News on free allocation of allowances 2021-2025

This year saw the start of Phase IV of the implementation of the Emissions Trading Scheme (period 2021-2030, in turn divided into allocation sub-periods 2021-2025 and 2026-2030).

The main new features associated with the free allocation regulations include a significant reduction in the free allocation and some changes in its calculation methodology, streamlining its calculation to adapt it to changes in the level of activity:

More stringent benchmarks: for this new period, the benchmarks to be used for the calculation of the allocation have been updated and reduced to a maximum of 24% compared to the values of Phase III. Also, the list of sectors and sub-sectors considered to be at risk of Carbon Leakage has been revised.

Activity Level Report (ALR): to analyse whether the annual free allocation of emission allowances should be adjusted, operators must submit an activity level report to the Spanish Climate Change Office by 28 February of each year. This report must be verified and must include information on each of the sub-installations into which their installation is divided or provide information on new sub-installations.

Monitoring methodology plan (PMS): this will serve as the basis for monitoring annual activity levels, and its contents should be modified when any of the situations foreseen in the regulations arise and should be notified to the competent authority. It shall contain a description of the installation and its sub-installations, the production processes and a detailed description of the monitoring methodologies and data sources.

Ex-post adjustments of the free allocation: the average activity level (AAL) of the sub-installation for the current year will be calculated from the average of its activity levels of the previous two years. This value shall be compared with the historical activity level (HAL), which shall correspond to the average activity level of the years 2014-2018. Where the variation between these values is greater than ±15 %, a proportional adjustment shall be made to the free allocation. Where an adjustment has already been made, subsequent adjustments may only be made where the variations exceed the nearest 5 % above the 15 % variation that caused the previous adjustment.

Factors applicable to reduce the free allocation: for sectors not exposed to carbon leakage, this factor shall have a value of 0.3 until 2026. Thereafter, it will be reduced until 2030, after which sectors not exposed to carbon leakage will no longer receive free allocation. Likewise, for sectors exposed to leakage, this factor will have a value of 1, receiving 100% of the corresponding free allocation throughout Phase IV.

Thus, this new regulation brings with it new obligations. All installations that have received free allocation must monitor the annual activity levels of the sub-installations into which the installation is divided. This information on activity levels will be used to make, where appropriate, the corresponding adjustments to the free allocation, hence the importance of the information reported being correct.

For further information, please do not hesitate to contact:

Iria Flavia Peñalva – Partner. Project Manager – EU ETS

Source: Global Factor