This study, conducted in collaboration with Entec UK Ltd. for the UK Department for Trade and Industry, explores in detail the possibility of using “benchmarking” as a way to allocate emissions allowances to UK installations during Phase Two of the EU Emissions Trading Scheme (ETS). Benchmarking can be used to compare the emissions performance of each installation to the performance of its relevant peers and is often considered in contrast to allocation approaches based only on historical emissions levels.

The study’s analysis focused on the evaluation of different benchmarking approaches against various criteria, including the ability to accurately reflect site need for allowances, administrative implications, and the incentive effects generated. The authors conclude that benchmarked allocations to incumbent sites appear to be feasible in a number of UK industry sectors, but note that it is important to compare benchmarking to other allocation approaches and to consider it in the context of the overall approach to allocation for all sectors. They emphasize that careful consideration needs to be given to the ways that different benchmarking approaches may interact with the incentives for low-cost emissions reductions created by the scheme. The study discusses the implications of the “updating” features, such as new entrant reserves, which are expected to persist within the EU ETS for some time.