This is a subsidy scheme within the EU Emissions Trading System (EU ETS) where heavy industrial operators are compensated with state aid for the higher energy costs to power their activities, to prevent the affected companies from conducting their business in a jurisdiction that charges less for that same activity.

This is an example of a measure to address hypothetical ‘carbon leakage’. However, the compensation has removed an incentive for the affected companies to decarbonise their production or to increase their usage of renewable energy sources. 

Carbon Market Watch campaigns for indirect cost compensation and  free allocations to be removed from the EU ETS to ensure the full potential of carbon pricing is realised.