Allen & Overy leads European charge on EU carbon challenge

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An emissions trading system (ETS) exists within the European Union, established by Directive 2003/87/EC. Originally it was the member states themselves that would decide on the total emission allowances they would allocate to certain installations, in accordance with national allocation plans.

However, an annual EU-wide limit of allowances has now been introduced. As of 2013, this limit will decrease each year by a linear factor. Member states must auction all allowances other than those they may allocate free of charge. The European Commission needed to determine an industry cap in order to determine the maximum number of free allowances that could be allocated. In order to calculate this cap, member states had to notify the European Commission of the annual amount of free allowances that they were intended to allocate to installations in their territories. Only when the preliminary annual amount of free allowances exceeds the industry cap must the European Commission adjust the difference by applying the cross-sectoral correction factor…

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