EU lawmakers have provisionally agreed to give energy-intensive industries covered by the EU ETS ‘fallback’ benchmarks more than 120 million additional free allowances up to 2030, in a deal struck late Thursday between the European Parliament and the Council of member states, Carbon Pulse reports. For compliance buyers and investors, the agreement would raise free allocation to industrial installations whose products fall outside the system’s product-specific benchmarks, softening their need to buy allowances, while remaining a provisional deal that both institutions still have to formally adopt.
What the co-legislators agreed
Parliament and Council agreed on around 120 million extra free EU emissions trading system (ETS) allowances for industry from 2026 to 2030, Insight EU Monitoring reports, citing the Council. More precisely, the co-legislators agreed to increase free allocation for energy-intensive sectors at risk of carbon leakage, providing a total safety cushion of roughly 121 million free allowances.
The figure is built in layers. The provisional agreement builds on the Commission proposal to make around 88 million allowances available for free allocation under the existing ETS rules. To that sum, the co-legislators added a further 28 million allowances not previously allocated because installations did not meet ETS conditionalities, the obligations concerning energy efficiency audits or climate neutrality plans. They also agreed to set aside 5 million allowances between 2026 and 2030 to shield highly exposed, energy-intensive sectors from the risk of carbon leakage, meaning relocation to non-EU countries with weaker climate rules. Any allowances not used under this last measure will support investments via the Modernisation Fund and innovation in ETS sectors under the Innovation Fund.
From 80 million to 121 million: how the number grew
The Commission tabled its legislative proposal on 17 July 2026, revising Article 10a of Directive 2003/87/EC, the article that sets the rules for updating benchmark values and determining free allocation to sectors exposed to a high risk of carbon leakage, according to the European Parliament’s Legislative Train. The Commission proposed to reduce the maximum annual reduction rate applied to heat and fuel benchmark values for 2027 to 2030, using the entire 3% free allocation buffer, equivalent to 80 million allowances, without triggering a cross-sectoral correction factor. It valued the extra allocation at around 6 billion euros for 2026 to 2030.
The proposal carved out oil and gas activities, covered by NACE codes 0610, 1920 and 4950, from the softer reduction rate. For those activities, the Commission will instead establish sector-specific sub-benchmarks differentiated from all other fallback activities.
In the Parliament, the file followed the urgent procedure decided on 15 September 2026, with Adam Jarubas (EPP, Poland) as rapporteur. The report adopted at the October II plenary aimed to raise free allocation to around 99 million allowances for fallback sectors, setting the benchmarks below an indicative 12.5% reduction compared to 2021 to 2025 values, and proposed splitting 22 million allowances equally between the Modernisation Fund and the Innovation Fund. The final provisional deal, at roughly 121 million, went beyond both the Commission and Parliament figures.
Why fallback benchmarks matter
Free allocation in the EU ETS is based on performance benchmarks, comprising 52 product-specific benchmarks. Heat and fuel, also known as fallback, benchmarks allocate allowances based on energy consumption and apply to products and processes that cannot be covered by a product benchmark. The regular update of those benchmark values for 2026 to 2030, carried out in June, reduced free allocation, prompting concerns from industry and member states, and EU leaders noted in June 2026 the Commission’s intention to present a separate proposal in response.
What the Irish presidency said
“Through this agreement we will swiftly increase free allowances for vital energy-intensive sectors within the heat and fuel ‘fallback’ ETS benchmarks that underpin the European economy,” said Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment, in remarks quoted by Insight EU Monitoring. “This amendment will provide the predictability industry needs for the sustainable transition, while remaining competitive at home and retaining production within the EU.”
Next steps and what to watch
The provisional agreement will now have to be endorsed by the Council and the Parliament. It will then be formally adopted by both institutions following legal-linguistic revision. After adoption, the Commission will adopt implementing rules on the calculation of heat and fuel benchmarks. The file sits within the ‘One Europe, One Market Roadmap’, with a completion timeline for the first quarter of 2027.
Three points matter for market participants. First, status: nothing is law yet, and both endorsement and formal adoption are still pending. Second, demand: extra free allocation to fallback installations reduces the volume of allowances those installations must buy, a modest but real shift in compliance demand through 2030. Third, the treatment of oil and gas sub-benchmarks and the fate of the 5 million allowance reserve, including any transfer of unused volumes to the Modernisation and Innovation Funds, will determine how much of the cushion reaches the market in other forms.
