Revision of the benchmark values for free allocation of emission allowances (2026-2030)

The issue of the reduction in free allocation, resulting from the proposed revision of ETS benchmarks, invites a broader reflection on the role and effectiveness of the European Emissions Trading System in supporting the decarbonization of industry.

Indeed, it is necessary to question the actual function of an ETS in which the price of CO₂ remains consistently below the marginal abatement costs of many of the technologies that are critical for the industrial transition. If the carbon price signal is insufficient to make investments in solutions such as low-emission hydrogen, carbon capture and storage (CCS), or the electrification of high-temperature industrial processes economically viable, the system risks failing to generate the incentives needed for technological transformation. At the same time, the progressive reduction of free allowances increases the residual cost of emissions for companies, even in the absence of mature, scalable, and competitive technological alternatives.

This creates a paradox: on the one hand, the carbon price is still too low to make many of the investments required for deep decarbonization economically attractive; on the other hand, it is already high enough to significantly affect the competitiveness of European industry. Under these conditions, the ETS risks becoming more of a cost driver than an instrument capable of effectively supporting the transition.

Against this backdrop, careful consideration should also be given to proposals aimed at containing the price of CO₂. If the carbon price generated by the market is deemed incompatible with industrial sustainability, it is necessary to question the overall coherence of the emissions reduction trajectory. The carbon price is nothing more than the economic expression of allowance scarcity: systematic interventions designed to limit its increase risk weakening the very signal the system is intended to generate. If the market price is considered excessive relative to the industry’s capacity to adapt, the issue to be addressed is not merely the functioning of the allowance market, but rather the relationship between the pace of cap reduction and the actual availability of the technologies needed to support it.

Yet we need the ETS. We need it to support the transition towards a more sustainable and resilient economy and to gradually, pragmatically, and without ideological excesses, loosen Europe’s dependence on fossil fuel supplies. The real question, therefore, is not whether to preserve the system, but how to make it consistent with industrial and technological realities.

At the same time, Europe must remain both a climate leader and a competitive industrial economy. Achieving climate neutrality will require ambitious policies, but also a strong industrial base capable of investing in and deploying the technologies needed for the transition. Until the technologies required for deep decarbonization become available at scale and at sustainable costs, it is essential to avoid a situation in which the ETS primarily generates cost transfers without creating the conditions necessary for emissions reductions. From this perspective, instruments such as free allocation should not be viewed as a derogation from climate objectives, but rather as a balancing mechanism that helps preserve industrial competitiveness during the transition.

The purpose of free allocation is precisely to mitigate and partially decouple compliance costs from the carbon price signal. The price of CO₂ should continue to provide a credible and progressively stronger indication of the economic value of emissions, guiding long-term investment decisions. However, it is not necessary for this signal to be translated immediately and fully into an economic burden for every installation. Free allowances make it possible to temporarily protect facilities exposed to international competition while first movers test and industrialize new decarbonization technologies. In other words, they allow the system to maintain its strategic direction without immediately imposing on the entire industrial base costs that current technologies do not yet make avoidable.

It is also necessary to acknowledge a frequently overlooked reality: the key breakthrough technologies on which the decarbonization of heavy industry depends—from hydrogen to carbon capture and storage—extend beyond the boundaries of the individual plant. They require dedicated infrastructure, transport networks, storage systems, supply markets, and investments that exceed the capacity of any single company. Their deployment therefore presupposes deep coordination between the public and private sectors, capable of sharing the risks, costs, and timelines of the transition.

This is where the real Gordian knot of industrial decarbonization emerges: if these technologies are too expensive, companies will not deploy them; but if no one deploys them, the economies of scale needed to reduce their costs will never materialize. Breaking this vicious circle requires instruments capable of supporting the market during the initial phase of adoption. In many industrial sectors, the marginal abatement cost of breakthrough technologies still significantly exceeds the price of EU Allowances (EUAs), making it difficult to expect the ETS alone to provide a sufficient investment signal. In this respect, experiences such as the Carbon Contracts for Difference (CCfDs) introduced in Germany offer a particularly promising example. Through long-term contracts, the public sector helps bridge the cost gap between conventional and low-emission technologies that the carbon price alone is not yet capable of rewarding, enabling companies to invest today in solutions that may become competitive tomorrow.

Looking ahead, the gradual integration of Carbon Dioxide Removals (CDRs) into the ETS architecture also deserves careful consideration. As the remaining cap converges toward the irreducible core of hard-to-abate emissions, the risk of economic tensions and regulatory distortions will inevitably increase. If accompanied by stringent criteria regarding quality, additionality, permanence, and verifiability, the integration of CDRs could provide an additional source of flexibility, helping to achieve climate neutrality objectives without placing the entire burden of managing residual emissions on the Linear Reduction Factor and the progressive reduction of available allowances.

The challenge, therefore, is not to weaken the ETS, but to complete it. The carbon price must continue to provide the long-term signal; free allocation must prevent that signal from translating prematurely into a loss of competitiveness; industrial policy instruments must enable emerging technologies to overcome the initial barriers to deployment; and CDRs may, if properly regulated, contribute to the long-term sustainability of the system as emissions reductions enter their most difficult and costly phase.

In light of these considerations, aggressive reductions in free allocation appear premature and unlikely to contribute to maintaining an appropriate balance between carbon pricing and industrial competitiveness. Without such a balance, the risk is not only that decarbonization efforts will slow, but also that industrial activity, employment, and emissions will increasingly be relocated beyond Europe’s borders.