On April 27, 2011, the European Commission (the EU's executive body) announced updates to the EU's Emissions Trading System. Previously, the system was based on fixed national emissions caps, and the vast majority of installations, including electricity generators, received free emissions allowances pegged to their level of historical emissions. This system, however, had the effect of rewarding installations that historically emitted more GHGs with a greater number of free allowances.
The new system establishes a European Union-wide cap that will decrease annually. Free allowances will no longer be awarded to electric utilities, which will have to purchase their allowances at auction. Other classes of emitters will receive free allowances, each of which represents the right to emit one metric ton of carbon-dioxide equivalent, based upon benchmarks. Approximately 80% of the free allowances will be tied to one of 52 product benchmarks; each benchmark represents the average GHG emissions per ton of output at the top 10% most GHG-efficient of European installations that produce that product. Installations that produce products not covered by a product benchmark may receive allowances related to a heat or fuel benchmark for carbon dioxide ("CO2") emissions per terajoule of energy consumed at the installation.
In 2013, the first year of the new program, a facility will receive free allowances for 80% of the emissions that would result if it emitted at the benchmark rate while maintaining its historic production level. The percentage of free allowances will decline annually until it reaches 30% of benchmark-rate emissions in 2020; the EU hopes to end free allowances by 2027. The new system will, however, award free allowances for 100% of the benchmark-rate emissions from installations in sectors that are exposed to significant risk of "carbon leakage," i.e., an increase in production and, consequently, GHG emissions at installations outside the EU that might result if EU installations are burdened by the expense of procuring allowances or reducing emissions.
More information is available at: http://ec.europa.eu/clima/policies/ets/benchmarking_en.htm