The EU’s Emissions Trading System: free allocation of allowances needed better targeting

Summary:

The reduction of greenhouse gas emissions is one of the main challenges of our times. Under the EU Emissions Trading System, companies need to obtain emission allowances covering their carbon emissions. Free allocation is set as a transitional method of allocating allowances in contrast to the default method (auctioning). However, for both phase 3 and 4 of the EU ETS, allowances allocated for free continue to represent more than 40 % of the total number of available allowances. We found that there is limited targeting of the free allocation of allowances. We make recommendations to the Commission on better targeting as well as better addressing technical challenges when revising the methodology for the free allocation of allowances.

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