EU Nations Approve Carbon Benchmarks for Handout of Free Permits

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(Bloomberg) — European Union member states approved a controversial update of benchmark values for the bloc’s carbon market, taking a key step toward distribution of free allowances to companies in the flagship emissions trading system. 

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The new carbon efficiency benchmarks, which determine how many free permits facilities covered by the EU ETS will get in 2026-2030, have been a point of contention between the European Commission and energy-intensive industries concerned about costs. The approval on Monday came after the commission pledged a fast-track revision of the methodology for the five-year period to increase the number of free allowances, according to people with knowledge of the matter. 

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As part of the compromise, the calculation of 54 benchmarks already took into account indirect emissions, a move that will lead to €4 billion ($4.6 billion) more free allowances to some sectors, said the people, who asked not to be identified commenting on a private meeting. The change was aimed at addressing concerns among some governments and manufacturers over the region’s declining competitiveness.

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Still, the fuel and heat fallback benchmarks — crucial for many energy-intensive companies — will fall by the maximum allowed 50% versus 2013-2020 and by 34.1% compared with 2021-2025. Under the deal clinched on Monday, the commission will come forward with a separate proposal to revise those benchmarks at the same time that it presents a review of the ETS next month.

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The revision will cover allocations in the 2026-2030 period, with new sub-sector fallback benchmarks applicable as soon as possible, according to the people. It will be designed in a way to avoid the so-called cross-sectoral correction factor, which the commission is entitled to apply across industries to ensure that the total number of free allowances requested by governments doesn’t exceed the maximum allowed under EU law.

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The benchmark values represent the emissions intensity of the bloc’s most efficient industrial producers. If a plant or factory is as “clean” as the benchmark, it receives enough free permits to cover its emissions. The commission updates the benchmarks every five years to ensure that the free allocation rewards efficiency while incentivizing industry to rein in emissions. 

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Following the approval of member states, the updated benchmarks need to be adopted by the commission. In the next step, member states will need to submit national implementation measures before the EU decides if it needs to apply the so-called cross-sector correction factor. The commission signaled earlier this month that free allowances for this year could be issued toward the end of July.

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