The Fit for 55 Package has been adopted but... things could have gone a lot better. In fact, as we show in our updated ETS simulator, the EU risks missing the goals it set for itself.

Going on in the background: revisions of the Free Allocation Regulation (FAR) which could have drastic consequences for industrial decarbonisation (or lack thereof) and of the Innovation Fund, which risks wasting taxpayers’ money on projects that may be innovative but not sustainable.

If you have a question, comment, or want to alert us about an upcoming advocacy opportunity, please don’t hesitate to reach out:
free allocation regulation

Powering Through the Cap

One uncertainty concerns the incentives set by the Free Allocation Regulation. For many years we pointed out the absence of incentives set by the current regime. This issue was raised during the EU ETS trilogue and some wording was added to the amended Directive to remedy it. However, the Commission’s proposals so far have been quite timid and are unlikely to incentivise significant emission reductions from industry.

Given the lack of incentive created by free allocation rules, industry might not significantly change its emission levels for another decade. Therefore, decarbonisation efforts are likely to rely, once again, on the power sector which has already reduced its emissions (contrary to industry).

EU to Miss Climate Goals

Following the adoption of the EU ETS directive amendment and the CBAM, Sandbag’s newly updated simulator predicts that emissions from sectors covered by the ETS may exceed the cap by up to 37%. This comes despite renewed efforts by the European Commission to achieve the revised goal of reducing emissions under the ETS by 62% by 2030.

The culprit will be a combination of minimal changes to emissions by industry (particularly steel and cement) and aviation sectors and difficulties faced by the power sector to decarbonise at a fast pace while battling growing demand from subsidy-backed hydrogen electrolysers.

Sandbag had previously warned that the new legislation left too many loopholes and did not sufficiently incentivise industrial decarbonisation.

Reforming Free Allocation

Earlier this spring, Sandbag presented to the European Commission’s Expert Group on Climate Change Policy a proposal for reforming the granting of free emission permits to industry under the bloc’s carbon market.

Our proposal aims to incentivise the switch to lower carbon production methods, which the current way of handing out free allowances does not. By awarding free allowances for the use of scrap, our proposal would create sufficient incentives to encourage investment in steel mills able to use more scrap in flat steel product manufacturing.

The impact could be considerable: with a similar amount of free allocation, 160m tonnes of CO2 could be reduced through this incentive, under the same assumption that, with the REPowerEU plan, 1.5m tonnes of hydrogen will be used by steel plants by 2030.
The Commission’s proposal is limited to small changes made to individual benchmarks. For example, for steel, it is planning to extend the boundaries of the ‘hot metal’ benchmark so that it covers direct reduced iron (DRI).

We are worried that the CCEG on FAR is not on track to fulfill its mandate to ensure that "free allocation for the production of a product should (…) be independent of the feedstock or the type of production process” as per Recital 10 of the amended ETS Directive.

Making Scrap Count

We even joined forces with industry on the Free Allocation Regulation reform and sent a joint letter with EuRIC, the voice of the European recycling industry. In our letter, we argued that, to reduce emissions and minimise material use, but also to eliminate dependencies on systemic rivals, circularity is crucial on the EU’s path to Net Zero. We proposed to make free allocation dependent on products rather than processes. This could save 160 million tonnes of CO2 by 2030.

Fixing the Commission's Innovation Fixation

The EU’s Innovation Fund, launched in 2018, is the EU’s programme for funding cutting-edge low-carbon technologies. It is currently being overhauled to reflect recent changes to the Emissions Trading System. However, the Commission is ignoring most of its flaws (concerning upfront spending, competition, circularity, and scalability). This is bad news for the taxpayer and sustainability.

We submitted our recommendations to the Commission’s expert group, which has frustratingly ignored it. Not only that, the next (and only second) expert group meeting will not take place until late September, when the Delegating Act revising the Innovation Fund will already have been adopted. This flies in the face of the stakeholder exchange and transparency that these expert groups are supposed to provide.
If you would like more information on any of these topics, or to speak with a member of the Sandbag team, please send us an e-mail.

What we're reading


28 June: Environment Council.

30 June: Last day for European Parliament or Council to reject Delegated Act on RFNBOs.

30 June: Deadline for Member States to submit their National Energy and Climate Plans (NECPs)

1 July: Spanish Council Presidency starts.

11 July: Commission to present ‘Greening Transport Package

July: Adoption of Delegated Act for revision of Innovation Fund.

About Sandbag

Sandbag is a non-profit climate change think tank which uses data analysis to build evidence-based climate policy. We focus on EU policies such as the EU Emissions Trading Scheme and climate governance, and emissions reductions in industrial sectors.

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Flat Steel in the Free Allocation Regulation

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The European Hydrogen Bank Confirms a Blind Support Approach

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Feedback on the Draft of the CBAM Implementing Regulation

We welcome the Commission's draft of the CBAM implementing regulation concerning the reporting obligations and provisional methodology for calculating embedded emissions in CBAM goods. However, we have concerns regarding the accounting and monitoring rules applied to metal scrap. We are worried that they may open the door to carbon leakage for aluminium and steel production, i.e. the metals currently covered …

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Anil Xavier on Unsplash

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