The Business for CBAM Coalition is extremely concerned about the Commission President’s implied statements at the 19 March European Council on the EU ETS (ETS1) to reassess the phase out of free allocation (FA) beyond 2034 for CBAM sectors.
Rather, we believe the EU should stay the course: The trajectory of the FA should not change for any sector. Too many investment decisions have been made on this planned phase-out. Revising the foreseen phase-out of FA will negatively impact European frontrunners across industries as it would punish innovative first movers. Furthermore, it risks watering down the impact of the CBAM at a time when all industries call for a watertight instrument.
Rather than slowing down the FA phase out trajectory, the proceeds of FAs taken from CBAM sectors currently flowing into the Innovation Fund (IF) should be used more effectively. In the current IF, billions of euros are tied up via lump-sum CAPEX grants for years because they are promised projects that never make it to FID. That is why the European Court of Auditors (ECA) found that by the end of June 2025, only 2.7% of the IF’s EUR 12.3 billion was actually paid out. Billions of euros have been promised to projects that use the full 4 years to decide on whether or not to take an FID. If they then give back the money because they do not meet the deadlines in time, this money will have not been utilised for years. This presents a huge opportunity cost.
Instead of solely lump-sum CAPEX grants, the proceeds from phased out FA could partially be used in a similar way to the ETS investment booster: as below-market rate loans or output-based support for actual low-carbon production. This means the money can be ex-post support, so not related to investment promises or future production. It is something that can be directly modelled into business models (ex-ante conditionality, US Inflation Reduction Act style). Because the money is finite, we suggest rewarding early movers by providing them with a fixed amount of money per ton of low-carbon production, allocated on a first-come, first-served basis until the envelope is exhausted. This approach is light on administration: in principle the only critical administration required is the output, and the penalty for non-delivery is simply no subsidy. This provides a strong incentive to bring substantial low-carbon production online as soon as possible. And importantly: it is additional to what is already foreseen today, so a true carrot, not a stick.