Fears that tighter controls on CO2 emissions in Europe will drive factories to relocate abroad has led the EU to grant sweeping exemptions for industries deemed to be at risk.
Existing proposals for the permits to be allocated according to carbon intensity "benchmarks" were approved with only slight modifications by the European Commission on 15 December.
They will now be passed on to the European Parliament and EU member states for a three-month scrutiny period.
Barring rejection of the decision, the permits will then be issued under the EU’s Emissions Trading Scheme (ETS), the world’s largest carbon market. This will be its third phase. Phase I ran from 2005-2007 and Phase II from 2008-2012.
During discussions, some technical changes were made to the permit proposals. Product benchmarks were dropped for iron ore pellets while those for nitric acid, ammonia, carbon black, Electric Arc Furnace (EAF) carbon steel and EAF high alloy steel were revised.
Amendments were also made to a provision addressing the use of "clinker" lumps in cement, and a special provision on district heating delivered to private households was included, to the benefit of the "new" member states.
Maria Kokkonen, spokesperson for Climate Action Commissioner Connie Hedegaard, told EurActiv that the benchmarks were a means of setting an emissions cap and a price to carbon.
"They are an incentive to installations to cut emissions and improve energy-efficiency," she said.
The benchmarks chosen reflect the average greenhouse gas performance of the 10 most efficient installations in each sector, as calculated against the base year of 2007-2008. From 2013 until 2020, some 60% of permits will be auctioned but those for the most "climate-friendly" installations will be freely allocated for a transitional period.
The actual number of free allowances that each industrial allocation receives will be calculated by EU member states themselves in 2011.
Previous carbon permit issues were criticised for being free, over-allocated, and containing carry-over provisions to the next market phase. "That was certainly a lesson," Kokkonen said "because we saw that there was no incentive to cut emissions if you could carry over."
Under the new scheme, the auctioned permits will be time-limited and (mostly) sold at costs set on a scale taking into account an industry’s carbon-intensity, environmental impact and the potential for "carbon leakage" – meaning relocating across national borders to territories without carbon prohibitions. Over time, this auction process will become the ETS’s default operating system.
Thus the benchmark for hot metal has been set at 1.328 permits per ton of product (lower than the price sought by the steel lobby), while for oil refineries it is 0.0295 allowances per unit of output. Oil refinery output is measured by "CO2-Weighted Tonnes".
Warnings by some firms of "carbon leakage" have led the Commission to identify 164 industrial sectors with higher CO2 costs, and higher exposure to international trade.
These companies will be awarded 100% of their benchmarked allowances for free until the end of 2014 to encourage them not to "leak". After 2014, the list will be revised according to unchanged criteria.
Environmentalists have expressed concerns that such high benchmarks may in effect subsidise carbon-intensive business sectors represented by powerful industrial lobbies. But Ms Kokkonen insisted that the new measures would deter leakage.
"It allows companies to earn money if they can reduce emissions at a cost below the carbon price," she said "as they would earn money from investing in reducing emissions and selling allowances. At the same time it shelters them from carbon leakage as they need to buy fewer allowances for maintaining existing activities."
Energy firms will not be eligible for free allocations under the scheme. However, in a major revision of the ETS, airline emissions will be included in the ETS system for the first time from January 2012.