In this report for the European Commission, a NERA team reviews major design options related to the allocation of emissions allowances under the European Union Emissions Trading Scheme (EU ETS). The report was developed to assist European policy-makers in evaluating options for the EU ETS after 2012, during the third and subsequent phases of the Scheme. Drawing on the authors’ experience with the design and evaluation of emissions trading programs on behalf of governments and private sector clients in Europe, the US, and elsewhere, the report provides a comprehensive discussion of a wide range of issues related to allowance allocation. The authors examine cross-cutting topics such as “competitiveness,” and explore design decisions related to cap-setting, auctioning, emissions-based grandfathering of allowances, benchmarked allowance allocation, and new entrant and closure rules. The report evaluates design options against key criteria, including environmental effectiveness, economic efficiency, and distributional implications. The report, which was completed in October 2007, served as a key input into the European Commission's recent proposals to revise the EU ETS Directive after 2012. It will be of interest to policy-makers and industries affected by emissions trading programs around the world.