The new rules for harmonized free allocation of allowances under the EU ETS were published this month in the Official Journal of the European Union. The amendments, which imply, among others, tighter benchmarks for the steel sector, were prompted by the need to align the allocation process with the new ambitions of the revised EU ETS.

The previous allocation system was criticized for failing to create incentives to decarbonize the European heavy industries, mainly the steel industry which is the most polluting industrial sector “responsible for no less than a quarter of all the emissions covered by the EU ETS,” as stated by Sandbag.

However, according to a recent report by LSEG analyst Luyue Tan, the updated rules applying to the steeling sector could “cut allocation by 2 million per year in 2026-2030 from our current supply assumptions based on the previous rules”, resulting in a total reduction of around 10 million allowances.

Still, from 2025, renewable hydrogen, ammonia, and green steel producers will be granted free allocation under the EU ETS. The decision is intended to level the industrial playing field by giving the same advantage as producers using polluting equivalents.

Based on estimates made by LSEG, free allocation granted to green technologies is estimated to range between 2-3 million allowances per year, offsetting the reduction predicted for the polluting steel production. Therefore, “the new allocation rules result in only minor changes in our free allocation projection for 2026 to 2030.”