The Council of the European Union and the European Parliament have reached a provisional agreement on a revised legislative framework to expand free carbon allowances between 2026 and 2030 for energy-intensive industrial sectors regulated under the EU Emissions Trading System (EU ETS).
The agreement specifically adjusts the EU ETS heat and fuel ‘fallback’ benchmarks, which determine free allowance allocations based on energy consumption for industrial processes not covered by product-specific benchmarks. Accounting for approximately 25 per cent of all free allocations, these benchmarks shield critical manufacturing sectors—including chemicals, pulp and paper, ceramics, glass, and food and beverage processing—from carbon leakage, the relocation of industrial production to jurisdictions with less stringent climate regulations.
Under the provisional deal, co-legislators agreed to establish a total safety cushion of roughly 121 million free allowances over the four-year period. The package expands upon the European Commission’s initial July 2026 proposal to release around 88 million allowances under existing rules by adding 28 million allowances that had previously gone unallocated due to installations failing to meet energy efficiency audit or climate neutrality plan conditionalities.
Negotiators also agreed to ring-fence an additional 5 million allowances between 2026 and 2030 to provide targeted protection for highly exposed, energy-intensive industries. Any unused portion of this 5 million reserve will be redirected to finance low-carbon investments through the Modernisation Fund and industrial clean technology projects under the Innovation Fund.
Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment, stated that swiftly increasing free allowances within the heat and fuel benchmarks provides vital economic predictability for European manufacturers, allowing domestic industries to remain competitive and retain production within the bloc while executing their green transition.
The legislative revision addresses widespread industrial and member-state concerns following the regular June 2026 update of EU ETS benchmarks, which had significantly reduced free allocations for the 2026–2030 trading phase.
Forming part of the bloc’s ‘One Europe, One Market Roadmap’ targeted for completion in the first quarter of 2027, the provisional agreement now awaits formal endorsement and adoption by both the Council and the European Parliament following legal-linguistic review, after which the European Commission will adopt implementing rules for calculating the updated benchmarks.
