The existing instruments for protecting against carbon leakage, that means the free allocation of emission allowances within the EU ETS 1 and the electricity price compensation in Germany and some other Member States, will be continued in part, particularly where the limitation of the scope of the CBAM requires this.
Climate Change 43/2019: Risks in the Post-Paris World
Climate Change 16/2018: Forms and Channels of
Free Allocation
Free allocation for industry and heat generation will also be continued in the context of the ‘Fit-for-55’ reform. However, industrial activities covered by the Carbon Border Adjustment Mechanism (CBAM) (see section C below) will receive a free allocation which will gradually decrease to zero from 2026 to 2034 and will be replaced step-by-step by the CBAM. Free allocation for other industries with a significant carbon leakage risk will continue in principle in accordance with the set benchmarks, but now with an additional conditionality. The allocation will be partially reduced if there is no evidence for ‘environmental services in return’ or ‘climate neutrality plans’ with binding milestones. The allocation for products with no significant carbon leakage risk will decrease linearly from 30 per cent based on the respective benchmark values in 2026 and will reach zero in 2030 except if other decision is taken as part of the review process in accordance with Article 30 Directive 2003/87/EC. The exception applies to the value for generating district heating, which remains constant at 30 per cent until 2030.
Furthermore, the above-mentioned benchmark values for the second allocation period (2026 to 2030) are currently being reviewed and adjusted by the European Commission on the basis of updated data on emissions and physical activity levels of the installations covered by the scheme (see Article 10a(2), subparagraph 3(c) to (e) of the EHRL). New installations will be added through adjustments in the scope of EU ETS 1 and the definition of benchmarks including installations that will significantly contribute to decarbonisation such as electrolysers that are powered by renewable energy. As these too will receive the free allocation in the future, a ‘level playing field’ will be created vis-à-vis comparable installations that previously received an allocation.
Electricity Price Compensation
The guidelines on granting aid to compensate for indirect CO2 costs under the EU Emissions Trading Scheme 1 (electricity price compensation) are expected to be amended by the European Commission in 2025. In particular, the electricity comsumption efficiency benchmarks, geographical areas and regional CO2 emission factors relevant for calculating the aid are to be updated.
To the topic
(partly available in German only)
Electricity Price Compensation
Introduction of a carbon border adjustment mechanism (CBAM)
The Carbon Border Adjustment Mechanism (CBAM) for imports was introduced as part of the ‘Fit-for-55’ package in October 2023 to supplement carbon pricing in the EU. Production-specific, product-related emissions, also known as ‘embedded emissions’, in the country of production will first be reported for a specific set of products including electricity, iron and steel, cement, aluminium, ammonia/fertilisers and hydrogen. Starting in 2026, CBAM certificates will be purchased and surrendered corresponding to the production-specific, product-related emissions. These ‘CBAM certificates’ are to be sold weekly by the competent national authorities at the price of EU ETS 1 emission allowances (EUA price).
Simultaneously to the step-by-step introduction of CBAM, free allocation for relevant products will be progressively reduced from 2026 to 2034 as the mechanism is intended to gradually replace the existing instruments to provide protection against carbon leakage. A decision will be made during the transition phase in 2023 to 2025 about the inclusion of further goods and indirect emissions from current CBAM goods that are linked to the purchase of heat or electricity from other installations.
From the start of the regular phase in 2026, there will not only be an obligation to report emissions, but also to purchase allowances equal to the manufacturing-related, product-specific emissions and to surrender the corresponding amount annually. These ‘CBAM certificates’ are to be sold weekly by the competent national authorities with the price of CBAM certificates based on the price of EU ETS 1 emission allowances (EUA price).
Article 30 of the CBAM Regulation (EU) 2023/956 contains the most important aspects for the further development of the CBAM, including the inclusion of additional goods and indirect emissions associated with the purchase of heat or electricity from other installations for goods currently covered by the CBAM. A legislative proposal on this is to be submitted by the end of the transition phase (2023 to 2025) as required. From the start of the regular phase, there will be further regular revisions of the CBAM Regulation in order to continuously develop it further. The first revision is scheduled for January 2028.
footnote