Free Allocation
Free allocation for industry and heat generation will also be continued in the context of the ‘Fit-for-55’ reform. However, industrial activities covered by the Carbon Border Adjustment Mechanism (CBAM) (see section C below) will receive a free allocation which will gradually decrease to zero from 2026 to 2034 and will be replaced step-by-step by the CBAM. Free allocation for other industries with a significant carbon leakage risk will continue in principle in accordance with the set benchmarks, but now with an additional conditionality. The allocation will be partially reduced if there is no evidence for ‘environmental services in return’ or ‘climate neutrality plans’ with binding milestones. The allocation for products with no significant carbon leakage risk will decrease linearly from 30 per cent based on the respective benchmark values in 2026 and will reach zero in 2030 except if other decision is taken as part of the review process in accordance with Article 30 Directive 2003/87/EC. The exception applies to the value for generating district heating, which remains constant at 30 per cent until 2030.
Furthermore, the above-mentioned benchmark values for the second allocation period (2026 to 2030) will be reviewed and adjusted. New installations will be added through adjustments in the scope of EU ETS 1 and the definition of benchmarks including installations that will significantly contribute to decarbonisation such as electrolysers that are powered by renewable energy. As these too will receive the free allocation in the future, a ‘level playing field’ will be created vis-à-vis comparable installations that previously received an allocation.
Electricity Price Compensation
The guidelines on granting aid to compensate for indirect CO2 costs under the EU Emissions Trading Scheme 1 (electricity price compensation) are expected to be amended by the European Commission in 2025. In particular, the electricity comsumption efficiency benchmarks, geographical areas and regional CO2 emission factors relevant for calculating the aid are to be updated.
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Electricity Price Compensation
Introduction of a carbon border adjustment mechanism (CBAM)
The Carbon Border Adjustment Mechanism (CBAM) for imports was introduced as part of the ‘Fit-for-55’ package in October 2023 to supplement carbon pricing in the EU. Production-specific, product-related emissions, also known as ‘embedded emissions’, in the country of production will first be reported for a specific set of products including electricity, iron and steel, cement, aluminium, ammonia/fertilisers and hydrogen. Starting in 2026, CBAM certificates will be purchased and surrendered corresponding to the production-specific, product-related emissions. National competent authorities will weekly sell these ‘CBAM certificates’ at the EEA price.
Simultaneously to the step-by-step introduction of CBAM, free allocation for relevant products will be progressively reduced from 2026 to 2034 as the mechanism is intended to gradually replace the existing instruments to provide protection against carbon leakage. A decision will be made during the transition phase in 2023 to 2025 about the inclusion of further goods and indirect emissions from current CBAM goods that are linked to the purchase of heat or electricity from other installations.
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UBA factsheet (2023): Introduction of a Carbon Border Adjustment Mechanism (CBAM) in the EU
UBA factsheet (2022): CBAM – Relevance of Foreign Trade and CO2 cost
Climate Change 21/2022: Carbon Border Adjustment Mechanism (CBAM)
European Commission: Proposal for a regulation establishing a carbon border adjustment mechanism
Climate Change 43/2019: Carbon Leakage Risks in the Post-Paris World
Climate Change 16/2018: Forms and Channels of Carbon Leakage