Environment Committee seeks 100 million additional free allocations under EU ETS

Lawmakers overseeing the review of the EU's carbon market voted to extend free allocations given to industry to prevent carbon leakage, the European Parliament said Oct. 19.

Members of Parliament voted in favor of softer fallback benchmarks for the 2026-2030 period, resulting in an additional 100 million free allocations under the EU Emissions Trading System.

The Committee on the Environment, Climate and Food Safety (ENVI) met to discuss the Commission's earlier proposal for heat and fuel benchmarks under the ETS.

"By increasing the free allocation proposed by the Commission, the Committee recognizes, with broad support, that certain sectors need stronger protection against carbon leakage," said rapporteur Adam Jarubas from the European People's Party.

"At the same time, it takes into account the diverse range of industries covered by the general fuel benchmark. It also calls on the Commission to act swiftly for sectors such as ceramics, which, according to the calculations, should receive a higher allocation than the general benchmark gives them," he added.

The values were proposed earlier this year and will be used to calculate free emission allowance allocations for industrial processes for which a specific product benchmark cannot be defined due to high product variety or small numbers of installations.

Lawmakers shared the Commission's position, pushing to use all allowances available for free allocation over up to 2030, estimated at around 88 million.

The MEPs further call for adding around 11 million allowances withheld from installations that failed to meet specific ETS conditions, such as implementing energy audit recommendations, bringing the total to nearly 100 million.

The position was adopted with 64 votes in favor, 11 against and 2 abstentions.

Industry safeguards

This decision would see fallback benchmark values around 12.5% lower than in the 2021-2025 period, according to Parliament.

The allowances not allocated due to reduced free allocations would be split into three revenue pots, shared between fallback benchmark adjustments and auctions.

The revenue would go to the Modernization Fund — which supports investments such as modernizing district heating — and to the Innovation Fund, which helps deploy net-zero and low-carbon technologies.

Lawmakers said there are cases where the new benchmarks might not reflect the industrial performance of some sectors, calling on the Commission to set sector-specific sub-benchmarks based on the 10% most efficient installations in that sector, where significant and documented differences exist. The same reference period, data and methodology as the general fuel benchmark would be used.

"The sector-specific sub-benchmarks would be new subcategories within the existing fuel benchmark, which is one of the two fallback benchmarks," a spokesperson for the Parliament told Platts, part of S&P Global Energy. "They are not new fallback benchmarks, and they do not concern the heat benchmark."

The Commission would set out, in a delegated act, the criteria for defining the sector-specific benchmarks and their system boundaries, the spokesperson said. The sub-sectoral values would apply within three months of the regulation's publication. Within six months, the Commission would determine the sub-benchmark values in implementing acts.

"Priority would be given to refractory products and ceramic tiles (NACE codes 23.20 and 23.31)," the spokesperson added.

The EU Parliament is scheduled to vote on the procedure on Oct. 22, after which negotiations with the Council will start, with a view to applying the new values starting in 2027.

The EU ETS review is underway following the proposal put forward by the Commission in July, with lawmakers and council members balancing questions of industrial competitiveness and climate ambition as the bloc faces high energy prices, with natural gas futures at a more than three-year high.

EU leaders have previously said they will seek to reach a final political agreement on the reform by the first quarter of 2027, but industry members and counterparties active in the carbon market have previously expressed skepticism about the feasibility of this deadline.