EU ETS Carbon Leakage: How to Remediate Disincentives within the Current System of Free Allocation

The free allocation of allowances within the EU ETS prevents the price signal to be fully passed on to most industrial installations. This significantly lowers the incentives to invest in climate-friendly measures – and hinders the EU ETS from realizing its full potential as one of EU’s main policy instruments to meet the EU climate target Plan.
In this policy brief, we evaluate the proposal by the Euro-pean Commission and point out suggestions to improve the current system of free allocation. If free allocation remains in the EU ETS and is amended according to the revised proposal, three measures should be implemented:
1. An earlier and more comprehensive CBAM phasing-out free allocation
2. Tighter conditions for free allocation
3. A more stringent benchmark approach