Units known as EU allowances (EUAs) can be acquired in three different ways in the EU’s Emissions Trading System. They may be bought in auctions, bought in the open (secondary) market, or received for free. It is the latter option that is most problematic and, as evidenced by Carbon Market Watch research, has led to companies profiting from the EU carbon market. 

The ‘free allocation’ of EUA units, also known as ‘free allowance’,  was offered to polluting sectors covered by the EU ETS deemed to be at risk of so-called carbon leakage (see related entry). 

Our ‘Emissions Aristocracy’ and similar reports highlighted how freely allocating emissions allowances disincentivises major polluting sectors from taking sufficient climate action, and in 2022 units totalling a market price of around €47.6 billion were handed out cost free – effectively a licence to pollute at no cost to the polluter but at massive cost to society and taxpayers.

Free allocation undermines the level of climate action demanded by science, and also raises serious questions about economic fairness, as well as social and environmental justice. These free pollution permits represent a market failure within the EU ETS since the external costs of the carbon pollution are not internalised. Companies have no incentive to clean up their act, and citizens carry the cost of this pollution. At the same time, by handing out free pollution permits, EU governments forego auctioning revenue which could have been spent on further climate action.

Carbon Market Watch campaigns vigorously for the EU ETS free allocation loophole to be closed once and for all. The polluter must pay and it must pay fairly.