EU ETS Phase 2: Allocation Methodology

Allocation methodology is the way in which the overall number of allowances to be allocated in the UK (the overall cap) is distributed to individual installations.

Phase II allocation methodology approach

The Government intends to use a two-stage process for distributing allowances in Phase II.  Once the UK's Phase II overall cap is decided on, it will be first split amongst the EU ETS sectors (in the form of sector caps).  A proportion of the emission projections used to calculate the sector caps relates to emissions of projected new entrants and a number of allowances will be deducted from each sector cap to fund the Phase II New Entrant Reserve.  The remaining allowances for each sector will then be shared between the installations in that sector.  The report on sector classification can be found below:

How allowances will be calculated for individual installations

Each installation will receive a percentage share of the sector's available allowances according to its share of the total relevant emissions in its sector. 

For most installations, this share will be determined according to their historic emissions over a set baseline period (an average of 2000 - 2003, dropping the lowest year's emissions).  However, some installations were allocated according to a benchmark in Phase I because they either did not have historic data or were new entrants (and therefore not operating before 2003).  The allocation methodology for those installations that have useable 2003 emissions data will be based on 2003 and 2004 emissions data.  For the others, the amounts prescribed by the benchmark will be treated as if they represented average historic emissions. 

The Government has decided that installations in the Large Electricity Producers sector (formerly the Electricity Supply Industry) should be allocated using benchmarking.  Details of the benchmark for the Large Electricity Producers for Phase II can be found below:

Further to comments received in response to the consultation on the draft National Allocation Plan informal discussions were held  with industry some possible adjustments to the proposed approach to the allocation of allowances to the Large Electricity Producers, on 22 June.  These are set out in the presentation blow:

Further information on allocation methodology

On 6 March 2006 operators were asked for data for the development of the UK's Phase II National Allocation Plan.  More information about the data trawl can be found on the Defra: EU ETS - UK National Allocation Plan (Phase 2) webpage. 

Following publication of the Government's consultation on Phase II issues in July 2005, meetings were held with sectors to discuss a supplementary paper on allocation methodology. 

The report by consultants on the feasibility of developing benchmarks for use as an allocation methodology for incumbents can be found below:

Allocation Methodology rules - guidance and appeals against decisions

Detailed guidance on the Phase II allocation methodology is available below:

This guidance also provides details on when and how operators can apply for Allocation Methodology rules to tackle certain anomalies in emissions during the historic baseline period.  An addendum to the guidance was published on 8 May 2006 to explain the allocation methodology relating to the creation of a CHP sector for Phase II in more detail and is available below:

The Government has notified operators of its decision on applications for Allocation Methodology rules. Operators have the right to appeal against the Government's decision within 15 working days of notification. Guidance on the appeals process and an appeals template can be found below:

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