Extending the EU Commission's Proposal for a Reform of the EU Emissions Trading System

Abstract

INTRODUCTION 2 THE EUROPEAN COMMISSION PROPOSAL FOR THE REVISION OF THE EU EMISSIONS TRADING SYSTEM 2.1 The key elements of the Commission proposal Duration of Phase 4 Long-term target Auctioning share and volume of free allowances Benchmarks and Cross-sectoral Correction Factor Carbon leakage provisions Flexibility of free allocations Reserves 2.2 Design of the mechanism for free allocations Cap of allowances for free allocations Binary treatment of sectors Looking for a more tiered mechanism of free allocation 3 ESSENTIAL EVIDENCE OF THE CURRENT STATE OF THE EU ETS FOR UNDERPINNING A STRUCTURAL REFORM 3.1 The surprising strong decline of emissions Verified emissions remain below the target path Projected emissions might stay below the target path until 2030 3.2 The high relevance of a flexible mechanism for free allocations The split between auctioned and free allowances is less relevant than implementing a flexible free allocation mechanism Perspectives for non-industry sectors Perspectives for industry sectors 3.3 Switching to an emissions intensity based allocation of free allowances prevents excessive allocations An emissions intensity based allocation of free allowances prevents a surplus of free allowances The cumulative surplus of allowances will remain until 2030 above the upper intervention bound of the Market Stability Reserve 3.4 The Commission proposal in view of the current state of EU ETS 4 ENHANCING THE PROCEDURE FOR ALLOCATING FREE AND AUCTIONED ALLOWANCES 4.1 The basic design for the allocation of free allowances 4.2 Extending the Commission proposal for allocating free allowances 4.2.1 Data requirements Emissions and activity data for each installation Trade data for each sector or subsector 4.2.2 The caps for allowances 4.2.3 Determining the benchmark emissions intensities of free allowances Benchmark period Ranking installations according to their emissions intensity Applying a reward factor Target benchmark shares of free allowances Calibrating the benchmark volume of free allocations Effective benchmark emissions intensities of free allowances 4.2.4 Allocating the volume of free allowances 4.3 Maintaining the stringency of the emissions caps by flexible supply 4.3.1 Unused free allowances are transferred to a reserve 4.3.2 Additional free allowances are transferred from a reserve Option A: Adjusting the auctioning volume Option B: Flexibility of the overall cap Avoiding violating the overall cap 4.4 Administrative aspects 4.4.1 Shifting tasks to the auditing procedure 4.4.2 Incentives for installations 5 COST IMPACTS OF FREE ALLOCATIONS 5.1 The relevant cost components 5.2 An operational procedure for calculating cost impacts of free allowances Data requirements Simulation of schemes for free allowances 6 CONCLUSIONS Identifying exposed industry sectors Benchmark procedure for free allowances Maintaining the emissions cap 7 REFERENCES 8 APPENDIX 1: SUMMARY OF AN ENHANCED ALGORITHM FOR ALLOCATING FREE ALLOWANCES 8.1 Rule based allocation of free allowances 8.2 Algorithm for the allocation o...

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