A joint NGO letter calls on the EU to exclude international carbon credits from the 2040 target. The signatories urge a domestic-only approach to protect climate credibility and ambition.
Free allocation has long been used to address carbon leakage under the EU ETS, but it has key limitations. It only covers emissions up to benchmark levels, fails to reward cleaner EU producers, and forfeits auction revenues that could support decarbonisation. It also creates perverse incentives by making high-emission goods artificially cheap.
The current carbon emissions reporting in the CBAM fails to achieve its goal of replacing free allocations under the EU ETS and undermines its integrity. A systematic default value system would improve the CBAM and safeguard the EU ETS.
We took part in a targeted survey run by the European Commission’s DG TAXUD on methodologies used to calculate embedded emissions and the rules for adjusting CBAM obligations alongside free allocation under the ETS. Our proposal: free allocation should be reformed to close the ‘DRI loophole’.