Free allocation: efficiency is the key!
In the early years of emissions trading, each participating country was allowed to set up its own allocation rules, also known as national allocation plan. During this period, allocations were almost exclusively free of charge and their amount was based on the historical emissions of the respective company.
At the beginning of 2013, the start of the 3rd trading period, a far-reaching harmonisation of the EU ETS began and the national allocation plans have since then been a thing of the past. Today, the same allocation rules apply in every participating country.
Free allocation is primarily based on efficiency standards. The most efficient plants across the EU in terms of the CO2 emission intensity set the so-called benchmarks. A less efficient plant will only receive an allocation equal to the benchmark set for it, despite a higher demand for allowances.
Sectors with plants subject to ETS intensively competing with third countries cannot pass on to their customers the costs they incur in acquiring emission allowances. This could result in a relocation of production and thus a displacement of greenhouse gas emissions from the monitored area of the EU ETS to countries with no or less climate protection. This risk is called Carbon Leakage.
All sectors or products at risk of carbon leakage, which are summarised on a so-called Carbon Leakage List drawn up by the EU, receive a 100% free allocation taking into account the benchmarking applied.
Electricity producers, on the other hand, who can easily pass on the costs resulting from emissions trading to their customers, will not receive free allocations.