EU Deal Adds 121 Million Free Carbon Allowances for Industry

European lawmakers have struck a provisional deal to hand energy-intensive industry 121 million additional free carbon allowances between 2026 and 2030 — roughly €10 billion in value under the EU emissions trading system and well beyond what the European Commission proposed in July.

Negotiators from the European Parliament and the EU Council reached the agreement late at night, according to an announcement from both institutions. The package includes 5 million allowances earmarked for specific energy-intensive sectors classed as highly exposed to carbon leakage — the shift of emissions-intensive production to countries with weaker climate policies.

The July proposal from the Commission had called for 88 million free allowances over the same period. Parliament and the Council have now raised that figure by 33 million, extending relief to sectors that have spent two years lobbying over energy costs driven by the Russia-Ukraine war and the conflict involving Iran.

What does this change for covered sectors?

The allowances fall under the ETS heat and fuel benchmarks, which allocate free permits based on energy consumption. These benchmarks cover products and processes that lack a specific product benchmark and account for around 25% of total free allocation. The sectors they shield from carbon leakage include chemicals, pulp and paper, food and beverage processing, ceramics and glass.

Under the ETS, established in 2005, industrial operators must surrender one allowance for every tonne of greenhouse gas they emit. Free allocation is calculated against benchmarks that mirror the performance of the most efficient facilities in each sector. Companies that emit below their allocation can sell surplus allowances; those that exceed it must buy more. That structure is meant to keep European producers competitive while rewarding emissions cuts.

The system covers electricity and heat generation, oil refineries, steel, cement, paper, chemicals and commercial aviation, among other sectors. Since launch it has generated more than €270 billion in revenues, and the Commission credits it with driving a 50% reduction in emissions across covered sectors.

Why did member states push for relief?

Rising energy prices, sharpened by geopolitical shocks, led several member states to demand a review of the ETS to ease pressure on industry. The Commission's July answer proposed slowing the pace of mandated emissions reductions, extending free allocation for several years, and steering significantly more ETS-derived capital into industrial decarbonization.

The Commission framed the extra 88 million allowances as the core of that relief. Legislators went further, adding 33 million more and carving out the 5 million allowance set-aside for the sectors most exposed to carbon leakage.

Wopke Hoekstra, EU Commissioner for Climate, Net Zero and Clean Growth, defended the outcome. "This is great news for climate, competitiveness and independence," Hoekstra said. "And it ensures the EU carbon market remains robust, our industry can compete, and our clean transition is fair, predictable and firmly on track."

What happens next?

The agreement remains provisional. Both the European Parliament and the Council must endorse it before formal adoption — the procedural milestone that will determine when the additional free allocation enters force and how quickly covered installations can plan their permit positions through 2030.