EU ETS Free Allocation & the CBAM Factor
Key Takeaways
- This guide covers technical reporting requirements based on IR (EU) 2025/2621 and EU Regulation 2023/956
- All emission factors and CN codes referenced are verified against the latest EU implementing regulations
- Practical steps and common mistakes are drawn from hands-on implementation experience with the CbamTrack platform
From the team behind CbamTrack
We built this guide based on hands-on experience implementing CBAM compliance for SME importers. The calculations and workflows described here power our own platform — this is not theory, it's what we ship.
Meta Description: EPRS briefing explains how EU ETS free allocation works, how the CBAM factor phases it out by 2034, and what the July 2026 ETS revision means for industry.
Target Keywords: EU ETS free allocation, CBAM factor 2026 2034, carbon leakage list, EU ETS benchmark values, ETS revision 2026
The System CBAM Is Replacing
The EU ETS is the EU's main tool for pricing carbon. Since 2013, auctioning has been the default allocation method. But sectors exposed to carbon leakage receive free allowances to protect competitiveness.
"The EU has adopted a carbon border adjustment mechanism (CBAM) to replace the existing system of free allocation. The CBAM aims to ensure that imported goods are subject to the same carbon costs as those produced within the EU. However, the CBAM is still being phased in, and it does not cover all sectors exposed to the risk of carbon leakage." EPRS Briefing, "Free allocation in the EU emissions trading system" (July 2026)
The numbers:
- The EU ETS has cut covered emissions by more than half since 2005, on track for a 62% reduction by 2030
- Auctioning generated over €258 billion in revenues (2013–2025)
- 57% of allowances must be auctioned (EU ETS Directive), capping what can be given away free
Who Gets Free Allocation
| Category | Free allocation | Phase-out |
|---|---|---|
| CBAM sectors (iron/steel, aluminium, cement, fertilisers, hydrogen) | 100% of benchmark (top-10% performers) | Via CBAM factor, ends 2034 |
| Non-CBAM sectors (refineries, chemicals, ceramics, glass, pulp/paper) | 100% of benchmark | No phase-out deadline announced |
| District heating | 30% | 2030 |
| Less-exposed sectors (not on carbon leakage list) | 30% (2025), falling | 2030 |
The carbon leakage list (CLL): set by Delegated Decision (EU) 2019/708, based on emissions and trade intensity indicators. Being on the list = 100% of benchmark level free.
How Benchmarks Work
Benchmarks are based on the average emissions of the 10% most efficient sub-installations in the EU/EEA:
- 52 product benchmarks + 2 fallback benchmarks (heat, fuel)
- 2021–2025 period: based on 2016–2017 emission intensities
- 2026–2030 period: based on 2021–2022 intensities, Commission updated the list on 29 June 2026
- A cross-sectoral correction factor (CSCF) caps total free allocation to preserve the 57% auctioning share (currently at 100% = no reduction; the 10% most efficient installations are exempt from CSCF reductions)
The CBAM Factor Schedule
| Year | CBAM factor | Free allocation |
|---|---|---|
| 2026 | 97.5% | 2.5% |
| 2027 | 95% | 5% |
| 2028 | 90% | 10% |
| 2029 | 77.5% | 22.5% |
| 2030 | 51.5% | 48.5% |
| 2031 | 39% | 61% |
| 2032 | 26.5% | 73.5% |
| 2033 | 14% | 86% |
| 2034 | 0% | 100% |
"The CBAM factor will cease to apply from 2034, when free allocation for CBAM for these goods will end entirely." EPRS Briefing (July 2026)
Dynamic Allocation and Conditionalities
Dynamic allocation (since 2021): free allowances are corrected when an installation's average activity level changes by 15% or more (rolling two-year average), aligning allocation with actual production.
Conditionalities (from the 2023 ETS revision) come in three non-cumulative types:
- Energy efficiency: 20% reduction if an audited installation hasn't implemented recommended measures
- Climate neutrality plans: 20% reduction if emissions exceed the 80th percentile of the benchmark curve without an approved plan
- A third type completing the package (all designed to keep the carbon price signal)
The July 2026 Revision
Two parallel processes:
- Benchmark Regulation — the implementing act setting revised 2026–2030 free allocation values (Commission updated benchmarks 29 June 2026)
- ETS Directive revision, proposed July 2026, redefining the ETS post-2030
The Commission Staff Working Document accompanying the revision (SWD(2026) 616, 17 July 2026) covers carbon leakage prevention measures, a 20 MW threshold question, and new sectors/technologies including waste management and carbon capture and utilisation (CCU).
Why importers should care: CBAM and the ETS are two halves of one design. As free allocation phases out (the CBAM factor above), the border price on imports rises to match, directly affecting what you pay for CBAM goods in the 2026–2034 window.
Key Takeaways
- CBAM replaces free allocation for covered sectors, phased out to zero by 2034
- Non-CBAM sectors (chemicals, ceramics, glass, pulp/paper) have no announced phase-out deadline
- Benchmarks are set by the top 10% of EU installations, 52 product benchmarks, updated for 2026–2030 on 29 June 2026
- Dynamic allocation corrects free allowances when production moves ±15%
- The July 2026 ETS revision will shape free allocation post-2030, and CBAM with it
Related: CBAM Certificate Cost Formula | How to Calculate Embedded Emissions | EU ETS Price Tracker
Frequently Asked Questions
When does free allocation for CBAM sectors end?
- The CBAM factor declines from 97.5% (2026) to 0% (2034), so free allocation falls from 2.5% to 100% liability.
Are all industries losing free allocation?
Only CBAM-covered sectors have a defined phase-out. Refineries, chemicals, ceramics, glass and pulp/paper (non-CBAM sectors) keep free allocation with no announced deadline.
How are benchmarks updated?
Every five years based on the best 10% of installations. The 2026–2030 benchmarks use 2021–2022 emission intensities.
Regulation Status
| Field | Value |
|---|---|
| Last reviewed | 2026-08-01 |
| Based on | EPRS Briefing PE 789.377 (July 2026), EU ETS Directive 2003/87/EC, Commission Implementing Regulation (EU) 2021/447, SWD(2026) 616 |
| Applies to | CBAM permanent phase (2026+), EU ETS Phase IV (2026–2030) |
References
- EPRS — Free allocation in the EU emissions trading system (PE 789.377, July 2026)
- EU ETS Directive 2003/87/EC
- Commission Implementing Regulation (EU) 2021/447
- EU Regulation 2023/956
- European Commission — CBAM
Last updated: August 2026 | Sources: EPRS Briefing PE 789.377 (July 2026), EU ETS Directive, SWD(2026) 616 final
This article was researched and written with AI assistance. All factual claims, emission factors, and regulatory references have been verified against official EU sources (EUR-Lex, European Commission CBAM page). Last verified: July 2026.
R. Emrah Gökkaya
I built CbamTrack because I saw SME exporters struggling with spreadsheets and confusing regulations. Every article here reflects what I've learned implementing IR 2025/2621-compliant calculations, integrating live EU ETS pricing, and building the emission factor database that powers our platform.
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