EU ETS free allocation: benchmarks, the carbon leakage list and how free allowances are cut

Under the EU Emissions Trading System (EU ETS), some installations receive part of their allowances free of charge, although from 2021 the ETS Directive (Directive 2003/87/EC) sets the share of allowances to be auctioned at 57% 111. How many an installation gets depends on EU-wide benchmarks and on whether its sector is deemed to be at risk of carbon leakage 18. For 2026 to 2030, the benchmark values are set by Implementing Regulation (EU) 2026/1412 10. Our EU ETS overview explains how the rest of the system works.

The European Commission describes carbon leakage as the transfer of CO₂ emissions from one country to another 12. It happens when companies relocate production to countries with weaker emission constraints because of strict climate policies, and this can contribute to an increase in global greenhouse gas emissions 12. Free allocation is meant to address that risk while the EU's basic principle remains auctioning 13.

Free allocation is shrinking. Sectors that aren't on the carbon leakage list get 30% of their benchmark amount in 2026 and nothing in 2030, except district heating 8914. Production of goods covered by the Carbon Border Adjustment Mechanism (CBAM) gets less each year from 2026, and none from 2034 1. Two Commission proposals of 17 July 2026 would change these rules; they are proposals, not law 1516.

Do I get free allowances, and at what rate?

Answer these four questions in order. Each one ends in a result and the reason for it.

1. Do you run an installation in the EU ETS, for something other than producing electricity? Free allocation goes to installations under harmonised EU rules 1. Electricity production gets none, except electricity produced from waste gases and the transitional option in Article 10c, which some EU countries with a lower gross domestic product (GDP) per head can use until 31 December 2030 117. Aircraft operators get none from 1 January 2026, apart from reserved quantities 3. An installation that has ceased operating gets none 1. Free allocation is also only given where your country's list of installations includes your sub-installation data 2. If you run an eligible installation, go on to the next question.
2. Is your sector on the carbon leakage list? If yes, you get 100% of the amount your benchmarks give, until 2030 8. If no, you get 30% in 2026, falling by equal steps to nothing in 2030; district heating keeps its 30%, and in some EU countries can get an extra 30% under conditions explained below 8914. Either way, go on to the next question.
3. Do you produce goods covered by CBAM, such as cement, fertilisers, iron and steel, aluminium or hydrogen? If yes, the amount for those goods is multiplied by the CBAM factor, which is 97.5% in 2026 and falls each year after 1918. Go on to the next question.
4. Have you met the two conditions on energy audits and climate-neutrality plans? If an installation misses one, its final amount is cut by 20% 156. If it meets both, or neither applies to it, there is no such cut.

The sections below explain each step: how the amount is calculated, the list, the CBAM factor and the two conditions.

How is the free amount worked out?

Your EU country calculates it for each year, one sub-installation at a time, using the benchmark values for the period 9. As an operator, you divide your installation into sub-installations, in this order of priority 4:

• Product benchmark sub-installations, for products that have their own benchmark 419
• Heat benchmark or district heating sub-installations, for measurable heat such as steam or hot water not covered by a product benchmark 419
• Fuel benchmark sub-installations, for heat that can't be measured that way, from burning fuel or from electricity 419
• Process emissions sub-installations, for emissions from processes such as reducing metal ores or breaking down carbonates 419

Each sub-installation's amount is its benchmark value multiplied by its historical activity level, such as tonnes of product or terajoules (TJ) of heat 9. Process emissions sub-installations have no benchmark: their historical activity level is multiplied by 0.97 for the years until 31 December 2027 and by 0.91 from 2028 9. The historical activity level comes from your data for the baseline period, the five calendar years before the deadline for your country's list of installations 919.

That amount is then multiplied by the carbon leakage factor for the sub-installation (1 for sectors on the list) and, for CBAM goods, by the CBAM factor 9. The installation's total is the sum of its sub-installations, multiplied by the cross-sectoral correction factor, a uniform cut used only when free allocation would exceed the maximum amount 19. For each year from 2026 to 2030, that factor is 100%, so it cuts nothing 20. The 20% reductions, where they apply, come off this final amount 56.

The Commission sums up the result: because benchmarks reflect the 10% most efficient installations in each sector, only the most efficient installations will receive enough free allowances to cover their needs 12. Installations that don't reach the benchmark have to cut emissions, buy allowances, or both, according to the Commission's page on allocation to industrial installations 21.

What is a benchmark?

A benchmark is the number of allowances given per unit of output, set for the whole EU 122. Its starting point is the average performance of the 10% most efficient installations in a sector or subsector in 2007-2008, and benchmarks are set for products rather than inputs wherever possible 1. The Commission counts 54 benchmarks: 52 for products and two fallback benchmarks, for heat and for fuel 2123.

For 2026 to 2030, the values were updated with data for 2021 and 2022 123. As a rule, each benchmark falls by an annual reduction rate for every year from 2008 to 2028, but by no more than 2.5% and no less than 0.3% a year 1. Over those 20 years, that means a reduction of at least 6% and at most 50% 23. Some benchmarks follow other rules: aromatics and syngas are adjusted by the same percentage as the refineries benchmarks, and for soda ash, intermediary emissions are added after the reduction rate is applied 123.

These are some of the 2026-2030 values; Implementing Regulation (EU) 2026/1412 lists all 54 2223:

Source: Implementing Regulation (EU) 2026/1412, Annex, adopted on 26 June 2026 2122. CO₂e (CO₂ equivalent) counts greenhouse gases as the amount of CO₂ with the same warming effect. EAF: electric arc furnace. 222425

In this table, the benchmark value is higher than the 10% average for nitric acid, EAF carbon steel and the heat and fuel benchmarks; for those four rows, the limit on the yearly reduction rate is the reason, in our reading of Article 10a(2) and the regulation's recitals 12223. The heat and fuel benchmarks show a large gap, and they are what Commission proposal COM(2026) 619 is about (see "What could change?") 1522.

Why is there no across-the-board cut for 2026 to 2030?

The Directive caps total free allocation so that the auction share of 57% is respected, and a uniform correction factor cuts every installation's amount if demand goes above that cap 111. Installations below the average of the 10% most efficient for their benchmarks are exempt from that cut 1. For 2026 to 2030, Implementing Decision (EU) 2026/1862 set the factor at 100% for each year 20.

The Commission's reasons are in the decision. For 2026, the maximum available for free allocation is 432,346,850 allowances, after deductions that include 40 million allowances for the Social Climate Fund 2627. Allowances left unused from 2021 to 2025 and an extra amount of up to 3% of the total quantity of allowances can top this up, so demand fits under the cap 126.

Is my sector on the carbon leakage list?

A sector is deemed to be at risk of carbon leakage if its trade intensity with non-EU countries, multiplied by its emission intensity, exceeds 0.2 8. Trade intensity is exports to and imports from non-EU countries, divided by the market size in the European Economic Area; emission intensity is kilograms of CO₂ per euro of gross value added 8. Sectors between 0.15 and 0.2, and some with an emission intensity above 1.5, could also be added after a further assessment 813.

The list is in Delegated Decision (EU) 2019/708 and covers 2021 to 2030 28. It names sectors by their NACE code, the EU's statistical classification of economic activities, and some subsectors by their Prodcom code, the classification of goods used for statistics on industrial production 1329. The Commission says the list identifies 63 sectors and subsectors, covering about 94% of industrial emissions in the EU ETS 12. The full list is at the end of this page.

The list decides your rate, sub-installation by sub-installation 49:

• On the list: 100% of the benchmark amount until 2030 89
• Not on the list: 30% in 2026, 22.5% in 2027, 15% in 2028, 7.5% in 2029 and 0% in 2030 814
• District heating: 30% each year, outside the phase-down 89

District heating can get more in some EU countries. Where a country's share of EU emissions from district heating, divided by its share of EU GDP, was greater than five on average from 2014 to 2018, district heating gets an additional 30% for 2026 to 2030 8. The condition is that an investment worth the value of that extra allocation significantly reduces emissions before 2030, in line with a climate-neutrality plan whose targets and milestones are confirmed by verification 8. The operator of the district heating sub-installation needs to apply for it 6.

You must show, using NACE and Prodcom codes, whether each heat, fuel and process emissions sub-installation serves a listed sector 4. Heat you export to a site outside the EU ETS counts as serving a sector not at risk, unless you prove to the competent authority that the buyer is in a listed sector 4.

Free allocation isn't the only support for carbon costs. EU countries may also compensate sectors at risk for carbon costs passed on in electricity prices, through State aid; that compensation isn't free allocation 1.

How does the CBAM factor cut free allocation?

No free allocation is given for producing goods listed in Annex I to the CBAM Regulation (Regulation (EU) 2023/956), but in the first years they receive reduced amounts, cut by a CBAM factor 1. Those goods are cement, electricity, fertilisers, iron and steel, aluminium and hydrogen 18. You must show, using Combined Nomenclature (CN) codes, whether each process serves the production of CBAM goods 4. Heat exported to a site outside the EU ETS counts as used for CBAM goods unless you prove otherwise 4.

The table shows the CBAM factor in force beside the change Commission proposal COM(2026) 616 would make 116. The right-hand column is a proposal, not law.

Source: Directive 2003/87/EC, Article 10a(1a); Commission proposal COM(2026) 616 of 17 July 2026. 116

The allowances cut by the CBAM factor go to the Innovation Fund, which supports low- and zero-carbon technologies 1. On the import side, the CBAM certificates importers surrender are adjusted to reflect the free allocation EU producers of the same goods receive 30. Our CBAM overview covers CBAM itself, and our explainer on what a CBAM certificate costs shows how that adjustment enters the price.

What can cut my allocation by 20%?

Two conditions can each cut an installation's final free allocation by 20% 156. The 20% withheld is first used to spare other installations from the correction factor; anything left goes half to innovation support and half to auctions 1.

The energy-audit condition

If your installation has to carry out an energy audit or run a certified energy management system under Article 8 of Directive 2012/27/EU, your free allocation depends on implementing its recommendations 1. If you can't show the competent authority that all of them are implemented, your final amount is cut by 20% 5. There is no cut if you can show that one of these applies 5:

• The investment for a recommendation pays back in more than three years 15
• Its cost is above 5% of the installation's annual turnover or 25% of its profit, both averaged over the three years before your application 5
• Its cost is above 50% of the average yearly value of the allowances the cut would remove, at the average auction price in the year before your application 5
• You took other measures that cut emissions by as much as the recommendations would 15
• The recommendation wouldn't save energy within the boundaries of the industrial process, the operating conditions behind the pay-back period haven't occurred yet, or it wasn't issued in the first four years of the baseline period 5

Your verifier checks this as part of the baseline data report, and where relevant in the annual activity level report 5. If you were cut and later complete the recommendations, or equivalent measures, you can ask to recover the allowances with your verified activity level report; once your competent authority agrees and the Commission has adopted its decision on the adjustment, you get the full amount for the remaining years of the period 31.

The climate-neutrality plan condition

This condition applies if at least one of your product benchmark sub-installations had emission levels above the 80th percentile for its benchmark in 2016 and 2017 6. It doesn't apply where that sub-installation accounted for no more than 20% of the installation's preliminary free allocation for 2021 to 2025 6.

To avoid the 20% cut, all three of these must hold 6:

• You submitted a climate-neutrality plan to the competent authority by 30 May 2024, or with your application for free allocation 6
• The competent authority found its content and format compliant with Implementing Regulation (EU) 2023/2441 6
• A verifier confirmed you reached the plan's targets and milestones 16

The plan sets out measures and investments to reach climate neutrality by 2050, milestones and targets for 2025 and each five-year period after, the investments in euros, and the expected effect of each measure on emissions 832. The milestones are checked for the period until 31 December 2025, and then for each period ending on 31 December of every fifth year 1. You report on them in a verified climate-neutrality report, due by 31 March 2026 for the period until 31 December 2025, and by 31 March of every fifth year after, unless your competent authority sets an earlier date 33. If the milestones to the end of 2025, or for 2026 to 2030, aren't verified, you get no more than 80% of your free allocation 1.

What happens if my production changes?

Your free allocation follows your output when it moves by more than 15% 134. Every year, the competent authority compares each sub-installation's average activity level over the two previous years with the historical activity level used to set the allocation 3435. If the difference is more than 15%, the allocation for that sub-installation changes by the exact percentage, from the following year 34. Further changes follow only when the difference passes the next 5% step, and no change is made unless it adds up to at least 300 allowances 3436. For heat, fuel and process emissions sub-installations, the comparison uses the average of the expected activity level instead 34.

The comparison runs on your activity level report. You must submit it, verified, by 31 March each year, unless your competent authority has set an earlier date, and the 2026 report covers the two years before 7. Without a verified report, the authority suspends the issue of your free allowances 7. A sub-installation that stops operating loses its free allocation for the rest of that year, pro rata, and gets nothing from the following year 34. You must also tell the competent authority about any other change to the installation that affects its allocation 37.

When do I receive the allowances?

By 30 June each year, the competent authorities issue that year's free allocation 2. The Commission says it adopted Decision C/2026/5089 setting the free allocation for each installation for 2026 to 2030, alongside Decision (EU) 2026/1312 on the national implementation measures 21. Our explainer on the yearly compliance cycle shows where this date sits in the yearly cycle of reporting and surrendering allowances.

What could change?

Two Commission proposals of 17 July 2026 would change free allocation 1516. Neither is law, and both could change before they are adopted.

Higher heat and fuel benchmarks: COM(2026) 619

Commission proposal COM(2026) 619 would raise the free allocation that the heat and fuel benchmarks give for 2026 to 2030 15. It would lower the maximum annual reduction rate for those benchmarks from 2027 to 2030, so as to use the extra amount available for free allocation without triggering the correction factor; the Commission puts that amount at around 80 million allowances 15. The top-up for 2026 would come through the benchmark values for 2027 15. Installations carrying out oil and gas activities, under NACE codes 0610, 0620, 1920 and 4950, would be left out 15.

If adopted, it would enter into force on the third day after its publication 15.

Free allocation after 2030: COM(2026) 616

Commission proposal COM(2026) 616, the review of the EU ETS, would change free allocation in three ways 16:

• A slower CBAM phase-out. The CBAM factor would fall more slowly from 2028 and reach 0% in 2038, as the table above shows; this change would apply from 30 September 2027 16.
• Investment conditions from 2031. From the period starting on 1 January 2031, an installation would get 80% of its free allocation once its "Invest in EU decarbonisation plan" is verified and approved 16. The other 20% would come only after the competent authority confirms that investments worth at least the value of all its free allocation for the period were made in the EU and led to significant emission reductions 16. This would replace the energy-audit and climate-neutrality plan conditions from 2031 16.
• The list and the 100% rate until 2040. The carbon leakage list would continue to apply until 31 December 2040, and sectors on it would keep 100% free allocation until 2040 16. Free allocation to district heating would fall after 2030, to nothing in 2040 16.

The Commission calls 2031 to 2040 Phase V; it calls 2021 to 2030 phase 4 1621. Our Decode on what the July 2026 review would change covers the rest of the proposal 16.

What should I do?

Work through these steps for each installation that applies for free allocation:

1. Map your sub-installations. Assign every product, heat, fuel and process emissions sub-installation, and record the NACE or Prodcom code each one serves and the CN codes of any CBAM goods 4. Then check those codes against the carbon leakage list at the end of this page 29.
2. Check your energy-audit recommendations. If your installation has to carry out an energy audit, implement its recommendations, or document why one of the exceptions applies, before your verifier checks it 5. Or, if you were already cut, you can ask to recover the allowances once the recommendations are implemented 31.
3. If you are above the 80th percentile on a product benchmark, keep your climate-neutrality plan current and have its milestones verified; the next climate-neutrality report covers the period from 2026 to 2030 633.
4. Submit your verified activity level report by 31 March each year, or by any earlier date your competent authority sets, and tell it about changes that affect your allocation 737.
5. Plan for the cuts in law. If you are not on the list, your free allocation falls to nothing in 2030, except for district heating; if you produce CBAM goods, it falls each year to nothing from 2034 18914. Treat the proposals as possible changes until they are adopted.

This is general information, not legal advice. For decisions about your company, check with a lawyer or adviser.

Which sectors are on the carbon leakage list?

These sectors are deemed to be at risk of carbon leakage for 2021 to 2030, under Delegated Decision (EU) 2019/708 2829.

Source: Commission Delegated Decision (EU) 2019/708, Annex. Four-digit codes are NACE sectors; longer codes are Prodcom subsectors. 29