Yesterday (5 December), the European Commission published a 

call for feedback on the draft of the Free Allocation Regulation

 (published with the stakeholder consultation). The consultation period will run until 2 January 2024. This legislation covers technical details for how free allocation will change for the next period (2026-2030).

The changes laid out in this secondary legislation are expected to be applicable from 1 January 2024, but will not impact free allocation for incumbent installations until 2026. For new entrants submitting applications for free allocation following 1 January 2024, the new rules will apply.

This legislation translates objectives from the EU ETS Directive into technical details for how the distribution of free allocation will take place for the period between 2026 and 2030. Among these changes are conditionality rules, updates to benchmarks, and treatment of some processes (exchangeability of fuel and electricity, process emissions, etc.).

As a part of the reforms to the EU ETS, the 20% worst performers under a benchmark are required to establish and carry out climate-neutrality plans. 

Commission Implementing Regulation (EU) 2023/2441

, adopted 31 October, provides details on the practical steps that must be taken to be compliant. The draft free allocation regulation sets rules for how the 20% free allocation penalty for non-compliance will be implemented. Notably, the draft legislation provides a route for non-compliant installations to recover the penalty in the event that the climate-neutrality plan is carried out and verified. The regulation also establishes a de minimis rule, under which conditionality rules do not apply.

The updated Free Allocation Regulation draft will eliminate the rules for the exchangeability of fuel and electricity. Essentially, this is intended to ensure that electrified industrial processes are set to benefit from free allocation in the same way as emissions-intensive processes. The regulation also seeks to ensure that, with this change, compensation for indirect emissions does not address the same impacts as free allocation for electrified processes.

Benchmark values will be updated ahead of the 2026-2030 period to reflect the new minimum and maximum reduction rates per the EU ETS Directive, however a separate review took place through 2023. This review focused on ensuring that existing benchmarks provided the desired incentives towards improved efficiency. In light of these reviews, the system boundaries and definitions under several product-specific benchmarks will be updated upon adoption of this text. All of the iron and steel (excl. iron casting) benchmarks will be modified: sintered ore, hot metal, EAF carbon steel, EAF high alloy. White and grey clinker benchmarks will be opened to alternative, lower-emissions intensive products. Lime, dolime, ethylene oxide, ethylene glycols, and soda ash benchmarks will also be modified. Notably, the hydrogen benchmark will also be updated to include water electrolysis.

Further secondary legislation concerning the distribution of free allocation is on its way ahead of the next free allocation period (2026-2030). In 2025, we can expect two implementing acts; one covering rules for adjusting free allocation based on changes in activity levels, the other updating benchmark values.

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