EU ETS Free Allocation Benchmarks for Industrial Sectors and CBAM-Linked Full Phase-Out
ENFORCEMENT TIMELINE
Revised operation began 2024 (CBAM-linked phase-out from 2026 to 2034)
Overview
This card focuses on the allocation criteria for 'free allocation' to industrial sectors under the EU Emissions Trading System — based on product-specific carbon efficiency benchmarks — and on the schedule for the full phase-out of free allocation as the Carbon Border Adjustment Mechanism (CBAM) is introduced.
To prevent carbon leakage (the relocation of manufacturing outside the EU), sectors at high risk of carbon leakage have traditionally received EUAs free of charge, in full or in part, based on 'benchmarks' set at the emission intensity of the top 10% most efficient installations producing each product. However, as CBAM begins operating as a level-playing-field mechanism that imposes a carbon cost on imported goods, free allocation for the six sectors covered by CBAM (such as steel, aluminum, and cement) will be reduced in annual stages from 2026 to 2034, ultimately reaching zero (full auctioning).
Enforcement Timeline
2026: Full CBAM application begins; free allocation for CBAM sectors is cut by 2.5% (97.5% free).
2028: The free allocation reduction rate for CBAM sectors accelerates to 10% (90% free).
2030: Nearly half of free allocation (48.5%) has been cut (51.5% free).
2034: Free allocation for CBAM sectors is fully phased out (0% free, 100% auctioning complete).
Business Impact
Operators within the EU producing CBAM goods such as cement, iron and steel, aluminium, fertilisers and hydrogen must address the growing financial risk from 2026 onward as free allocation for those goods is reduced year by year, sharply increasing the cost of procuring allowances. Under the amendments made by Directive (EU) 2023/959, free allocation is reduced by 20% for installations that have not implemented the recommendations of their energy audit, and also by 20% for installations whose emissions exceed the 80th percentile for the relevant product benchmark (the top 20%) if they have not established a Climate Neutrality Plan.
Benchmark updates, applying an annual efficiency-improvement rate of 0.3% to 2.5%, will further reduce free allocation for below-standard plants that have been slow to adopt low-carbon technology. EU manufacturers need to take advantage of the level playing field CBAM creates against products from outside the EU, while rapidly advancing green transition investments — such as green steel and green chemicals — in anticipation of the phased loss of free allocation.