Three steps to understand the implications of the EU ETS reform on free allocation
I4CE has built a simulation tool to estimate the EU ETS free allocation in Phase IV (2021-2030) according to different parameters discussed in the current trilogue negotiations between the EU Parliament, the EU Council and the EU Commission. Trilogue negotiations started in April 2017 and a compromise was reached on November 9th 2017.
In the debates on the post-2020 EU ETS reform, the issue of carbon leakage and of the competitiveness of EU industries has been calling particular attention.
Free allocation in the EU ETS: positions in the trilogue differ on some elements
The current approach of freely allocating allowances to industrial sectors deemed to be exposed to carbon leakage will go on, and along with the emissions cap, the free allocation cap will decrease.
In this context, industries are worried that a cross-sectoral correction factor (CSCF) might need to be triggered, to adjust the total free allocation to the free allocation cap. Such a factor would reduce uniformly free allocation in all sectors, a concern for those most exposed to carbon leakage.
Will a cross-sectoral correction factor (CSCF) be necessary in Phase IV?
A number of parameters influence either the free allocation cap or the calculation of the bottom-up preliminary free allocation and thus determine whether a CSCF will be necessary. In particular:
- The free allocation cap depends on the total EU ETS cap, which decreases annually by a rate fixed by the linear reduction factor (LRF).
- In Phase IV, the share of free allowances will be a fixed proportion of the total amount of allowances. In the negotiations, the possibility to increase this share up to a given percentage to avoid triggering the CSCF is being debated.
- Phase IV will be divided in two sub-periods for the calculation of free allocation: 2021-2025 and 2026-2030. Preliminary free allocation at the level of an installation under the EU ETS will be calculated as the product of activity levels (depending on growth rates in the industry) in the relevant years for each sub-period (2013-2017 for the first sub-period and 2018-2022 for the second sub-period) multiplied by the applicable benchmarks.
- Benchmark values for each sector and sub-sector are reference values of carbon intensity (either by product, or for heat production or fuel consumption), and correspond to the average carbon intensity of the 10% most efficient installations. Benchmark values were established based on 2007-2008 data and will be decreased by an annual rate in Phase IV to reflect the improved carbon intensity of the different products.
- Installations in sectors which are not deemed to be exposed to carbon leakage will only receive a proportion of this benchmark-based allocation.
Find here a table summarizing the positions of the EU Commission, the EU Parliament and the EU Council, as well as the compromise deal achieved in trilogue negotiations on parameters which will have an influence on free allocation.
Find here a graph with our projections for free allocation in Phase IV of the EU ETS according to the compromise reached on November 9th.
STEP 1 | Estimate the amount of free allocation and identify the impact of a selection of parameters by moving the slider below to change their value:
STEP 2 | View your resultsThe graph below shows the free allocation cap with the preliminary allocation and the final allocation in Phase IV, taking into consideration the chosen parameters i> *.
* Other parameters have an influence on free allocation, such as the amount of allowances from the free allocation share which will be used to supply some funds/reserves (innovation fund, new entrant reserve, a fund to compensate for indirect costs…). In this simulation, it is assumed that in total 400 million allowances are taken from the free allocation budget. The eligibility criterion to carbon leakage list also has a great importance. Here, the default value of 0.2 for the product of trade intensity by carbon intensity is used. Besides, the Parliament’s position is to only apply the CSCF to least-exposed sectors. In this simulation, the CSCF applies indifferently to all sectors.
If you have any comment or question on this simulation tool, please do not hesitate to contact us.