A product benchmarks are the average of the 10% most greenhouse gas efficient installations, in terms of metric tons of CO2 emitted per ton of product produced at European level in the years 2007-2008, which is set Union-wide, ex-ante and used for determining the preliminary annual number of allowances (by multiplying the benchmark value with the relevant historical activity level) in the product-benchmark method for free allocation of emission permits under the European Union Emission Trading Scheme (EU ETS) in the period 2013-2020.
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In other words, benchmarks are reference values for the greenhouse gas emissions, in tCO2, relative to a production activity, used to determine the level of free allocation that each installation within each sector will receive.
"From phase 3 onwards, a benchmarking approach is used for the free allocation of allowances. The total amount of free allocation each installation should receive is determined by product-related GHG emission benchmarks, to the extent feasible (...). Those benchmarks are set at the average emission level of the 10% most efficient installations within each sector. In this way, installations that are highly efficient should receive all or almost all of the allowances they need to comply with EU ETS obligations. Inefficient installations have to make a greater effort to cover their emissions with allowances, either by reducing emissions or by purchasing more allowances (...). The same principle is used for free allocation to aircraft operators, but benchmarks have been determined in a different manner (...).
During phases 1 and 2, most allowances in all Member States were given out for free based on historical GHG emissions. This method is known as grandfathering. This approach has been criticised as rewarding higher emitters while not taking early action into account. In contrast to grandfathering, benchmarking does not have the effect of providing more free allocation to the highest emitting installations. Benchmarking allocates allowances based on their production performance instead of their historical emissions; GHG-intensive installations will receive less free allowances relative to their production compared to highly efficient installations, driving inefficient installations to take action to cover their excess emissions. Therefore, in phase 3 benchmarking was chosen to determine free allocation."
EU ETS Handbook, p. 41
This is noteworthy, a benchmark does not represent an emission limit or even an emissions reduction target. All installations within a sector receives the same allocation of allowances per unit activity (EU ETS Handbook, p. 47).
Given the allocation of free allowances is based on benchmarks that take into account the emissions performance of the most efficient installations, the system rewards highly efficient installations and incentivises less efficient installations to reduce emissions.
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The complete set of product benchmarks used for the purposes of EU ETS free allocation of emission permits to industrial sectors is laid down in annexes to the Benchmarking Decision.
Where possible, system is based on product benchmarks that encompass all of the production processes required for the manufacture of a specific product. Product benchmarks are not differentiated by technology, fuel mix, size, age, climatic circumstances or raw material quality of the installations producing the product. Where product benchmark is not possible fall-back benchmarks based on heat production or fuel consumption are used.
In turn, process emissions approach (based on historical emissions) need to be used in case where:
- no product benchmark is available,
- heat is not measurable and
- emissions are not resulting from combustion of fuel.
In total 52 product benchmarks have been established for the EU ETS phase 3. These cover around 75% of industrial EU ETS emissions. The rest of the emissions will receive free allocation determined by the three fall-back approaches heat, fuel and process emissions benchmark (EU ETS Handbook, p. 49). For free allocation to aircraft operators one fixed benchmark is used in phase 3.
Calculating free allocation using benchmarks
Allocation of allowances under Article 10a (i.e. for the "normal" industry, not for aircraft operators or the derogation under Art. 10c for the power sector) is calculated using the following formula (EU ETS Handbook, p. 45):
Allocation = Benchmark x Historical Activity Level (HAL) x Carbon Leakage Exposure Factor (CLEF) x Cross-Sectoral Correction Factor (CSCF) or Linear Reduction Factor(LRF)
The Historical Activity Level (HAL) indicates the historical production per year corresponding to the applicable benchmark. The HAL is calculated as the median (middle value) of the activity level in 2005–2008 or 2009–2010.
Free allocation is calculated at the start of phase 3 or when the new installation enters in operation. Unless the installation undertakes significant capacity changes or experiences large decreases in activity level, the free allocation remains constant over phase 3. Many installations produce more than one product. In these cases an installation can be divided into a number of 'sub-installations'. The boundaries of a sub-installation are determined by the benchmark being applied. For example, an installation may be divided into three sub-installations: Sub-installation 1 will use a product benchmark. Sub-installation 2 will use a heat benchmark and Sub-installation 3 will use a fuel benchmark.
For certain situations the calculation of free allocation is more complex and special rules apply. These include in particular:
- Exchangeability of fuel and electricity i.e. products can be produced through both fuel- or electricity-driven processes. Indirect emissions from electricity consumption are not eligible for free allocation, so the share of indirect electricity emissions needs to be subtracted from the calculated free allocation,
- Refineries have a complex production process and various difficulties arise when comparing emission intensities. Refineries make different products requiring different process units and the GHG performance of these units are dependent of each other. For refineries the carbon-weighted tonne (CWT) approach is therefore applied.
Special rules also apply if heat is imported from non-ETS installations.
Further regulatory clearance can be found in the Guidance Document 9 on the free allocation methodology.
Benchmarks in the post-2020 EU low carbon framework
Questions and answers on the proposal to revise the EU emissions trading system (EU ETS), Brussels, 15 July 2015, p. 2) confirm, while the basic EU ETS architecture will remain in place after 2020, individual elements, like, among others, benchmark values, will be improved in line with the agreement reached by EU leaders in October 2014.
"What is the merit of using a flat-rate approach to revise the benchmarks?
The proposed flat-rate revisions provide a high level of predictability for industry. As all sectors should contribute to reducing emissions, benchmark values will become more stringent across the board.
Benchmark values would be reduced by 1% every year, as a default value. Based on experience on technological progress, this is at the lower end of what industry has been able to achieve in terms of reducing their emissions intensity over recent years. For all sectors the real rate of improvement will be verified based on real data. If this reality check indicates that for a sector technological progress deviates substantially from this flat rate, a lower or higher rate would be applied. The three improvement rates proposed are thus the following:
- The central default flat rate of 1% will apply to all sectors that have a verified improvement rate in the range of 0.5% and 1.5% annually. This provides predictability to the majority of sectors.
- The low flat rate of 0.5% will apply to all those sectors that have an annual improvement rate lower than 0.5%. This way also the slowest sectors contribute, but with due consideration of their specific situation
- The high flat rate of 1.5% will apply to sectors with an improvement rate faster than 1.5%. This implies that the fastest moving sectors will have a more generous benchmark than the data shows, thereby letting those sectors keep some of the benefits of fast-improving carbon efficiency. E.g. a sector improving by 3 % annually will be able to keep half of the gains made."
Question 6, Detailed questions and answers on the proposal to revise the EU emissions trading system (EU ETS) of 15 July 2015, p. 2,3
Considering the fact current benchmark values are determined based on data from 2007-2008 and would not reflect the state of technology after 2020, under the post-2020 EU low carbon framework benchmark values will be updated to capture technological progress in the different sectors.
Detailed questions and answers on the proposal to revise the EU emissions trading system (EU ETS) of 15 July 2015, (p. 2) indicate, moreover, the 52 product benchmarks' values will be updated twice during the period 2021-2030 to reflect advances in technology. The first update will be for the benchmark values used as of 2021 and these values will be kept stable until 2025. The second update will concern the benchmark values applied as of 2026 and these values will in turn be kept stable until 2030.
When is comes to legal wording, European Commision's Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments of 15 July 2015 (COM(2015) 337 final) 2015/148 (COD) adds a new third subparagraph to paragraph 2 of Article 10a of the EU ETS Directive as follows:
"The benchmark values for free allocation shall be adjusted in order to avoid windfall profits and reflect technological progress in the period between 2007-8 and each later period for which free allocations are determined in accordance with Article 11(1). This adjustment shall reduce the benchmark values set by the act adopted pursuant to Article 10a by 1% of the value that was set based on 2007-8 data in respect of each year between 2008 and the middle of the relevant period of free allocation, unless:
(i) On the basis of information submitted pursuant to Article 11, the Commission shall identify whether the values for each benchmark calculated using the principles in Article 10a differ from the annual reduction referred to above by more than 0.5% of the 2007-8 value higher or lower annually. If so, that benchmark value shall be adjusted either 0.5% or 1.5% in respect of each year between 2008 and the middle of the period for which free allocation is to be made;
(ii) By way of derogation regarding the benchmark values for aromatics, hydrogen and syngas, these benchmark values shall be adjusted by the same percentage as the refineries benchmarks in order to preserve a level playing field for producers of these products.
The Commission shall adopt an implementing act for this purpose in accordance with Article 22a."
The industry stakeholders' reaction to the above propositions has been described in the Commission Staff Working Document, Stakeholder Feedback on the Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments {COM(2015)337 final}, 14.1.2016, SWD(2015) 297 final.
The said document observes with respect to the issue of the EU ETS benchmarks:
"When it comes to the benchmarks values that are used to calculate the amount of free allocation industry receives, many industry stakeholders argue that this update should be based on real data and that the flat rate revision proposed could lead to benchmarks values lower than emission levels that can be achieved with known technology, especially given that process emissions are deemed unavoidable. A few industry stakeholders do not consider it sufficiently clear that free allocation based on fall-back approaches will continue for sectors not having product benchmarks."
Briefing EU Legislation in Progress, March 2016, Post-2020 reform of the EU Emissions Trading System, p. 5, 6
Free allocation and benchmarks
"As in phase 3, industry would receive free allowances. Installations on the carbon- leakage list would receive up to 100% of the required allowances for free, others would get up to 30%. Free allocation would be decided for a period of five years, compared to eight years at present. The free allocation for an installation would be increased in case of increased production. Currently, this is only possible when production capacity is added.
Free allocation would be decided on the basis of benchmarks, based on the 10% most efficient installations. The benchmarks would be updated twice during phase 4 (for the periods 2021-25 and 2026-30), in order to take account of technological advances. The benchmarks would be tightened by 1% per year by default, in order to account for expected emission reductions through technological progress. For industries with lower potential for reducing emissions, the benchmarks would be reduced by only 0.5% per year, and for industries with more potential by 1.5%. According to the Commission, these changes reduce the chance that a correction factor would need to be applied.
The Commission proposes to move 250 million unallocated allowances from the MSR to a 'new entrants' reserve' that can provide free allocation for new market entrants and growing companies."
Regulatory chronicle
15 March 2021