in the European Commission's 2011 Benchmarking Decision.
Following these rules, all EU and EEA-EFTA countries carried out a preliminary calculation of the number of free allowances for each installation in their territory and sent these 'national implementation measures' (NIMs) to the Commission.
The Commission assessed each country's figures to ensure they are complete and comply with the relevant legal provisions (see 2013 Commission Decision). The EFTA Surveillance Authority did the same for those from the EEA-EFTA states.
The countries then made final allocation decisions for the entire phase 3 (2013-2020). Allowances are issued annually.
As the requested allocations for all installations in the EU exceeded the total amount available for free allocation, the allocation per installation was reduced for all installations by the same percentage. This is the cross-sectoral correction factor applied as of 2013.
The correction factor reduced allocation by around 11% in 2013. As the amount of allowances available decreases each year, the correction factor increases each year until 2020, when it will reach approximately 22%.
Moreover, the amount of free allowances can change throughout the period 2013-2020 due to production and capacity adjustments beyond the thresholds fixed in the harmonised allocation rules.
Free allocation in phase 4 (2021-2030)
Under the revised EU ETS Directive, the system of free allocation will be prolonged for another decade. The free allocation rules have, however, been revised for phase 4.
Focus on sectors at highest risk
Free allocation will focus on sectors at the highest risk of relocating their production outside of the EU.
These sectors will receive 100% of their allocation for free. For less exposed sectors, free allocation is foreseen to be phased out after 2026 from a maximum of 30% to 0 at the end of phase 4 (2030).
The list of sectors deemed to be at the risk of carbon leakage was updated in 2019 and will be valid for the period 2021-2030.
New and growing installations
A considerable number of free allowances will be set aside for new and growing installations.
This number consists of
- allowances that were not allocated from the total amount available for free allocation by the end of phase 3 (2020), and
- 200 million allowances from the Market Stability Reserve.
Alignment with actual production levels
More flexible rules have been set to better align the level of free allocation with actual production levels.
Allocation to individual installations may be adjusted annually to reflect relevant increases and decreases in production. The threshold for adjustments was set at 15% and will be assessed on the basis of a rolling average of two years.
To prevent manipulation and abuse of the allocation adjustment system, the Commission adopted an implementing act to define further arrangements for the adjustments.
The 54 benchmark values determining the level of free allocation to each installation will be updated twice in phase 4 to avoid windfall profits and reflect technological progress since 2008.
An annual reduction rate will be determined for each benchmark. It will vary between
- a minimum annual rate of 0.2% for the sectors with lower innovation uptake and
- a maximum annual rate of 1.6% for the sectors with higher innovation uptake.
While the minimum rate will ensure contribution from sectors with slower emission reduction paths, the maximum rate will provide an incentive for innovative sectors to reduce emissions more quickly.
Following the collection and submission by Member States of data to determine free allocation at installation level and to update benchmark values, the Commission will assess the data collected and will calculate the updated values for the 54 benchmarks throughout 2020.
To finalise implementation for the phase 4 of the EU ETS, the Commission will also adopt the following acts:
- A decision on determination of the list of installations included in the national implementation measures (NIMs) that will be used to determine benchmark values;
- An implementing act to update benchmark values;
- Decision on cross-sectoral correction factor (CSCF);
- Decision on the free allocation for each installation for the period 2021-2025.