The European Union may distribute free ETS allowances worth hundreds of billions of euros over the next two decades. Free allowances exist to mitigate carbon leakage risk, but current rules can put innovative climate neutral producers at a disadvantage vis-à-vis the carbon-intensive incumbents with which they need to compete.
This policy brief proposes an addition to free allocation rules, so that the free ETS allowances given to industry can be turned into innovation aid for very low-carbon producers, thereby helping companies transition to climate neutrality. Ultimately, industry free allowances would accelerate companies transition to climate neutrality and mitigate further environmental risk.
While the EU's proposed carbon border adjustment mechanism would reduce free allocation, it would not cover all sectors. As such, ensuring that free allocation benefits low- and zero- carbon producers through a new zero-carbon benchmark is critical. The report explains that this benchmark would reward low-carbon producers with additional free EU ETS allowances, which would come from the available supply of EUAs being redistributed.