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Climate Action

Free allocation

Video explainer: the EU Emission Trading System and the Social Climate Fund

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Auctioning is the default method for distributing emission allowances to installations and operators under the EU ETS. However, in certain sectors, the transition to full auctioning is taking place gradually. As the EU continues to pursue ambitious emission reductions targets, these sectors receive some allowances for free to address the risk of carbon leakage. Free allocation under the EU ETS follows specific, harmonised rules.

Free allocation to installations in the power and industry sectors

  • Since 2013, free allocation is primarily issued to installations in the manufacturing industry. While power plants usually have to buy their allowances, in certain cases they may receive some allowances for free to boost their modernisation and decarbonisation efforts.
  • Free allocation to specific sectors is based on their performance benchmarks, which reflect an average emissions intensity per unit of product of the 10% most efficient installations in each sector.
  • In total, 54 benchmarks (52 product and 2 so-called “fallback approaches” based on heat and fuel) are used. These were developed based on extensive technical work and consultations with various stakeholders.
  • Benchmarks are based on the principle of 'one product = one benchmark'. This means that the methodology does not vary according to the technology or fuel used, the size of an installation, or its geographical location.
  • Installations that meet their benchmarks – which are among the most efficient in the EU, in principle – will receive all the allowances they need to cover their emissions.
  • Benchmarks are reduced incrementally to encourage companies in each sector to decarbonise and advance innovation. As they receive fewer allowances for free over time, companies need to reduce their emissions, buy more allowances, or do both.
  • ETS benchmark values are periodically updated by the Commission, based on the data submitted by companies, to make sure they reflect the technological progress in each sector. This entails determining the applicable reduction rate.
  • Starting in 2021, volumes of free allocation are adjusted to reflect changes in industrial production levels. The threshold for these adjustments is set at a 15% increase or decrease in production.

Free allocation to aviation

Since 2013, the aviation sector receives most of its allowances for free. However, free allocation for aircraft operators will be fully phased out by 2026. This transition will be gradual – free allocation will decrease by 25% in 2024 and by 50% in 2025.

Benchmark update

In 2021, the Commission updated the values of ETS benchmarks applicable for the first allocation period (2021-25). These benchmarks will be updated again for the second allocation period (2026-30).

In total, 31 out of 54 benchmarks have been reduced at the maximum rate of 24%, with an annual reduction rate of 1.6% applying for the 2008-23 period. The remaining benchmarks were reduced within a range of 3-24%. This reflects the progress made in recent years by most industrial sectors in reducing the emissions intensity per unit of product. The Commission published a detailed document on the data processing and analysis behind this update of benchmarks, which is available in the Documentation section below.

For the second allocation period (2026-30), the annual reduction rates applicable to free allocation benchmarks will be increased. While the minimum reduction rate is increased from 0.2% to 0.3%, the maximum rate is adjusted from 1.6% to 2.5%.

How free allocation is calculated

In line with the ETS Directive and Free Allocation Regulation, countries calculate free allocation for each installation in their territory through 'National Implementation Measures' (NIMs), which are submitted to the Commission for review.

The Commission assesses each country's figures to make sure they are complete and compliant with the rules. The NIMs of Iceland, Liechtenstein and Norway are assessed by the EFTA Surveillance Authority.

Once their NIMs have been reviewed, countries make final allocation decisions for a given period and allowances are then issued annually. The most recent allocation decisions were made for the 2021-2025 period.

If the requested allocation for all installations under the EU ETS exceeds the total amount available for free allocation, allocation per installation may be reduced by a cross-sectoral correction factor. For the 2021-2025 period, the correction factor is equal to 1.

Alignment with actual production levels

Starting from 2021, the free allowances allocated to an installation may be adjusted annually if changes in industrial production occur. This helps align free allocation with actual production levels.

The adjustment threshold is set at a 15% increase or decrease in production. This is determined based on a rolling average of two years. Operators are required to submit yearly reports on production data to national competent authorities. Based on these reports, adjustments may be made to the issued volumes of free allocation.

The Commission adopted implementing rules to prevent manipulation and abuse of the allocation adjustment system.

Documentation

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Studies

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FAQ

Questions and Answers on the Commission Decision 2011/278/EU on free allocation rules for the ETS (26/02/2014)