The IFIEC method for the allocation of CO2 allowances in the EU emissions trading scheme : a review applied to the electricity sector

IFIEC Europe has developed an alternative allocation methodology for EU-ETS which aims at achieving the ETS climate targets while minimizing the adverse effects on EU industry’s competitive position. The current study reviews an application of this method to the EU-ETS electricity sector. We show that the IFIEC method limits the CO2 costs of electricity production to the actual costs of achieving a clean production level, as determined by a benchmark. This is different from the methods of auctioning and grandfathering in which the full costs (either real costs or so-called opportunity costs) of all CO2 emissions are passed through into the electricity price. As a result, application of the IFIEC method reduces electricity costs for end-users in the order of, on average, 10-30% of industry’s electricity bills and 5-20% of household bills. Within EU-ETS, the IFIEC method provides the same environmental incentives as auctioning and better incentives than the current system of grandfathering, provided that a single (not fuel-specific) benchmark is used for all electricity producers under EU-ETS. The lower electricity prices that result from the IFIEC approach, however, reduce the incentive for some low-carbon measures to be implemented outside EU-ETS.