EUROPEAN COMMISSION Brussels, 15.7.2015 SWD(2015) 135 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document 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}

{SWD(2015) 136 final}



TABLE OF CONTENTS 1. Procedural issues and consultation of interested parties 1.1. Identification 1.2. Organisation and timing 1.3. Consultation and expertise 1.3.1. Expertise used 1.3.2. Consultation 1.4. Subsidiarity 1.5. Scrutiny by the Commission Impact Assessment Board 2. Policy Context 3. General evaluation and lessons learnt 4. General problem definition 5. Objectives 5.1. General policy objectives 5.2. Specific policy objective 5.3. Consistency with other policies and objectives 6. Implementation of the EU's GHG emission reduction target 6.1. Linear reduction factor

6.2. Auction share 7. Free allocation and addressing the risk of carbon leakage 7.1. Problem definition 7.1.1. Underlying drivers of the problem 7.2. Operational policy objectives 7.3. Policy options for free allocation and other carbon leakage measures 7.3.1. Benchmark values 7.3.2. Production level and adjustments 7.3.3. Reserve for new entrants 7.3.4. Carbon leakage groups 7.3.5. Cross-sectoral correction factor 7.3.6. Compensation for indirect carbon costs 7.4. Option packages 7.5. Analysis of impacts 7.5.1. Direct and indirect effects 7.5.2. Environmental impacts 7.5.3. Economic impacts 7.5.3.1. Quantified impacts on competitiveness 7.5.3.2. Administrative burden 7.5.4. Social impacts

7.5.4.1. Employment 7.5.4.2. Energy prices for households 7.5.5. Comparing the options 7.5.5.1. Quantified environmental and social impacts 7.5.5.2. Reflect technological progress in industry sectors 7.5.5.3. Fully preserve incentives for industry to innovate 7.5.5.4. Most efficient installations do not face undue carbon costs leading to carbon leakage 7.5.5.5. Better alignment with production levels 7.5.5.6. Avoid windfall profits 7.5.5.7. No increased administrative complexity 7.5.6. Concluding remarks 8. Low-carbon funding mechanisms 8.1. Innovation fund 8.1.1. Problem definition 8.1.1.1. Underlying drivers of the problem 8.1.2. Operational policy objectives 8.1.3. Policy options 8.1.3.1. Screening of projects 8.1.3.2. Conditionality of Awards 8.1.3.3. Type of instrument

8.1.3.4. Maximum rate of funding 8.1.3.5. Parameters not varied in the options 8.1.4. Option packages 8.1.5. Analysis of impacts 8.1.5.1. General impacts 8.1.5.2. Economic impacts 8.1.5.3. Environmental impacts 8.1.5.4. Social impacts 8.1.6. Comparing the options 8.2. Modernisation Fund 8.2.1. Problem definition 8.2.1.1. Context 8.2.1.2. Underlying drivers of the problem 8.2.1.3. Lessons learnt 8.2.2. Policy Objectives 8.2.3. Development and screening of policy options 8.2.3.1. Policy options 8.2.3.2. Option packages 8.2.4. Analysis of Impacts 8.2.4.1. Effectiveness

8.2.4.2. Coherence 8.2.4.3. Market Distortion 8.2.4.4. Administrative Burden 8.2.5. Comparing the Options 8.3. Free allocation to promote investments for modernising the energy sector 8.3.1. Policy objective and problem definition 8.3.2. Conclusions on lessons learnt and policy context 8.3.3. Operational policy objectives 8.3.4. Development and screening of policy options 8.3.4.1. Aspects not varied between the options 8.3.5. Retained option packages 8.3.6. Assessment of options 8.3.6.1. General impacts - Effectiveness 8.3.6.2. General impacts - Complexity and administrative burden / flexibility to adjust to MS circumstances 8.3.6.3. General impacts - Transparency 8.3.6.4. General impacts - Potential distortion of EU energy market / complementarity with existing EU instruments 8.3.6.5. Timing and distribution of investments and volume and timing of allowances on market / auction revenues of investments 8.3.6.6. Environmental impacts - Potential decarbonisation 8.3.6.7. Social impacts 8.3.7. Comparing the options

8.4. Inter-linkages between the low carbon funding mechanisms 9. Monitoring and evaluation Annexes 1. Glossary 2. Summary of relevant findings of the 2030 impact assessment 3. Summary of stakeholder consultations 3.1. General consultation on the ETS revision I. Free allocation and addressing the risk of carbon leakage Industry stakeholders Public authorities Civil society II. Innovation Fund Industry stakeholders Public authorities Civil society III. Modernisation Fund Industry stakeholders Public authorities Civil society IV. Free allocation to promote investments for modernising the energy sector

Industry stakeholders Public authorities Civil society V. SMEs/regulatory fees/other Industry stakeholders Public authorities Civil society VI. General evaluation Industry stakeholders Public authorities Civil society 3.2. Consultation on carbon leakage provisions and innovation support I. Business and trade representations of business interests II. Government and regulatory authorities III. Academic and research organisations, NGOs, citizens, trade unions (civil society) 4. Summary of evaluation 4.1. NER 300 - lessons learnt 4.1.1. Introduction 4.1.2. NER 300 principles 4.1.2.1. Definition

4.1.2.2. Legal basis 4.1.2.3. Selection of projects 4.1.3. State-of-play 4.1.3.1. Results of calls for proposals 4.1.4. Lessons learnt so far 4.1.4.1. Geographical coverage 4.1.4.2. Technological coverage 4.1.4.3. Support to innovation 4.1.4.4. Cost-effectiveness in the use of NER 300 funds 4.1.4.5. Administrative simplification 4.1.4.6. Monetisation of allowances for grants 4.1.4.7. No ring-fencing 4.1.4.8. Number and timing of calls 4.1.4.9. Length of preparatory phase 4.1.4.10. Impact of projects 4.1.4.11. NER 300 and other financing instruments 4.1.5. Main challenges encountered 4.1.5.1. Financial barriers 4.1.5.2. Management structure 4.1.6. Conclusions

4.2. Free allocation to the power sector 4.3. Exclusion of small emitters – lessons learnt 4.4. Guaranteeing a robust and secure EU ETS (registry fees) – lessons learnt 5. Detailed description and screening of options for free allocation to industry 5.1. Benchmarks 5.1.1. Lessons learnt from the current system in phase 3 (2013-2020) 5.1.2. Policy options for updating benchmark values for 2021-30 5.1.3. Screening 5.2. Carbon leakage groups and criteria 5.2.1. Lessons learnt from the current system in phase 3 (2013-20) 5.2.2. Policy options 5.2.3. Screening 5.3. Production level and adjustments 5.3.1. Lessons learnt from the current system in phase 3 (2013-20) 5.3.2. Policy options 5.3.3. Screening 5.4. Reserve for new entrants 5.4.1. Lessons learnt from the current system in phase 3 (2013-20) 5.4.2. Policy options 5.4.3. Screening

5.5. Compensation for indirect carbon costs 5.5.1. Lessons learnt from the current system in phase 3 (2013-20) 5.5.2. Policy options 5.5.3. Screening 6. Further improvements to the current set of rules 6.1. Validity of emission allowances 6.1.1. Problem definition 6.1.2. Operational policy objective 6.1.3. Policy options 6.1.4. Analysis of impacts 6.1.5. Comparing the options 6.2. Optional exclusion of small emitters 6.2.1. Problem definition and general objective 6.2.2. Operational policy objective 6.2.3. Policy options 6.2.3.1. Assessment of the options 6.2.3.2. Comparing the options 6.3. Guaranteeing a robust and secure EU ETS (registry fees) 6.3.1. Problem definition and general objective 6.3.2. Operational policy objectives

6.3.3. Policy options 6.3.3.1. Screening of the options 6.3.3.2. Analysis of impacts 7. Impacts of different option packages for free allocation on individual sectors 7.1. Effect of carbon leakage groups on sectors 7.2. Cross sectoral correction factor 7.3. Estimated level of free allocation for biggest sectors in phase 4 7.4. Estimated compliance cost per sector, taking into account cost pass through 7.5. Sensitivity analysis 8. Impacts of different option packages for free allocation: Administrative burden and social impacts 8.1. Analysis of administrative burden 8.2. Analysis of social impacts 8.2.1. Employment 8.2.2. Energy prices for households 9. Literature review on cost-pass through rates 9.1. Theoretical studies on cost pass-through 9.2. Ex-ante empirical studies on the EU ETS 9.3. Ex-post empirical studies for the EU ETS 9.4. Conclusions 10. Description of Financial Barriers for energy sector: power generation, energy efficiency and networks

11. Impacts of creating the Modernisation Fund compared to the Baseline 12. More comprehensive overview of impacts for different options for creating the Modernisation Fund 13. Timing and approach to the monetisation of allowances for the Innovation fund and Modernisation Fund 14. Sensitivity analysis for possible funding rates for the Innovation Fund 15. Options for unallocated allowances Policy options Comparison between the options



List of tables Table 1: Option packages for addressing the risk of carbon leakage Table 2: Estimated number of sectors and distribution of free allowances under 'Baseline', 'limited changes' and 'targeted 'options Table 3: Overview of assessment of policy option packages compared to 'Baseline B' Table 4: Option packages for Innovation Fund Table 5: Comparison of options for the innovation fund Table 6: Retained options for examining for the Modernisation Fund Table 7: Impact of policy options for the Modernisation Fund Table 8: Option packages for the free allocation to the power sector Table 9: Comparison of options for the free allocation to the power sector Table 10 Stakeholder consultation responses Table 11: Projects submitted and awarded

Table 12: Distribution of awarded NER 300 funding Table 13: Screening of options for updating benchmark values Table 14: Overview of minimum cost pass-through values found in existing literature Table 15: Screening of options for carbon leakage groups and criteria Table 16: Screening of options for production level and adjustments Table 17: Screening of options for reserve for new entrants Table 18: Screening of options for compensation for indirect cost Table 19: Comparison of options Table 20: Comparison of the options in relation to relevant problems and objectives Table 21: Comparing the options in relation to relevant problems and objectives Table 22: Estimated number of sectors, share of gross free allocation and GVA in the different groups Table 23: Estimated carbon leakage status at sectoral level based on past data Table 24 Overview table on estimated compliance cost per sector, taking into account cost pass-through rates Table 25 Sensitivity analysis of compliance costs compared to sector turnover at different carbon prices Table 26: Estimated administrative costs for additional NIMs exercises: Table 27: Estimated additional annual administrative costs for production level adjustments Table 28: Estimated administrative costs for harmonised rules for indirect cost compensation (additional costs compared to national compensation currently applied in 6 MSs as baseline) Table 29: Estimated employment impacts of policy option packages compared to baseline B from the pass through of additional costs (annual average for 2021 – 2030, underlying assumptions in italics) Table 30: High estimate of employment impacts of policy option packages compared to baseline B from additional costs absorbed (annual average for 2021 – 2030, underlying assumptions in italics) Table 31: Analysis of impacts of policy option packages on the district heating sector 2021-30

Table 32 Estimate of cost pass-through rates from ex-post econometric studies Table 33 Overview of the range of average cost pass-through in selected sectors from literature Table 34: Comparison under baseline and creation of the Modernisation Fund for allocation of 2% of total allowances, 2021-2030 Table 35: Modernisation Fund allocation shares per beneficiary Member States, 2021-2030 Table 36: Monetised health benefits in 2030 as a percentage of GDP Table 37: Reduced air pollution control costs by 2030 as a percentage of GDP Table 38: EU28 jobs associated with investments in the power sector and energy efficiency, 2011-2030 Table 39: Overview of impacts for different options for creating the Modernisation Fund Table 40: Sensitivity of amount to raise by RES, CCS or industry project sponsor to funding rates and project size Table 41: Sensitivity of 15% to price of carbon Table 42: Comparison of options for further action with unallocated allowances



List of figures Figure 1 Respondents from industry Figure 2: Structure of the total quantity of allowances in phase 3 Figure 3: Sectors on and off the carbon leakage list. Figure 4: Estimated combined effect of carbon leakage groups and the correction factor under different option packages Figure 5: Annual allowances from fund by type Figure 6: Combined free allocation trajectories Figure 7: Stakeholder consultation responses Figure 8: Industry stakeholders – shares of each sector replying

Figure 9: Distribution of installations in terms of amount of emissions Figure 10: Annual Emissions from small installations (installations with annual emissions < 25 kt) and from opt-out installations Figure 11: Ranking of sectors in terms of emissions in EU ETS Figure 12: Indicative carbon leakage groups in the 'Limited changes' option package based on 2009-2011 data Figure 13: Indicative carbon leakage groups in the 'Targeted' option package based on 2009-2011 data Figure 14: Estimated combined effect of carbon leakage groups and the correction factor under different option packages Figure 15: Employment in selected energy-intensive industries Figure 16 Cost pass-through rates derived by Vivid Economics (2014) in sectors investigated in reduced and full detail (2020, € 15/tCO2)



Executive Summary Sheet Executive Summary Sheet Impact assessment on Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC A. Need for action Why? What is the problem being addressed? The EU's long-term goal, also agreed in the context of the UNFCCC, is to limit global average temperature increase to below 2°C compared to pre-industrial levels. The general problem analysis concerning EU climate policy targets for 2030 and the ETS has been done in the impact assessment on the 2030 climate and energy framework. The European Council agreed on the 2030 framework in October 2014, including a binding domestic reduction of greenhouse gas GHG) emissions of at least 40% in 2030 as compared to 1990, and a corresponding emission reduction target for the sectors in the EU Emissions Trading System (ETS) of 43% compared to 2005. The European Council also gave strategic guidance on the continuation of free allocation to industry and the establishment of low-carbon funding mechanisms to ensure EU's low-carbon transition. The problem to be addressed is how to adapt the respective ETS Directive provisions to make them suitable post-2020, including also further improvements to the system based on lessons learnt in phase 3 since 2013. What is this initiative expected to achieve? The specific policy objective is to align the EU ETS architecture with the 2030 emission reduction commitment and refine and improve the EU ETS post-2020 framework in the light of the lessons learnt in a context where fully comparable climate policy measures may not yet be undertaken by all other major economies; reinforced research, development and innovation efforts should take place in order to maintain Europe's industrial base and competence, and support the 2030 climate and energy framework as well as the long-term goal of low-carbon economy; reinforced investment efforts should take place in order to modernise the energy system and experience gathered during the first years of phase 3 since 2013 suggests that there is potential to reinforce efficiency. What is the value added of action at the EU level? The EU ETS Directive exists and will continue being in force post 2020. It is an EU policy instrument. Climate change is a trans-boundary problem. Therefore, coordination of climate action at European level and, where possible, at global level is necessary and EU action is justified on grounds of subsidiarity. Many of the policy elements have an important internal market dimension and many of the required investments and infrastructures have an important European dimension. Therefore, the objectives can be better achieved by an EU framework for action. Delegating the legislative powers to Member States would lead to partitioning, an uneven playing field and decreased efficiency. B. Solutions What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why? The impact assessment was carried out for a number of aspects on which the European Council gave strategic guidance allowing some discretion - addressing the risk of carbon leakage, establishment of a Modernisation and an Innovation Fund, optional free allocation to modernise the electricity sector in some Member States, and aspects building on the lessons learnt since 2013 (validity of emission allowances; guaranteeing a robust and secure Registry; and optional exclusion of small emitters). The options in these areas are screened preliminarily in view of achieving the operational objectives. There are numerous possible combinations of options on different elements that could be evaluated. Therefore, based on the screening, combinations of options are selected to form coherent packages, representing different ends of a spectrum and differentiating across the different elements to evaluate their specific impacts, while also focusing on the realistic options. For addressing the risk of carbon leakage, options are considered concerning benchmarks, production levels, new entrant reserve, carbon leakage groups and indirect cost compensation. For the Innovation Fund, options are developed for the way that projects are screened and selected, and the way in which financial support is provided. For the Modernisation Fund, potential options are considered on its governance. For the optional free allocation to the energy sector, options are developed for improving its modalities and enhance transparency compared to the current practice. Who supports which option? Different stakeholders have different views, sometimes within the same sector, making it difficult to categorise homogenous groups of stakeholders supporting particular options. On addressing the risk of carbon leakage, a number of industry stakeholders are in favour of limited changes to the current system, while other stakeholders, including Member States and civil society, believe that more targeting or further harmonisation is needed. For the Innovation Fund, energy and industry stakeholders generally welcome continued support for low-carbon innovation and the expansion of scope to include industry, with diverging views on how the risk sharing approach could be tailored for industry or CCS to improve the effectiveness compared to the current NER 300 mechanism, for example by providing support at an earlier stage in the project life cycle or a higher rate of support. On the Modernisation Fund some stakeholders support a key role in managing it for the beneficiary Member States, while others ask for a stronger role for all Member States, the Commission and the European Investment Bank. On the optional free allocation to the energy sector, market participants generally support streamlined, common and simplified rules, and harmonised reporting guidelines. C. Impacts of the preferred option What are the benefits of the preferred option (if any, otherwise main ones)? The general benefit of measures to address the risk of carbon leakage is addressing competitiveness issues and the potential risk of carbon leakage, as long as comparable climate policies are not undertaken by other major economies. The overall benefit of establishing the Innovation Fund is a stepped-up effort to rapidly introduce new low-carbon technologies to the market enabling the EU to reach its long-term decarbonisation goals. The general benefit of establishing the Modernisation Fund and optional free allocation to the energy sector is contributing to the modernization of the energy systems in low-income Member States. What are the costs of the preferred option (if any, otherwise main ones)? Costs must be seen in the overall context of the EU climate objectives of limiting global average temperature increase to not more than 2°C above pre-industrial level. Measures to address the risk of carbon leakage directly affect the costs for industrial installations covered by the ETS or EU Member States' budgets. Options for the Innovation and Modernisation Fund affect primarily administrative costs and for the Modernisation Fund may lead to market distortion. Together with a possible impact on the carbon market, these types of costs are also relevant for the options for the optional free allocation to the energy sector. How will businesses, SMEs and micro-enterprises be affected? Businesses covered by the EU ETS are directly affected. The overall impact is independent of the assessed policy choices as the contribution the EU ETS has to make to the overall EU 2030 reduction target has already been set. Sectoral impacts in major industrial sectors covered by the EU ETS vary to some degree depending on policy choices. However, choices that lower the costs and impacts on some industrial sectors necessarily result in higher costs and impacts for other industrial sectors. The proposal also affects producers of renewable energy, and manufacturers of equipment for low carbon technologies. Innovative technologies will generate new business opportunities. The revision of the ETS also constitutes an important part of the work on the achievement of a resilient Energy Union with a forward looking climate change policy at its core, which has as one of its goal giving EU consumers – including businesses – secure, sustainable, competitive and affordable energy. The majority of installations under the EU ETS are in the energy intensive industries with market structures characterised by large enterprises. Small emitters (not necessarily owned by SMEs or micro entreprises) should benefit from the option envisaging continuation of the possibility for Member States to exclude them from the ETS if they are subject to equivalent measures. Will there be significant impacts on national budgets and administrations? National budgets and administrations are primarily affected due to the link to auctioning revenues. If Member States were to be required to share the EU-level costs of the Union registry, this would also have an impact on their national budgets, but not a significant one. Will there be other significant impacts? No other significant impacts are expected. D. Follow up When will the policy be reviewed? Not specifically foreseen, but Articles 10(5) and 29 of the ETS Directive require the Commission to establish regular reports on the carbon market and to verify whether the carbon market is functioning properly. 1.Procedural issues and consultation of interested parties 1.1.Identification Lead Directorate-General (DG): Climate Action Other services involved: Secretariat-General; Legal Service; DG Budget; DG Competition; DG Economic and Financial Affairs; DG Employment; DG Energy; DG Environment; DG Internal Market, Industry, Entrepreneurship and SMEs; DG Mobility and Transport; DG Regional and Urban Policy; DG Taxation and Customs Union; DG Trade and DG Research, Science and Innovation. Work Programme 2015 reference: Included under initiative no. 5 Strategic framework for the Energy Union Agenda Planning reference: 2015/CLIMA/001 1.2.Organisation and timing The analysis of the policy framework for climate and energy in the period from 2020 to 2030 (hereafter 'the 2030 framework') has played a central role in identifying the key elements for the revision of the European Union Emission Trading System (EU ETS) for the period after 2020. The current impact assessment is a follow-up exercise from the impact assessment for the 2030 framework and focuses on certain ETS-specific methodological elements not already assessed. The work for this impact assessment (IA) started in December 2014 with the launch of a 12-week online consultation on the revision of the EU ETS .The work also builds on the results of the consultation on the 2030 framework and a separate consultation on the post-2020 carbon leakage provisions.

DG Climate Action invited the above-mentioned Commission services to be part of an Impact Assessment Steering Group. Three meetings took place (on 18 December 2014, 26 February 2015 and 16 April 2015) where comments were exchanged and taken into due account. The final draft impact assessment was submitted to the group on 13 April 2015. Another meeting of the Steering Group took place to discuss the revised draft on 23 June 2015. An evaluation of the existing ETS Directive is part of the impact assessment work and has fed into the assessment of the policy options. 1.3.Consultation and expertise 1.3.1.Expertise used This impact assessment builds on the impact assessment for the 2030 framework and analyses ETS-relevant aspects not covered in it. In terms of external expertise, the Commission drew upon a study on evaluation of the ETS, commissioned in 2014 and carried out by a consortium led by ICF International . Furthermore, in 2014, a study was commissioned to assess the issue of costs being passed through from industrial sectors to their downstream customers and to determine the factors influencing such ability to pass through costs quantifying it for major energy intensive industry sectors. Another study was commissioned to evaluate the experience gathered with the harmonised benchmark-based allocation process, and in particular to evaluate whether the benchmarks have achieved the intended objectives. In 2013, a study was commissioned to assess the evidence for carbon leakage in the period 2005-2012 for ten major energy intensive industry sectors. The findings of these studies are discussed in chapter 7 . In terms of data, in 2011-2013, Member States submitted to the Commission verified, detailed, confidential and commercially sensitive data on preliminary free allocation to industrial installations. After checking their compliance with the harmonised allocation rules, these data were used for the analysis of the amount of free allocation to industrial installations. 1.3.2.Consultation Relevant stakeholders (Member States, industry representatives, NGOs, research and academic institutions, trade unions and wider public) were involved throughout the entire process. Complementing the consultation for the 2030 framework, an extensive follow-up stakeholder consultation was carried out on various technical aspects of the post-2020 carbon leakage provisions, as well as on innovation support. It included three stakeholder meetings (June, July and September 2014) and a written consultation (May–July 2014) . An online consultation (December 2014-March 2015) also on other aspects (free allocation for the power sector, Innovation and Modernisation Funds, small and medium sized enterprises (SMEs), regulatory fees and general evaluation of the EU ETS) followed. The Commission did its best to accept also late submissions, and the consultation attracted a total of over 529 contributions from a broad spectrum of stakeholders. The main findings of the public consultation are found in Box 1 and the summary report in Annex 3 . Moreover, there have been bilateral meetings with many stakeholders, allowing them to express their specific views on the future of the system, as well as their dedicated efforts on certain aspects. A questionnaire on benchmarks for industry stakeholders was distributed in March 2015 and a conference on the Modernisation Fund was organised. All of the above consultations have been published on the DG Climate Action website. The Commission minimum standards on stakeholder consultation have all been met. The views of the stakeholders were taken into account to the extent possible in this impact assessment, given their number, the sensitivity and complexity of the issues and the diverging opinions expressed by different stakeholder groups. The respective sections indicate how the opinions have been reflected in the proposed options. Over 500 responses were received both through the website and by email, including general position papers on the ETS revision. Some responses were coordinated at the level of industrial sector (e.g. over 100 identical submissions from ceramics companies and associations), and also in the case of several NGOs. The majority of submissions - 86% of which 14% from the power sector - were from a wide variety of industry stakeholders (companies, SMEs, national associations, European associations). The graph below shows the various industry stakeholders: The public consultation showed that the EU ETS is considered to correspond well to the EU climate policy objectives and is perceived as an adequate tool to achieve these objectives. There is overall support for the system as a central instrument to reduce greenhouse gas emissions in the EU and as a market-based system. The majority of stakeholders support continuation of the existing principles, though with improvements in certain aspects according to their different concerns - e.g. industry would like enhanced protection against the risk of carbon leakage, whereas NGOs would like increased ambition of EU ETS and more investments in low-carbon technologies. Stakeholders took the opportunity provided by the consultation to present their broader positions on climate and energy policy and highlighted their specific concerns. For instance, the steel sector stakeholders underline the issue of waste gas transfers, the ceramics sector highlights the issue of high labour costs leading to high gross value added which make the sector appear to have lower carbon costs, the non-ferrous metals sector refer to the importance of electricity costs in their total costs and argue for a better system for indirect cost compensation. Member States express concerns about administrative complexity, while civil society advocates for using auctioning revenues for climate-related measures. Given the variety of views not just among, but also within stakeholder categories, this box, the summary in Annex 3 , and the analysis of policy options tries to focus on the views receiving widest support. Free allocation and addressing the risk of carbon leakage

There is overall support for free allocation as the measure to address direct carbon costs. Industry stakeholders from different sectors (steel, ceramics, glass, chemicals) supported the idea that the best performers should be fully compensated by free allocation and therefore no correction factor should apply. Continuing with the existing principles and basing benchmarks on the most efficient EU installations gathered quite some support, but some respondents (notably NGOs) argue for benchmarks based on worldwide performance in the sectors. Public authorities highlight the importance of maintaining the incentive to innovate and of rewarding the best performers. The energy intensive industry stakeholders support 'dynamic allocation' or allocation based on more recent production volumes. However, some energy sector stakeholders stress that defining the amount of free allowances available for industry should not create uncertainty on the available auction volumes, and therefore the amounts of allowances to be auctioned by Member States should be fixed ex-ante. They also argue that given the final EU objective to conclude an international agreement, the system of free allocation should continue to be considered as a transitional instrument only to address the risk of carbon leakage. Regarding cost pass-through (passing the cost of allowances in product prices), many stakeholders claim it is difficult to quantify since products are traded on global markets and prices are determined internationally, influenced by a multitude of factors. Civil society stakeholders concur with the empirical evidence and are of the view that all industrial sectors are able to pass through to their customers at least some of the carbon costs. Some public authorities believe there should be no free allocation for the costs passed through by companies. Many stakeholders express the view the issue of cost pass through should be addressed. Innovation Fund: Stakeholders support continuing with the application of the general set of rules for the NER300 programme and increasing the amount of allowances dedicated to the new Innovation Fund, while they also highlight the need for some improvements. Industry stakeholders typically support the rules being adapted to ensure they match industry needs, including those of SMEs. The energy sector stakeholders argue that the current NER 300 programme contains several lessons on pitfalls in energy innovation demonstration policy, such as insufficient coordination and Member State commitment. Some academics raise concerns about a lack of available information on the decision process and especially on lessons learnt from the current NER 300 programme. Similarly, NGOs ask for increased transparency particularly on the selection phase. Modernisation Fund: Regarding the investments, some energy-intensive industry stakeholders argue that as a principle, private and public projects should be on an equal footing, and that industrial actors should also be eligible. The energy sectors highlight inefficiency and high administrative cost of complex funding systems, and hence the importance for investors of having simple structures. Some beneficiary Member States expressed preference that the main responsibility to ensure an effective and transparent management of the Fund should be at the Member State level. In contrast, other Member States support an important and strong role for the European Investment Bank (EIB) to play in managing the use of the Fund within the constraints of available EIB resources. Optional free allocation to the energy sector: In principle, stakeholders tend to support agreeing on common, general EU level criteria for the selection of projects. Should free allocation to the electricity sector be introduced, it should at least ensure that the support does not subsidise investments in inefficient power generation. General evaluation: Many energy intensive industry stakeholders support the EU ETS as a resilient and flexible solution to achieve EU emissions reductions in a cost-effective manner. However, strong concerns are raised about the absence of an international agreement and the EU ETS not being linked to any similar emission trading system. Stakeholders from the energy sector and public authorities see the objectives of the EU ETS as being in line with EU’s climate policy objectives for 2020 and 2030. 1.4.Subsidiarity The EU ETS Directive exists and will continue being in force post 2020. It is an EU policy instrument. A revision of the EU ETS can only be implemented through proposals by the Commission to amend the EU ETS Directive. Climate change is a trans-boundary problem. Therefore, coordination of climate action at European level and, where possible, at global level is necessary, and EU action is justified on grounds of subsidiarity. Articles 191 to 193 of the TFEU confirm and further specify EU competencies in the area of climate change. Many of the policy elements have an important internal market dimension, in particular the options related to the indirect cost compensation for industry (see section 7.3.6 ), the Modernisation Fund (see section 8.2 ) and the free allocation to power (see section 8.3 ), and many of the required investments and infrastructures have an important European dimension, especially in the low-carbon funding mechanisms and the free allocation to industry. The Modernisation Fund aims to modernise the energy systems and improve energy efficiency in the beneficiary Member States, but the fund also has important implications on the internal energy market as the investments supported would be made in the context of a liberalised European energy market. Therefore, the objectives can be better achieved by an EU framework for action. Delegating the legislative powers to Member States would lead to partitioning, an uneven playing field and decreased efficiency. 1.5.Scrutiny by the Commission Impact Assessment Board The Impact Assessment Board of the European Commission assessed a draft version of the present impact assessment and issued its opinion on 22 May 2015. The impact assessment was improved and resubmitted to the Board, which issued its final opinion on 17 June 2015. The Impact Assessment Board made several recommendations and, in the light of the latter, the final impact assessment report contains a clearer presentation and explanation of options and their impacts, including more assessment of impacts on particular sectors as added in section 7.5.3 and Annex 7 . The report also explains better the rationale behind the choices of values for thresholds and criteria in sections 7.3 and 8.1.3 . The coherence between various funding mechanisms is also addressed, as well as their options and impacts. Various methodological questions are clarified (use of carbon leakage criteria and relation to cost pass -through, modelling of employment effects and energy prices for households). Annex 15 was added to address the issue of using the unallocated allowances inter alia for carbon leakage and innovation as agreed in the context of the market stability reserve proposal. A particular effort has been made throughout the text to simplify the language and improve readability for non-expert audience, including boxes briefly explaining ETS and carbon leakage. 2.Policy Context Building on the Commission Communication on the 2030 framework and the accompanying impact assessment, in October 2014 the European Council and with the endorsement of the European Parliament agreed on the 2030 framework, which includes a binding domestic reduction of greenhouse gas (GHG) emissions of at least 40% in 2030 as compared to 1990. To meet this target, the European Council also specifically agreed that the emissions in the EU ETS should be reduced by 43% compared to 2005. As a result of the measures needed to meet this emission reduction target for the 2030 framework and the Market Stability Reserve which is expected to become operational in 2019 as provisionally agreed by the co-legislators, the EU ETS will deliver a meaningful carbon price and stimulate cost-efficient emission reductions. A reformed EU ETS will play an important role in giving the right investment signals to businesses and Member States to ensure emission reductions happen at the least cost. The EU ETS is the EU cornerstone policy to combat climate change. It is the first - and still by far the biggest - international system for trading GHG emission allowances covering more than 11,000 power stations and industrial plants in 31 countries (28 EU Member States and 3 EEA/EFTA states), as well as airlines. It covers around 45% of the EU's emissions. It is a 'cap and trade' system: a 'cap', or limit, is set on the total amount of greenhouse gas that can be emitted by the factories, power plants and other installations in the system. The cap is reduced annually over time so that total emissions fall: in 2020, emissions from sectors covered by the EU ETS will be 21% lower than in 2005, and by 2030 43% lower. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. After each year a company must surrender enough allowances to cover all its emissions, otherwise fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so. Participation in the EU ETS is mandatory for companies operating in the sectors covered. By putting a price on carbon and thereby giving a financial value to each tonne of emissions saved, the EU ETS has placed climate change on the agenda of company boards and their financial departments across Europe. A sufficiently high carbon price also promotes investment in clean, low-carbon technologies. Launched in 2005, the EU ETS is now in its third phase (2013 – 2020), significantly improved and based on EU-wide harmonised rules. For more details see Section 3. Allowances are either auctioned or allocated for free to address international competitiveness concerns of industrial sectors that are deemed to be exposed to carbon leakage. The power sector is not eligible for free allocation, except under special conditions in few Member states (See section 8.3 ). According to market analysis (Bloomberg New Energy Finance), the EU carbon market for emission allowances in 2014 had a volume of 8 330 Mt, amounting to a value of €47.4 billion. For more information and explanations see: http://ec.europa.eu/clima/publications/docs/factsheet_ets_en.pdf Mainly as a result of the severe economic recession the EU ETS has faced the challenge of a growing surplus of allowances for some years. In the short term this surplus risks undermining the orderly functioning of the carbon market; in the longer term it could affect the ability of the EU ETS to meet more demanding emission reduction targets cost-effectively. As an intermediate first step, he co-legislators agreed to postpone (or 'back-load') the auctioning of 900 million allowances, followed by an agreement to establish a market stability reserve - a sustainable solution to the surplus in the longer term. The latter proposal is informally agreed by co-legislators (at the time of writing) and is expected to start in 2019. For more information see http://ec.europa.eu/clima/policies/ets/index_en.htm

The European Council also gave strategic guidance on several issues regarding the implementation of the emission reduction target, namely free allocation of allowances to industry, the establishment of a Modernisation Fund and an Innovation Fund, as well as optional free allocation of allowances to modernise electricity generation in some Member States. Similarly, the European Parliament highlighted the necessity of a revised and well-functioning ETS, including the continuation of provisions on the need to address the international competitiveness of industrial sectors deemed to be at risk of carbon leakage. This guidance is being translated into a legislative proposal to revise the EU ETS for the period post-2020 and this impact assessment focusses on choices to be taken to establish these rules. The free allocation of allowances to industry is a key element in addressing industry competitiveness concerns and how to determine the rules for this allocation constitutes a key part of this impact assessment, addressed mainly in chapter 7 . The low-carbon funding mechanisms are analysed in chapter 8 . This impact assessment and the legislative proposal for revision of the ETS Directive do not cover detailed methodological options to establish the technical measures to implement these revised rules. Respective legislative proposals and accompanying analysis will follow in due course.

The revision of the EU ETS makes an important contribution to the efforts to establish a resilient Energy Union with a forward looking climate change policy at its core. The goal of the Energy Union is to give EU consumers – households and businesses – secure, sustainable, competitive and affordable energy. The EU climate policy will continue contributing to a major shift away from expenditure on fuels towards innovative equipment with high added value that will stimulate investments for innovative products and services, create jobs and growth and improve the Union's trade balance. As already shown, together with the 2020 targets for renewable energy and energy savings, the GHG emission reduction target and the ETS have played a key role in driving progress to low-carbon economy and sustaining the employment of more than 4.2 million people in various eco-industries, with continuous growth during the crisis. 3.General evaluation and lessons learnt The main aim of the EU ETS is to incentivise cost-effective emission reductions in the sectors in its scope. As the emission reductions and thus the positive environmental outcome in the EU ETS is guaranteed by its absolute limit on emissions, i.e. the cap, the EU is currently well on track to meet its 2020 targets for GHG emissions reduction not only for the sectors in the EU ETS, but for the EU as a whole. As decided in the 2008 climate and energy package, thanks to the emission reductions incentivised by the European carbon market and the measures taken in sectors out of the EU ETS, as well as the policies on renewables and energy efficiency, in 2020 the GHG emissions from the sectors in the EU ETS will be at least 21% lower than in 2005. Thus, the ETS in particular, and EU climate and energy policies in general, seem to be working well. The regulatory framework of the EU ETS was largely unchanged during the first eight years of its operation (2005-2012). Based on the lessons learnt in these years, in phase 3 (2013-2020), a significant number of architectural and regulatory changes took effect, improving the functioning of the system. The following fundamental changes have been applied: an EU-wide cap on allowances was introduced, as opposed to individual Member State caps. This EU-wide cap decreases by 1.74% annually, up to and beyond 2020, providing much greater regulatory predictability and stability; auctioning became the default system of allocation of emission allowances in phase 3, ceasing the previous practice of granting free allocation for electricity production. Revenues from these auctions are distributed to Member States (for more details see section 6.2 ). At least 50% of these revenues are to be used for climate action. As a transitional derogation, some Member States can still grant some of their auction volume as free allowances to their power sector (for more details see section 8.3 ); harmonised rules for transitional free allocation to industrial sectors were introduced, ensuring that all companies in the EU in one sector receive free allowances based on harmonised rules to address the risk of carbon leakage. The amount of free allocation for the installations is calculated based on emission performance benchmarks established prior to phase 3, production data and a carbon leakage factor measuring the exposure of the industrial sectors to international competition and carbon leakage risk (for more details see chapter 7 ); stricter rules on the type and quantity of international credits that are allowed for use in phase 3. These aspects are not analysed in the current impact assessment, as they have been covered by the impact assessment by the 2030 framework; replacement of national registries by a single Union registry; Emission allowances were classified as a financial instrument with the latest revision of the financial markets legislation in 2014, to be enforced in 2017. The revised EU ETS Directive can be considered as fairly recent legislation. However, it is already clear that the present institutional framework with auctioning and EU-wide harmonised free allocation rules constitutes a significant improvement and simplification compared to the previous trading periods that still had National Allocation Plans. Allowing for auctioning to fully function as the main driving principle of the ETS - as compared to having rules for free allocation to industry and to power sector in certain Member States - would bring further simplification to the system. Research concludes that in periods when the carbon price is likely to increase, other beneficial impacts of the EU ETS are visible through a broad range of mechanisms –incentives for cost-cutting and attention, experimentation, learning and investment in low-carbon solutions outside business-as-usual for companies . Studies show that due to the EU ETS a large proportion of firms pursued some measures to reduce GHG emissions and that CO2 has now become part of the investment appraisal in construction of power stations. However, at the start of phase 3 in 2013, the EU ETS was characterised by a large imbalance between supply and demand of allowances, resulting in a surplus of around 2 billion allowances expected to grow over the coming years to more than 2.6 billion allowances by 2020, and a correspondingly weak carbon price signal. As a short term measure to mitigate the effects of the surplus on the carbon market it was decided to postpone (“back-load”) the auctioning of 900 million allowances in the early years of phase 3. This was followed by a proposal for a long-term measure of establishing a Market Stability Reserve to make the auction supply of emission allowances more flexible and increase shock resilience. The reserve's architecture also captures changes in the demand of allowances due to renewables and improved energy efficiency and, if need be, adjusts the auction supply accordingly. Hence, the Market Stability Reserve will, once fully functional, also strengthen the coherence between the EU ETS and energy efficiency and renewables policies, which also lead to lowering of emissions. The operation of the Market Stability Reserve is open-ended and does not affect the total quantity of emission allowances (the cap). Therefore, the introduction of the Market Stability Reserve improves the functioning of the EU ETS, but does not change its nature as a market-based policy instrument. According to many energy-intensive industry stakeholders, the EU ETS corresponded well to the EU climate objectives, namely to cost-effectively reduce GHG emissions, in its initial architecture. However, they argue that with back-loading and the Market Stability Reserve, the EU ETS sectors will be facing a stricter GHG-target compared to EU climate policy objectives. In contrast, other business stakeholders, including from renewables sector, believe that the EU ETS is currently giving neither a long-term price signal that impacts investment decisions nor a short-term signal for operating decisions. Hence, they advocate in favour of structural measures, such as earlier implementation of the Market Stability Reserve and additional measures to address the surplus in order to 'fix' the EU ETS in the short and mid-term. Some stakeholders responded that the EU ETS does not correspond to the EU's climate policy objectives, because no country in the world has accepted the EU ETS concept. However, it should be stressed that there are actually 17 emission trading systems in operation across four continents, accounting for 40% of global GDP. The study to evaluate the existing ETS Directive is ongoing. It analyses the EU ETS in terms of relevance, effectiveness, efficiency, EU-added value and coherence with other Union policies. The preliminary findings indicate that despite criticism on some of its details, the EU ETS as a policy tool combining environmental regulation with a market instrument is working in practice and delivering on its targets. It is highly relevant for meeting the EU's climate targets, as it represents a cost-effective way for emission reductions. Emissions in the covered sectors have decreased steadily, and even though not all emission reductions can be attributed to the ETS alone, evidence has been found that the system does contribute effectively to emission reductions.

At the same time, the study observes that the EU ETS has found its way to the board rooms of companies and thus facilitates the internalisation of CO2 costs. The ETS contributes to investments decisions, even though with the current low carbon price, the CO2 costs are often included in the general envelope of energy costs. Smaller improvements in terms of GHG efficiency have become regular practice, but larger investments in GHG efficiency still remain the exception. Moreover, the EU ETS has a clear EU value added since different systems or other climate policies at Member State level would lead to a fragmented and costly situation for the regulated entities, as well as different ambition levels and carbon prices throughout the EU, leading also to unfeasibility and administrative complexity. The EU ETS with an EU-wide carbon price and its harmonised infrastructure takes advantages of the synergies that EU action can provide. In terms of coherence with EU policies, the study observes that renewables and energy efficiency policies both overlap with the EU ETS and may affect the cost of achieving the ETS' target, but both policies fully support the environmental effectiveness of the EU ETS as they do not affect the cap. In terms of coherence with international climate policy, the study also finds that the EU ETS performs well. It is widely used as a model for emissions trading systems around the world, benefitting from the EU's learning effects. Specific evaluation and lessons learnt on the different aspects of the EU ETS are presented in the corresponding chapters. A comprehensive evaluation summary report on individual aspects can be found in Annex 4 . 4.General problem definition The general problem analysis concerning EU climate policy targets for 2030 and the ETS has been done in the impact assessment on the 2030 climate and energy framework. In brief, despite the fact that the EU is on track to meet its short-term emission reduction target of -20% by 2020, to ensure the long-term goal of a low-carbon economy and emission reductions of 80 to 95% by 2050, an intermediate step needs to be made with the binding EU target of at least 40% domestic reduction by 2030 compared to 1990. This target should be delivered collectively by the EU in the most cost-effective manner possible, with the reductions in the ETS sectors amounting to 43% and 30% in the non-ETS sectors compared to 2005. Concerning the implementation of the emission reduction target, setting the cap at the emission level leading to a reduction of 43% would require a change in the linear reduction factor from 2021 onwards. The European Council conclusions already foresee certain methodological elements for the implementation of the EU's GHG emission reduction target, for which no options were hence developed. These include the change in the annual linear reduction factor reducing the EU ETS cap from 2021 onwards and the share of allowances to be auctioned. These elements are outlined in chapter 6 . Free allocation and carbon leakage, low-carbon funding mechanisms and further improvements to the current system need to be analysed and specific problem definitions and options are developed in the respective sections. Free allocation and carbon leakage While current policies to prevent carbon leakage such as the allocation of free allowances in the ETS have been successful, these do not automatically apply beyond 2020. In its strategic guidance the European Council has been clear that free allocation should not expire. Existing measures should continue after 2020 to prevent the risk of carbon leakage due to climate policy, as long as no comparable efforts are undertaken in other major economies, with the objective of providing appropriate levels of support for sectors at risk of losing international competitiveness. The problem to be addressed is how to adapt the respective ETS Directive provisions to make them suitable post-2020. Low-carbon funding mechanisms: Modernisation Fund and Innovation Fund The impact assessment of the 2030 climate and energy framework indicated that significant investments will be needed in the EU in the period through 2030 related to energy system modernisation and to reach the objectives of the 2030 climate and energy framework. In this context, the European Council has also given clear guidance that Member States with a GDP per capita below 60% of the EU average may opt to continue giving free allowances to modernise their energy sector up to 2030 (see section 8.3 ). In addition, a new reserve of 2% of the total quantity of allowances should be set aside to address particularly high additional investment needs in these Member States (so-called Modernisation Fund). The specific problems to be addressed with the setting up of the Modernisation Fund are analysed in section 8.2 The European Union will have to step up its efforts in research and innovation to support the post-2020 climate and energy framework. The European Council conclusions provide clear guidance that the existing NER 300 facility should be renewed, including for carbon capture and storage (CCS) and renewables, with the scope extended to low-carbon innovation in industrial sectors and the initial endowment increased to 400 million allowances (so-called Innovation Fund). The specific problems to be addressed with the setting up of the Innovation Fund are analysed in section 8.1 While the current architecture of the EU ETS is relatively recent, based on experience gathered, certain additional technical changes to the current set of rules in the ETS Directive should also be considered for the period post-2020. Since these changes are of more technical nature, options for these are developed in Annex 5 . This impact assessment explicitly does not address issues related to aviation emissions as covered under the ETS. As indicated in Regulation (EU) No 421/2014, following the 2016 ICAO Assembly, the Commission shall report to the European Parliament and to the Council on actions to implement an international agreement on a global market-based measure from 2020, that will reduce greenhouse gas emissions from aviation in a non-discriminatory manner. 5.Objectives 5.1.General policy objectives The general objective of climate action policy, and of EU ETS as its key instrument, is to contribute to achieving the EU climate goal of limiting global average temperature increase to not more than 2 degrees Celsius above pre-industrial level. EU action against climate change was translated into a GHG emission reduction target of 20% compared to 1990 as adopted in the 2020 Climate and Energy Package. For the period 2021-2030, the GHG emission reduction target of at least 40% domestic reductions compared to 1990 by 2030, ensures the EU is on the path of low-carbon transition to emission reductions of 80-95% by 2050. 5.2.Specific policy objective

The specific policy objective is to align the EU ETS architecture with the 2030 emission reduction target and refine and improve the EU ETS post-2020 framework. This needs to be achieved in the light of the lessons learnt in a context where: Fully comparable climate policy measures may not yet be undertaken by all other major economies; Reinforced research, development and innovation efforts should take place in order to maintain Europe's industrial base and competence, and support the 2030 climate and energy framework as well as the long-term goal of a low-carbon economy; Reinforced investment efforts should take place in order to modernise the energy system, and support the 2030 climate and energy framework; Experience gathered during the first years of phase 3 (from 2013) suggests that there is still potential to reinforce efficiency of the system. These specific objectives for the revision of the ETS Directive are further developed in the operational objectives of each of the chapters and sections. The operational objectives are tailored to the specifics of each cluster of issues, but also contribute to the achievement of the specific and general policy objectives of the ETS revision. 5.3.Consistency with other policies and objectives As outlined in the 2030 impact assessment, the policy aim of the 2030 framework was to set climate and energy targets up to 2030, which are consistent and mutually reinforcing. A well-functioning EU ETS is a key instrument to achieve the GHG emission reduction target and cornerstone of Europe's climate policy, consistent also with emission reduction efforts in non-ETS sectors. In line with the Energy Union strategy, by putting a price on carbon at EU level the EU ETS reinforces the functioning of the internal energy market and stimulates the uptake of renewables and other low-carbon and energy-efficient technologies. Through low carbon funding mechanisms, it financially supports power sector, industry and Member states in the low-carbon transition. In general, consistency of a revised EU ETS with any related policies is addressed in this impact assessment when discussing specific issues, such as for instance a forward-looking approach to CCS for the power and industrial sectors and the Innovation Fund. There is a need to continue driving progress towards a low-carbon economy, as this ensures competitive and affordable energy for all consumers, creates new opportunities for growth and jobs and provides greater security of energy supplies and reduced import dependence for the European Union as a whole. This ETS revision initiative is coherent with these objectives in the field of climate and energy policy. In terms of international competitiveness, previous Commission analyses of energy prices and costs have shown that there has been little impact on the EU's relative competitiveness which could be directly attributed to the ETS carbon price in the context of energy prices, although in the future the carbon price is assumed to be reflected in electricity retail prices. However, as long as there are no comparable efforts undertaken in other major economies, policy measures (including a system of free allocation of allowances) are appropriate after 2020 to address the competitiveness of Europe's energy-intensive industries. 6.Implementation of the EU's GHG emission reduction target 6.1.Linear reduction factor The outcome of the ETS in terms of emissions is determined by its cap on the total number of allowances. According to the ETS Directive and the present target of -21% by 2020 compared to 2005, the ETS cap for stationary installations declines linearly, by an annual amount equal to 1.74% of the average annual allocation during phase 2 (2008-2012), referred to as the linear reduction factor. Setting a cap at the 2030 emission level of -43% compared to 2005 requires a change in the linear reduction factor from 2021 onwards. This change is also needed in line with the EU's longer-term GHG emission reductions objectives. According to the analysis in the impact assessment accompanying the 2030 framework , a revised linear reduction factor of 2.2% from 2021 onwards is required to ensure coherence with a 2030 cap equal to 43% emission reductions. The change from 1.74% to 2.2% reduces the supply of allowances by around 556 million in the period 2021-2030. The European Parliament has called for legislation to be proposed at the earliest appropriate date with a view to adjusting the 1.74% annual linear reduction requirement so as to meet the requirements of the 2050 emission reduction target of 80 to 95% emission reductions. The European Council also explicitly endorsed the linear reduction factor of 2.2%. As the Commission proposal for the ETS revision has to achieve the objective of emission reductions in the ETS sectors of 43%, meeting the specific requirements of the European Council conclusions, no diverging policy options for the linear reduction factor post-2020 could be developed. The impact assessment for the 2030 framework provides a comprehensive analysis of the impacts of emission reductions in the ETS of 43% by 2030 compared to 2005, and hence of the required linear reduction factor of 2.2%. Although the Market Stability Reserve was not explicitly included in the modelling work for the impact assessment for the 2030 framework, its effects can be considered as reflected: in the analysis the emission reductions required to reach the 40% GHG target in 2030 and the 80% in 2050 and the respective carbon prices were determined so as to achieve these emission reductions cost-efficiently and assuming rational behaviour. In reality, however, businesses seem to base their abatement decisions on a shorter outlook for their industry than the 2030 reduction target would imply. This is likely to mean that the current large supply-demand imbalance in the ETS reduces the incentives for low-carbon investment and thereby negatively affects the cost-efficiency of the system and of the achievement of EU emission reduction goals. Hence, by simulating the achievement of the 40% target, the economic model actually acts as capturing in a simplified way the expected impact of the Market Stability Reserve of addressing the surplus, increasing the confidence of market participants, and in turn delivering a meaningful price on carbon emissions and ensuring the emissions evolve in line with the cap by stimulating cost-efficient emission reductions. Concerning changes in the underlying assumptions in the work for the impact assessment for the 2030 framework, notably the recently lower oil prices, it can be concluded that this price drop is not expected to lead to any major changes in the modelling results, even if it is sustained. It has had no major impact on the carbon price because of the reduced supply due to back-loading and the increasing expectation of the Market Stability Reserve being established. According to the International Energy Agency, the recent developments have made non-OPEC production more responsive to price swings than previously, which would likely set the stage for a relatively swift recovery. In addition, as relatively little oil is used as a fuel by installations in the ETS, the direct impact of changes in the oil price to the carbon price between 2021 and 2030 are expected to be limited, and a separate sensitivity analysis would not affect the outcomes for this impact assessment. 6.2.Auction share

In phase 2 (2008-2012), the overall cap that limits the amount of emissions and thereby sets the ambition level of the ETS was equal to the sum of national caps determined by the Member States in their National Allocation Plans (NAPs). These national plans determined different allocations at sector and installation level among the Member States. Allocating allowances on the basis of historical emissions (grandfathering) was the general rule and the auctioning of allowances the exception, leading to non-optimal investment and undesired distributional effects. As part of the EU's climate and energy package for 2020, it was thus agreed that as of 2013 a single EU-wide cap would be set and that auctioning would become the rule with transitional declining free allocation of allowances. For phase 3, the EU-wide total cap amounted to 2.084 billion allowances in 2013 and this annually decreases by the linear reduction factor of 1.74%. The total cap is divided into a part that is made available to installations for free and a part that is auctioned. While the rule is that everything that is not allocated for free is auctioned and the volume of auctioned allowances increases over time, the maximum amount for free allocation is currently a fixed share of the total cap. Setting a maximum to the free allocation constitutes a backstop to ensure long-term environmental integrity of the system, effectively implementing the polluter-pays-principle, while recognising the need for maintaining the international competitiveness of industrial sectors exposed to the risk of carbon leakage. In 2013, the maximum amount available for free allocation was around 809 million allowances. The determination of the maximum amount for free allocation has been a lengthy process (involving the Commission, Member States' authorities and companies included in the ETS), in particular due to the amount and nature of the necessary data. The wider public generally perceived the procedures as complex and insufficiently transparent. Over the period 2013 to 2020, free allocation is provided on the basis of EU-wide harmonised rules and product benchmarks. Because the aggregate amount of gross free allocation calculated by Member States on the basis of these rules exceeded the maximum amount of free allocation available to industry, the allocation for all installations over the period up to 2020 is reduced by the same proportion through the application of the cross-sectoral correction factor (Article 10a(5) of the ETS Directive) (for more details, see section 7.1 ). As an exception to the general rule that electricity generators should not receive any free allocation, additional allocation is provided in case these installations produce heat. Since this allocation benefits the power generation sector, this free allocation is not part of the maximum amount for free allocation to industry, but of the quantity of allowances auctioned by Member States which is reduced accordingly. Additional free allocation is made available from the new entrants' reserve (NER) for newly built plants or in case installations extend their capacity by more than 10%. The new entrants' reserve is constituted from 5% of the total cap, amounting to a total of around 780 million allowances for the period 2013 to 2020. 300 million of the allowances in the new entrants' reserve have, however, been earmarked and used to support carbon capture and storage (CCS) or innovative renewable energy projects under the NER300 facility. Since, according to the ETS Directive, everything that is not allocated for free is auctioned, some allowances are foreseen to be added to the auction volume at the end of phase 3 in 2020. This concerns in particular, allowances that remain unused in the new entrants' reserve and allowances that are not handed out to installations because they stop operations (closures) or reduce their production (partial cessations) will be auctioned at the end of the period. In the context of the legislative discussions on the Market Stability Reserve, the co-legislators decided that these allowances (so called "unallocated allowances") should be transferred into the Market Stability Reserve in 2020 to avoid that auctioning them would create another supply peak adversely affecting the market balance in 2020. The ETS revision should also analyse whether these unallocated allowances can be used inter alia for innovation and to address the risk of carbon leakage. This analysis is provided in Annex 15 . Certain Member States have the option to provide free allocation to the power sector in return for investments modernising power generation. This option constitutes a derogation from the general principle that no free allowances are available to installations generating electricity. However, considering the investment needs in the power sector in certain Member States, the ETS Directive foresees this derogation. While this amount is qualified as free allocation, the allowances given to the power companies are provided from the Member States' auction volumes if, and to the extent, Member States make use of this option. If not used to the full extent, the allowances are auctioned on behalf of the Member State concerned. For more details, see section 8.3 . Figure 2 illustrates the auction share over phase 3 (2013-2020). It translates the starting point of the ETS Directive, according to which, in principle, all allowances should be auctioned, but free allocation is granted transitionally. Over phase 3, 39% of the total quantity of allowances available will be allocated for free to industry and electricity-generating installations for the heat they produce. This share of free allocation will be further increased due to allocations to new entrants until 2020. Today, it is not yet known how much of the NER will be used in the coming years. However, up until January 2015, 247 installations have received allocation from the NER, which will amount to 69.6 million allowances to be allocated from the NER by 2020, representing 14% of the total of 480.2 million allowances. Based on these trends, it is thus expected that no more than 2% of the cap may additionally be allocated for free from the NER. In total, the free allocation over phase 3 is thus expected to be around 41% of the total amount. To the same extent that the allocations from the NER are not yet known today, it will also only be known at the end of the phase how many installations that currently receive an allocation will stop operation or reduce their capacity or production. Where installations no longer receive free allowances, the legal default is that these allowances will be auctioned on behalf of the Member States. In 2013 and 2014, the allocations to around 1100 installations were revised downwards by 85.7 million allowances. In general, the uptake from the NER and the return from closures and reductions are expected to be within the same order of magnitude , so that another 2% of total allowances are expected to remain within the auction share. Another some 2% of the total cap is used to fund the NER300 programme for CCS and innovative renewables projects. As explained above, free allowances provided to the power sector in return for investments modernising power generation are deducted from or added to the auction share of the relevant Member State and, as such, remain part of the auctioned volumes even though they are given for free to the energy sector. Taking into account these different elements, the average auction share over phase 3 amounts to 57%. For phase 4, these elements should not fundamentally change. As was the case for the NER300 programme, 400 million allowances should be made available for innovation support. Free allocation provided to the power sector in return for investments modernising power generation should continue and allowances used for this purpose would remain part of the auction volumes which individual Member States can decide to allocate for free in return for investments. In line with the starting point in the ETS Directive, that in principle all allowances should be auctioned, the allowances that according to the European Council should be auctioned for a new fund for the modernisation of the energy systems in certain low-income Member States are part of the auction share in phase 4 . The "backloading", i.e. postponing auction volumes into the latter part of phase 3, and the functioning of the Market Stability Reserve to address the structural surplus of allowances in the EU carbon market both relate to the amount of allowances auctioned by Member States. For example, in case of the Market Stability Reserve, auction volumes will be reduced when allowances are transferred into the reserve and increased at the time allowances are released from the reserve. Both these mechanisms have a neutral effect on the overall auction share. The European Council agreed that the share of allowances to be auctioned under the EU ETS post-2020 should not be reduced.This principle of not reducing the auction share was an important and integral part of the agreement to which Member States attach particular importance. Any change to the auction share would have distributional implications and adversely affect the balance of the European Council agreement, and have implications on the low-carbon funding mechanisms, in particular the free allocation to power, and on the re-distribution for solidarity purposes of allowances to be auctioned. The system post-2020 builds on phase 3. The shares of auctioned allowances between Member States are already set in the Directive and, to meet the specific requirement of the European Council conclusions, it is appropriate to express the auction share as a percentage figure in the legislation. The environmental integrity of the system guaranteed by the cap would remain entirely preserved, while providing a percentage figure for the auction share in the legislation would have considerable positive impacts on transparency, predictability and the functioning of the carbon market. It would enhance planning certainty of investment decisions and transparency for market participants inside and outside the system, as well as for the wider public. It would render the system simpler, more transparent, more easily understandable and thus positively impact the confidence in the EU ETS.

7.Free allocation and addressing the risk of carbon leakage The main policy tool to address the risk of carbon leakage is the provision of free allowances to industry. Free allowances lower the effective carbon cost for industry as otherwise allowances would have to be purchased on the carbon market. The total amount of allowances available to be handed out for free to industry for the period under assessment (2021 to 2030) is in the order of 6.3 billion allowances. The value of these allowances depends on the market price at the time and could be in the order of €160 billion. If not handed out for free to industry, these allowances could be auctioned by Member States and provide them with revenues. Free allowances are thus a public resource. This section of the impact assessment covers different options on how to distribute this public resource in a way that gives optimal impact in terms of effectively addressing the potential risk of carbon leakage. The EU ETS is in principle a quite simple instrument. The quantity of allowances is determined by policymakers, and any installation under the system has to cover the tonnes of CO2 it has emitted with allowances bought on the market. Incentives to reduce emissions and improve technology are driven by the fact that each tonne of CO2 to be covered by one allowance has a price (carbon price). Since buying allowances represents a cost (carbon cost), there have been concerns about the competitiveness impacts on the industry covered by the ETS, as long as competitors in other countries are not covered by a similar system or a carbon tax. There have also been environmental concerns linked to this: if European companies move production to outside of the EU, this could lead to increased emissions globally (in particular if the installations outside of the EU are more carbon intensive, which is often the case). This problem is the so called carbon leakage. If most major economies in the world had set a price on carbon and if these carbon prices were similar across the world, carbon costs would not be a problem for competitiveness since the impact would be the same for all companies. Steady progress is being made towards having an international carbon price which is one of the long-term goals of international climate negotiations. Until this happens, the EU ETS foresees certain measures to reduce the risk of carbon leakage. The measures consist of providing free allowances to industry, thereby reducing the cost of buying allowances (e.g. if an installation receives free allowances covering 90% of its emissions, it has to buy the remaining 10%). Nevertheless, it was deemed important that companies should still have an economic incentive to reduce their emissions and this was ensured when designing the free allocation system. To efficiently create such a system, the right balance should be found between addressing the problem of carbon leakage and avoiding compensating beyond the actual needs for allowances (over-compensating). The risk of carbon leakage differs across sectors as carbon costs are more or less important in relation to total costs in a given sector. The sectors which are deemed to be exposed to a significant risk of carbon leakage and which therefore receive more free allowances are included in the so-called "carbon leakage list" which the Commission is mandated to draw up every five years. At present, the sectors on the list represent more than 97% of industrial emissions under the ETS.

7.1.Problem definition Free allocation of allowances to industry is designed to address the potential risk of carbon leakage (increase in greenhouse gas emissions in third countries where industry is not subject to comparable carbon constraints) until an international agreement is concluded or comparable climate policy measures are undertaken by other major economies. This gives the justification to deviate from the general principles of EU environmental policy, i.e. the "polluter pays principle" and "internalisation of external cost" principle, meaning that the costs of measures to deal with pollution should be borne by the polluter and that all costs associated with the protection of the environment should be included in the companies' production costs. Since carbon leakage could lead to an increase in worldwide emissions, thereby undermining the EU climate policy objective, free allocation was chosen as a transitional measure to address this risk. In the first two phases of the ETS (2005-2007 and 2008-2012), free allocation was based on historic emissions and decided nationally. Basing the allocation on historic emissions implied that installations that emitted relatively more received more free allowances, compared to the more efficient ones. The revision of the ETS Directive ensured that in the third phase (2013-2020), the approach for allocation of allowances was harmonised across the EU to ensure a level-playing field across the internal market and to address concerns about potential market distortion. From 2013, the amount of free allowances that each installation receives is determined mainly by performance benchmarks instead of historic emissions. Generally speaking, benchmarks represent a value in CO2 emissions per tonne of product, reflecting the greenhouse gas emission performance of the best installations in the EU producing a specific product. Allocation to each industrial installation is calculated by multiplying the benchmark for the product it makes with its production data (for more details see Box 4 ).

For allocation purposes, each industrial sector is classified according to its exposure to the risk of carbon leakage that is assessed combining two parameters: trade intensity (imports and exports) and carbon intensity (CO2 emissions per tonne of product). Those sectors with a high combination of these two parameters are in general deemed as more impacted by the EU ETS, and therefore get a higher share of free allowances. They are put on the carbon leakage list and as such receive 100% of the amount of free allocation determined according to the benchmark-based methodology. The percentage of free allocation for sectors not on the carbon leakage list decreases in a linear manner from 80% in 2013 to 30% in 2020. In line with the EU's climate policy to reduce GHG emissions, the ETS cap (maximum amount of allowances available) decreases gradually over time. The total amount of allowances available for industry is a share of the total cap and therefore decreases correspondingly. For more details see chapter 6 . According to the current legal provisions, higher free allocation for sectors deemed to be exposed to the risk of carbon leakage ends in 2020. Thereafter free allocation for all industrial sectors would correspond to 30% of the amount determined based on the benchmarks. A further element in reducing costs for industries affected by the ETS is that installations in certain sectors can be compensated by Member States for higher electricity prices due to the ETS. These so called "indirect costs" are due to the power sector passing through the costs of the allowances (needed to cover their emissions) to their customers. This compensation is provided through state aid schemes determined at national level under the relevant State Aid Guidelines. The ETS is a flexible tool as it allows companies to choose the most cost-effective options to contribute to the overall emission reduction target, either by purchasing allowances on the market, or investing in less-carbon intensive technologies. A crucial input to the work on revising the EU ETS came from the European Council, which, in its Conclusions of October 2014 gave strategic guidance on the 2030 climate and energy framework in general, but also on the design of the ETS post-2020. As long as no comparable efforts are undertaken by other international partners, the European Council underlined the need to continue free allocation to industry after 2020. This is meant to ensure appropriate level of support for sectors at risk of losing international competitiveness due to the carbon costs when operating in the EU. It can be noted that industry stakeholders also hold the view that free allocation is an adequate instrument. The European Council also stated that the most efficient installations in sectors should face no undue carbon costs, that there should be no windfall profits due to free allocation, and that existing measures to compensate for indirect emissions should remain also in phase 4. Considering that the amount of free allowances is limited and will continue to decline in line with the necessary emission reductions, the future system to address the risk of carbon leakage needs to be better targeted. The total amount of allowances available for free allocation in phase 3 (2013-2020) is some 6.6 billion allowances, amounting to some € 50 billion (based on current carbon price), and the total amount available for free allocation in phase 4 (2021-30) is some 6.3 billion allowances, amounting to as much as €160 billion. The future system also needs to ensure that incentives for industry to innovate will be fully preserved and windfall profits (i.e. situation when industry receive allowances to cover carbon costs, even though they are able to pass on these costs to their consumers) avoided, without reducing the share of allowances to be auctioned. The problem to be addressed in this section concerns the future rules for free allocation to industry, and notably based on the principles defined by the European Council to establish how to optimally allocate the roughly 6.3 billion free allowances available. 7.1.1.Underlying drivers of the problem The starting point for the analysis is the existing system. Some general observations can be made. The harmonised rules applicable as of phase 3 represent an improvement compared to the previous situation. The harmonised approach is functioning well (an OECD study finds that the EU ETS has stimulated substantial emissions abatement of up to 28% compared to business-as-usual, while, at the same time, not causing disadvantages for the competitive position of the EU ETS firms) and the risk of carbon leakage seems to be properly addressed, while emission reduction incentives are also preserved. A study concluded in 2013 that no conclusive evidence of carbon leakage occurrence can be found. However, when determining the amount of free allowances to be handed out each year for phase 3 (2013-2020) the amount calculated based on the agreed rules exceeded the amount available. Already in 2013, the demand for allowances ("gross free allocation", i.e. the amount of free allocation determined by multiplying the benchmark and production before the application of the carbon leakage and the possible correction factor) exceeded the amount available by about 6%. This triggered, as foreseen in the ETS Directive, the application of a uniform cross-sectoral correction factor. Since the amount of allowances available decreases each year, and since allocation for phase 3 was determined for the entire period 2013-20, the cross-sectoral correction factor increases each year to 2020, when it will be 18%. While the cross-sectoral correction factor is effective in ensuring that free allocation stays within the overall allocation limit and the amount of allowances available for auctioning and delivering fiscal revenue to Member States remains predictable, it does not differentiate among sectors: i.e. does not account for differences in terms of ability to decarbonise over time, exposure to the risk of carbon leakage, the pass through of costs in product prices, etc. Given the shrinking amount of allowances it is self-evident that unchanged carbon leakage rules would result in an increasing correction factor beyond 2020 reaching potentially a level of 35 % in 2030. It should be noted that the cross-sectoral correction factor does not determine which sectors receive a certain level of free allocation: its purpose is only to ensure that the overall limit is respected and Member States auctioning revenues guaranteed. The correction factor is subject to strong criticism by industry stakeholders, which constitute the majority of the stakeholders replying to the consultation, mainly because it applies equally to all sectors and therefore the system does not guarantee that the most efficient installations in each sector do not face undue carbon costs. It has also has been criticised for having been determined too shortly before the start of phase 3. Since many industry stakeholders considered that the cross-sectoral correction factor represents high unpredictability in the system, one element of this impact assessment is to analyse different ways that the current allocation system can be improved to ensure a fair and efficient allocation of allowances, while avoiding or minimising the likelihood that a cross-sectoral correction factor would apply in phase 4.

For each installation in the EU ETS the amount of free allocation is calculated based on a formula where its production quantity (in tonnes of product) is multiplied with the benchmark value for that particular product (measured in emissions per tonne of product). A producer of lime thus multiplies its production of lime, e.g. 10000 tonnes with the benchmark for lime (0.954 tonnes of CO2 per tonne lime). This provides an amount, in this example, 9540 allowances for the installation. The installation is in principle eligible to receive this amount each year until from 2013 to 2020. The legislators have also decided that 100% of this amount should be provided only to sectors that were deemed to be at a significant risk of carbon leakage and are on the carbon leakage list (See Box 3 : Carbon leakage ). Sectors not on this list get a gradual reduction of the amount of free allocation. After checking whether the sector in which the installation operates is on the carbon leakage list or not, the allocation per installation is adjusted if needed, and Member States report requested allocation amounts to the Commission. The Commission adds up the requested allocations for all installations in the EU. If this amount exceeds the amount pre-determined as available for free allocation, a reduction is made for all – i.e. the allocation calculated per installation is reduced by the same percentage for all installations. This is the cross-sectoral correction factor which had to be applied as from 2013. It has reduced allocation by ca 6% in 2013 and will reach 18% in 2020 as it increases each year as the amount of allowances available to be handed out for free decreases each year. In brief, the formula to determine the amount of free allocation is: For the analysis, it is necessary to look at the different elements that determine free allocation. These are: the updating of the benchmark values; the classification of sectors, based on market situation including the possibility to pass through carbon costs into product prices; the production data used. On these three elements in the allocation system, the following can be noted:

1) The starting point for determining the benchmark values in phase 3, in accordance with the ETS Directive, was the average emission performance of the 10% most efficient installations in a sector in the years 2007-08. Since the benchmark values were set based on data from 2007-08, any technological progress since then is not taken into account. The ambition level of the benchmark values therefore erodes over time and in 2030 benchmarks would reflect the state of technology of more than two decades ago. 2) Currently based on criteria defined in the ETS Directive, almost all industrial sectors, i.e. those responsible for more than 97% of industrial emissions under the ETS are on the 'carbon leakage list'. The system is thus not targeted. 3) The third element in the allocation formula is the production data used to multiply the benchmark values. According to the current implementing rules, operators were allowed to choose between two historic production baseline periods (either 2005 – 2008 or 2009 – 2010). This led to a significantly higher demand for free allocation than if the same baseline period had been used for all. Furthermore, in general these years had particularly high production levels for most installations, but due to the economic crisis and slow recovery, actual production levels in 2013 and 2014 were significantly lower in certain sectors compared to the baseline production. This latter fact, however, is not always reflected in lower amounts of free allocation, resulting in a situation where some installations with low production levels receive allocation that exceeds the amount needed to cover their emissions. All the above features must thus be assessed in order to improve the existing system with a view to ensuring the optimal allocation of allowances and targeting the measures against carbon leakage to those sectors most exposed. A more general goal is to ensure predictability for companies covered by the system (which is a key request from a considerable number of industry stakeholders). 4) A further element important to consider is how new and/or growing installations i.e. "new entrants" will be treated in the system post-2020. The current system provides specific rules and a specific amount of allowances is set aside (new entrants' reserve) for this purpose. 5) Due to requests from the electricity intensive sectors, which argue that the current system of addressing indirect carbon costs passed through in electricity prices via state aid causes distortions in the internal market, the issue of compensation for these costs will also be analysed. Since the correction factor is a less efficient way of directing free allowances to those sectors most exposed to the risk of carbon leakage, an objective of this impact assessment is to analyse how a more focused system, resulting in a reduced likelihood of triggering a significant correction factor post-2020, should be designed. 7.2.Operational policy objectives As mentioned above, the overall objective of the free allocation system is to address the risk of carbon leakage by providing appropriate levels of support to sectors at risk of losing international competitiveness, as long as no comparable efforts are undertaken in other major economies. In line with the European Council Conclusions of October 2014, this general objective is operationalized in the following operational objectives: Reflect technological progress in industry sectors; Fully preserve incentives for industry to innovate; Most efficient installations do not face undue carbon costs leading to carbon leakage; Better alignment with production levels; Avoid windfall profits; No increased administrative complexity. The options for each element to be assessed will be screened preliminarily for the effectiveness, efficiency and feasibility in achieving the operational objectives. Not increasing administrative complexity reflects the efficiency and feasibility criteria, while all the other operational objectives relate to the effectiveness. Some operational objectives are particularly relevant for some aspects of the free allocation rules, but not for others, so when screening and comparing options, preference will be given to the most relevant operational objective(s). The degree of fulfilling an objective is indicated with pluses and minuses. Their meanings are: "--" much worse than baseline, "-" worse than baseline, 0 equal to baseline, "+" better than baseline, "++" much better than baseline. As mentioned above, the likelihood of triggering a correction factor post-2020 will be analysed for the option packages as a whole to assess the cumulative impacts of the elements composing them. It should be underlined that the development and assessment of options for the future system of free allocation and measures addressing the risk of carbon leakage are based on the assumption that no comparable climate policy measures are undertaken by other major economies.

However, there are a number of countries and regions that have or are intending to develop different emission trading systems (e.g. China, South Korea, California, Switzerland, some regions in Canada). Their approaches, design features and levels of ambition are heterogeneous, making it difficult to quantify the impacts. The policy options therefore assume that third countries fulfil Copenhagen/Cancun pledges, but there is no assumption on any further significant climate action in third countries. Should an international climate agreement be concluded, it will be necessary to first analyse the concrete measures taken as a consequence and to determine their implications for the EU climate policy in general, and impact on the competitiveness of EU industry in particular, before any revision of the existing/proposed rules. 7.3.Policy options for free allocation and other carbon leakage measures As explained above, the carbon leakage and free allocation system contains a number of elements. The level of free allocation per installation is the mathematical product of a benchmark value, a production level value, a carbon leakage factor and, if needed, a correction factor (see Box 4 ). The guiding principles adopted by the European Council address these elements and also compensation for indirect costs. Depending on the policy choices made, there will be differences in terms of the degree of realising individual operational objectives. The choices may also have different distributional effects between industrial sectors. This section summarises the underlying rationale and range of policy options which have been used to design option packages. A more detailed discussion of the options can be found in Annex 5 . 7.3.1.Benchmark values The first element in the allocation formula is the benchmark value. It determines tonnes of carbon emissions per tonne of product and is independent of the mode of production in terms of technology, fuel, the size of an installation, or its geographical location. The currently used benchmark values were determined based on performance data of the most carbon efficient installations throughout the EU in each sector based on real-life historic industrial production in the years 2007 and 2008. The European Council has requested a regular review of the benchmark values in order to reflect technological progress. The benchmark values should thus be lowered in phase 4, leading ceteris paribus to reduced allocation. However, this reduced allocation reflects lower emissions thanks to the ongoing technological progress and does therefore not as such make the allocation system less generous. There are various options how and how frequently to update the benchmark values. The full range of these options is presented in Annex 5.1 , and out of the screened options two are used in the option packages. The baseline option is to update all benchmark values based on new data reported by operators of ETS installations on mandatory basis and to keep the benchmarks constant over phase 4 (2021-2030). This baseline option is also used i