EU Mulls Free Carbon Allowance Rules for Heavy Industry Through 2030

The European Union is preparing to update the rules that determine how many free carbon allowances heavy industries receive through 2030, as Brussels tries to keep its flagship climate initiative moving amid growing pressure on industrial competitiveness.

The European Commission said on May 11 that it had launched a consultation on updated benchmark values for the EU Emissions Trading System (ETS) for 2026 to 2030.

The ETS is the EU’s cap-and-trade scheme for sectors such as energy, heavy industry, and aviation. Under the system, companies must surrender allowances for their emissions and buy tradable assets, called EU allowances, to cover their greenhouse gas emissions.

EU leaders have prioritized a renewables-first energy approach as part of the bloc’s aim to become “climate neutral” by 2050, a central goal of European Commission President Ursula von der Leyen’s Green Deal.

The ETS program is a key driver for decarbonization, and the EU has celebrated it, saying it has “massively” reduced fossil fuel consumption.

Operators that fail to cover their emissions face a penalty of 100 euros for each metric ton of excess emissions.

Under the proposal, industry will, on average, continue to receive free allowances covering about 75 percent of emissions.

That means that if a factory emits 100 metric tons (110.23 U.S. tons), the EU is saying that, on average, industry would still get free allowances covering about 75 metric tons. The company would then need to buy allowances for the remaining 25 metric tons, unless it cuts emissions.

“This ensures the EU ETS continues to drive decarbonization, competitiveness, and clean investment,” said Wopke Hoekstra, European commissioner for climate, net zero, and clean growth.

The EC said the measures would help support the “competitiveness and decarbonization” of EU industry while reinforcing the stability and predictability of Europe’s carbon market.

The benchmarks come ahead of an EU ETS review that is due in July.

The plan is also facing political pressure from governments and industries worried about high energy prices.

According to a March 11 S&P Global report, changes were being considered as the EU’s carbon market buckled under political strain.

“Amid growing concerns about EU industrial competitiveness, many governments are pushing for reforms to improve price predictability,” it said.

Ten EU countries pushed back against the ETS in March, urging Brussels to review the program.

Austria, Bulgaria, Croatia, the Czech Republic, Greece, Hungary, Italy, Poland, Romania, and Slovakia signed a letter on March 18 calling for changes to the system.

The letter said that “Europe stands at a critical juncture.”

“Recent geopolitical developments once again underline the fragility of today’s economic ecosystems and the difficult environment in which businesses operate,” it said.

The countries said that climate change “must be addressed decisively” but warned that Europe will succeed in the green transition only if its industrial base remains strong.

However, the countries said the world had changed significantly since the Green Deal was agreed.

“Energy prices have skyrocketed, inflation has made the investments required for the transition even more costly, and current decarbonizing solutions are not yet sufficiently developed for economic sustainability for hard-to-abate industries,” the letter said.

It said the ETS pathway to 2034 was “too steep and overly ambitious,” warning that the current framework had become an “existential risk for many European strategic industrial sectors.”

Lobby groups representing wind, solar, and hydrogen interests have previously criticized moves to loosen ETS rules.

In a joint statement on March 4, the groups said the ETS had been “instrumental” in driving Europe’s push for clean energy while reducing dependence on fossil fuel imports.

They warned that “undermining the EU ETS or introducing short-term corrective interventions” would raise the cost of capital and delay final investment decisions for clean energy projects.

“Such instability would undermine the bankability of clean energy and industrial decarbonization projects,” they said.