EU emissions trading system: free allowances must be better targeted - Main contents

​Free allowances still make up over 40 % of all available allowances under the EU’s ‘cap and trade’ emissions trading system (ETS), according to a new report by the European Court of Auditors (ECA). These free allowances, distributed to industry, aviation and, in some Member States, the electricity sector, were not well targeted. In addition, the speed of decarbonisation in the power sector was significantly reduced. The Commission needs to update its procedure for targeting free allowances to reflect the Paris Agreement and recent developments.

In principle, under the EU’s ETS, a price is put on carbon emissions and emission allowances are auctioned. Auction receipts also provide revenue for climate action. The EU’s ETS uses free allowances to discourage EU businesses from transferring activity to non-EU countries with lower environmental standards, as this would reduce investment in the EU and increase global emissions. This is known as “carbon leakage”. The industrial and aviation sectors benefit from free allowances, unlike most operators in the power sector, as it is considered that they can pass on carbon costs directly to the consumer. However, in the eight Member States with a GDP per capita below 60 % of the EU average, the power sector received free allowances to enable modernisation to take place.

“Free allowances should be targeted at those industrial sectors least able to pass on carbon costs to consumers,” said Samo Jereb, the ECA Member leading the audit. “However, this is not the case. Sectors representing over 90 % of industrial emissions are equally considered at risk of carbon leakage and benefit from continuous high rates of free allowances. Unless the allocation of free allowances is better targeted, the EU will not reap the full benefits the ETS could have on decarbonisation and public finances.”

Press Release: EU emissions trading system: free allowances must be better targeted, say auditors