As the EU ETS review moves forward, the future of free allocation is at the heart of the debate. Free allocation protects European industry against carbon leakage, but in its current form it can also distort production and investment decisions, generate windfall profits and cost public budgets revenue that could support the transition. This position paper looks at how free allocation can be made conditional on industrial decarbonisation without weakening carbon-leakage protection. 

The European Commission’s proposal to link free allowances to approved decarbonisation plans is a step in the right direction. However, approving a plan does not guarantee it is implemented, and only 20% of allowances would be held back until progress is verified at the end of a five-year period. Bellona Europa proposes making 100% of free allocation conditional on progress against credible, installation-level decarbonisation plans, with allowances distributed annually. This would be done in three steps:  

1) approving plans with clear milestones; 

2) linking each year’s allocation to progress against them; 

3) and verifying real emissions reductions over time.  

This approach strengthens accountability while giving companies flexibility to choose their own investment pathways, while  also recognising differences in technological readiness and access to enabling infrastructure. 

Read our new position paper now: 

• Position Paper: Making Free Allocation work for Industrial Decarbonisation (pdf)