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Phase 3 of the European Union Emissions Trading Scheme (EU ETS; 2013�2020) sees the introduction of new rules governing the free allocations of emissions allowances given to energy-intensive industries. In contrast to Phases 1 and 2, allocations will be based on historical production multiplied by best available emissions technology benchmarks. This article exploits an original database to provide a first analysis of the distributional and economic efficiency implications of the new rules. It is shown empirically that the new allocation rules reduce the scope for windfall gains by EU ETS firms while also effectively mitigating carbon leakage risks, even assuming optimistic forecasts of Phase 3 carbon prices. The example of the cement sector is used to show that benchmarking significantly improves the harmonization of the levels of free allocations to competing firms throughout the EU compared to Phase 2. However, it is also found that the use of ex ante output levels to determine allocations still leaves considerable scope for windfall gains and possible distortions of the internal market.
Policy relevance Concerns about carbon leakage have led to the adoption of rules granting free allocations of emissions allowances to energy-intensive trade-exposed industries in new carbon markets around the world. However, in the most mature scheme � the EU ETS � the learning process is continuing about how best to design anti-leakage measures. This article provides an early evaluation of several aspects of the benchmark-based free allocations, newly adopted by the EU. It shows that the use of best available technology benchmarks can be a pragmatic and effective way to address issues of harmonization across linked countries in an emissions trading scheme and balance competing stakeholder concerns. At the same time, it is found that if benchmarks are used in conjunction with ex ante activity levels, considerable scope for surplus allocations and possible competition distortions remain, and that these will need to be addressed in the design of future anti-leakage measures.
