Carbon markets
Free Allocation
The distribution of emissions allowances to covered installations at no cost, used in emissions trading systems as an alternative to auctioning, chiefly to shield trade-exposed industries from carbon leakage.
Definition
Free allocation is the granting of emissions allowances to installations or companies without charge under an emissions trading system. In the EU ETS, auctioning has been the default method since 2013 — with up to 57% of general allowances auctioned over 2021–2030 — but sectors deemed at risk of carbon leakage continue to receive free allocation, largely benchmarked against the most efficient installations.
References
Overview
What it means
Free allocation protects competitiveness by giving emitters allowances they would otherwise have to buy, but it blunts the carbon price signal and has been criticised for generating windfall profits when companies passed on the notional cost of free allowances to consumers. Allocation based on benchmarks is intended to reward efficiency rather than historical emissions.
How it is used
Policymakers calibrate free allocation shares and benchmarks in ETS design; the EU is phasing out free allocation for sectors covered by the Carbon Border Adjustment Mechanism; and analysts compare allocation rules across trading systems worldwide.
Why it matters
How allowances are distributed determines who pays for decarbonisation, how strong the incentive to abate is, and whether ETS revenues are raised for public use.
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