The European Parliament and EU Council have reached provisional agreement on freeing carbon allowances for industry sectors falling under the heat and fuel benchmarks of the EU’s emissions trading system.
Benchmarks serve as basis for determining free allocation of allowances to industry under the current EU Emissions Trading System (EU ETS), while providing carbon leakage protection. The top 10% best performers in a given sector set the benchmark level for receipt of free ETS allowances, thus incentivising emissions reductions sector-wide. The benchmarks are reduced every five years, to encourage companies to make efficiency gains. ‘Fallback benchmarks’ are used for those industrial sectors not covered by a specific product benchmark, and use heat or fuel consumption as proxies for relative efficiency.
The Commission tabled a separate proposal on the fallback benchmarks alongside the proposal for the ETS review in July 2026. The aim of this separate proposal is to address concerns raised by some industrial sectors affected by the benchmark update, strengthen protection against carbon leakage, and increase free allocation linked to heat and fuel benchmarks without triggering the cross-sectoral correction factor. This factor ensures that the maximum amount of free allocation is respected.
“Through this agreement we will swiftly increase free allowances for vital energy-intensive sectors within the heat and fuel ‘fallback’ ETS benchmarks that underpin the European economy”, said Ireland’s energy minister Darragh O’Brien, for the EU presidency: “This amendment will provide the predictability industry needs for the sustainable transition, while remaining competitive at home and retaining production within the EU.”
The agreement is expected to help ensure an increase of approximately 120 million allowances freely allocated to industry, worth more than €10 billion for the period 2026-2030. As part of the agreement, the Commission will establish sector-specific fuel benchmarks for the allocation period 2026-2030. The sector-specific approach will in particular benefit the ceramics sector, which is at high risk of carbon leakage.
The provisional agreement will now have to be endorsed by the Council and the Parliament. It will then be formally adopted by both institutions following legal-linguistic revision. Following adoption, the Commission will adopt implementing rules on the calculation of heat and fuel benchmarks.
