The impact of emissions-performance benchmarking on free allocations in EU ETS Phase 3

From Phase 3 (2013-20) of the European Union Emissions Trading Scheme carbon-intensive industrial emitters will receive free allocations based on harmonised, EU-wide benchmarks. This paper analyses and evaluates the impacts of these new rules on allocations to key energy-intensive sectors. It exploits an original dataset that combines recent data from the National Implementing Measures of 20 Member States with the Community Independent Transaction Log and ETS-installation NACE code data. The analysis reveals that free allocations to benchmarked sectors will be reduced significantly, though not excessively, in Phase 3. This reduction should both increase public revenues from carbon auctions and has the potential to enhance the economic efficiency of the carbon market. The analysis also shows that changes in allocation vary mostly across installations within, rather than across, countries. Lastly, the analysis finds evidence that the new rules will, as intended, reward installations with better emissions performance, and will improve harmonisation of free allocations in the EU ETS by reducing differences in allocation levels across countries with similar carbon intensities of production.