The EU’s provisional deal gives factories a temporary cost cushion as free carbon allowances fall, but does not exempt them from emissions rules.
How free allowances work
Under the EU Emissions Trading System, companies must surrender one allowance for every tonne of carbon dioxide they emit. Auctioning is the usual way to get allowances, but some industrial sites receive them for free to limit the risk that production will move to countries with weaker climate rules.
Free allocation usually follows product-specific benchmarks. Heat and fuel benchmarks are fallback rules for processes without a suitable product benchmark, and calculate allowances based on energy use. They affect industries including chemicals, ceramics, glass, paper and food processing, and account for about a quarter of free allocation.
Why negotiators added allowances
The deal followed the regular update of ETS benchmarks for 2026–2030. Revised heat and fuel benchmarks reduced free allowances, leading businesses and member states to warn that costs would rise for exposed industries. In July, the European Commission proposed a separate, temporary fix to increase protection against carbon leakage through 2030 without cutting free allocation more broadly across sectors.
The provisional deal provides a cushion of roughly 121 million allowances. About 88 million were available under existing ETS rules. Negotiators added 28 million that had not been allocated because sites failed conditions such as energy-efficiency audits or climate-neutrality plans, plus five million for especially exposed sectors. Any unused part of that targeted reserve is to support investment through the EU’s Modernisation and Innovation funds. The package is broader than the Commission first proposed.
What the deal does and does not change
The deal sits alongside the EU’s Carbon Border Adjustment Mechanism, or CBAM. It puts a carbon cost on imports of certain goods as free allowances for EU producers of those goods are phased down. CBAM does not cover every process that relies on heat and fuel benchmarks. A wider 2026 ETS proposal from the Commission would extend the phaseout of free allowances for CBAM-covered goods to 2038. That proposal, and the future of allowances after 2030, are separate from this temporary deal.
Affected firms should need to buy fewer permits and have more certainty about near-term costs. The Council says this can help keep production and jobs in Europe while industries make the transition. Critics, including Carbon Market Watch, say repeatedly softening benchmark rules risks weakening pressure to cut fossil-fuel use and invest in cleaner production. Firms still have to surrender an allowance for every tonne they emit, but free allowances affect their costs and who bears them.
What happens next
The agreement is provisional. The Council and Parliament must endorse it and formally adopt the text, after which the Commission would set rules for calculating the benchmarks. This process is expected to continue into the first quarter of 2027. The 2030 date ends this targeted increase, not all free allowances. A wider ETS revision will shape what protections continue afterward and how they fit with the EU’s emissions goals and CBAM.