The IFIEC method for the allocation of CO2 allowances in the EU Emissions Trading Scheme. A review applied to the electricity sector

Recently the European Commission has published a proposal to improve the function of the EU-ETS by amending the Directive which establishes the EU-ETS. The main changes proposed are the establishment of one EU-wide cap and the use of auctioning for a much greater share of allowances than is currently the case, replacing most of the allocation free of charge. Auctioning of allowances will eliminate the so-called windfall profits that occur under the current allocation free of charge that is based on historic production and emission levels; a grandfathering approach. IFIEC EUROPE, the international federation of industrial energy consumers, asked Ecofys to review the method that IFIEC has developed in recent years to allocate CO2 allowances in the EU emissions trading scheme (EU-ETS). According to IFIEC, their allocation method guarantees the same environmental outcome as other methods, without causing windfall profits and with lower risks of competitiveness loss for so-called exposed industrial users of electricity. It was decided to focus this study on the European electricity sector. This was done for several reasons: CO2 emissions from electricity generation cover a large part of the overall emission under EU-ETS, the electricity sector has a single well defined output (electricity) that can be used to illustrate the potential impact of the IFIEC benchmark based allocation approach, and electricity is a substantial cost factor for IFIEC members. This evaluation covers many aspects of IFIEC's method and compares these with two other allocation methods: auctioning and historic grandfathering. Within the IFIEC method two example approaches are evaluated: a single benchmark for electricity production and fuel-specific benchmarks for coal and gas fired electricity production. In the evaluation, we cover the following aspects: What is the IFIEC method; how does it differ from other allocation methods in character (chapter 2); What is the impact of different allocation methods, and the IFIEC method in particular, on electricity costs (chapter 3); What are the incentives for low-carbon electricity production under the different allocation methods (chapter 4); Uncertainty analysis of the IFIEC method (chapter 5)