ECA (European Common Allocation)

The European Common Allocation (ECA) is a method of allocating carbon allowances within the European Union Emissions Trading System (EU ETS). This system was established in 2005 as a key tool for the EU's efforts to combat climate change. It sets a cap on the amount of greenhouse gas emissions that companies can produce, and allocates a fixed number of emissions allowances that can be traded between companies. The ECA is a mechanism that aims to allocate these allowances in a fair and equitable manner.

The EU ETS covers more than 10,000 installations across Europe, including power plants, refineries, and industrial sites, which together account for around 40% of the EU's greenhouse gas emissions. Under the system, companies must purchase allowances for every tonne of CO2 they emit. The total number of allowances issued is capped, and this cap is reduced over time to reduce emissions.

The ECA is designed to ensure that the allocation of these allowances is fair and equitable, taking into account the need to reduce emissions while also protecting the competitiveness of European industry. The allocation of allowances is determined by a complex formula that takes into account a number of factors, including historical emissions, production levels, and energy efficiency.

The ECA formula is based on a benchmarking system, which sets a level of emissions intensity that is deemed achievable by the most efficient installations in each sector. Companies that emit less than this benchmark level receive free allowances, while those that emit more must purchase additional allowances on the market.

The benchmarking system is based on a number of factors, including the type of activity being carried out, the level of emissions intensity that can be achieved using best available techniques, and the overall energy efficiency of the industry sector. The benchmark level is then adjusted over time to take into account changes in technology and best practices.

The ECA system also includes a number of mechanisms to prevent the relocation of emissions-intensive industries to countries outside the EU, a phenomenon known as carbon leakage. This includes the allocation of additional allowances to industries that are deemed to be at risk of carbon leakage, and the use of import tariffs on goods from countries that do not have equivalent carbon pricing systems.

The ECA has undergone a number of changes since its inception, as policymakers have sought to refine the allocation formula and address issues such as carbon leakage. One of the key changes has been the introduction of a system of cross-sectoral correction factors, which adjust the allocation of allowances to reflect the fact that some industries have greater emissions intensity than others.

The ECA system has also been extended to cover additional sectors, including aviation and shipping, which were previously excluded from the EU ETS. This has led to the development of new benchmarks and allocation methods to reflect the unique characteristics of these industries.

Overall, the ECA system is seen as a key tool in the EU's efforts to reduce greenhouse gas emissions and combat climate change. While there have been criticisms of the system, particularly from industry groups who argue that it places an unfair burden on European companies, it is generally viewed as a necessary and effective mechanism for reducing emissions while also protecting the competitiveness of European industry.