The Challenge
Free CO2 permits under the EU’s Emissions Trading System (ETS1) are a well-known tool to protect heavy industry against carbon leakage. However, back in 2020, the way these free CO2 permits were distributed (based on a system called ETS product benchmarks) was one of the least-watched corners of EU climate policy. Several ETS product benchmarks were built around outdated production processes, which meant early movers using cleaner technologies fell outside the benchmark and received little to no free allocation, while higher-emission routes remained comfortably covered.
For example, the Hydrogen benchmark covered only fossil-based production, meaning a company investing in renewable hydrogen would exit the ETS1 and lose its free allocation. The Sintered Ore benchmark only covered iron ore producers making CO2-intensive sintered ore fines, while cleaner iron ore pellet producers were pushed into the fallback benchmarks and received a fraction of the free allocation per tonne of iron ore that their higher-emission peers received. The whole logic was backwards.
Building The Coalition
When my team and I started speaking to EU policymakers about this issue back in 2020, they acknowledged the problem but said they could not undertake action until we showed it was something holding back clean innovations across several industries and countries. My job was therefore to turn this technical issue into a cross-industry story that EU policymakers could engage with. I brought together and coordinated an informal coalition of early movers across iron, steel, cement, hydrogen and power, and together we worked the file at three decisive moments:
- During the drafting of the European Commission’s 2021 ETS1 proposal,
- During the co-decision negotiations in 2022 and 2023 with the European Parliament and Council, and
- Inside the European Commission’s Climate Change Expert Group (CCEG) that produced the follow-up Delegated Regulation in 2024.
Over roughly a year of monthly meetings, I worked with other expert group members to build the case for technology-neutral benchmarks, and prepared technical submissions on several of them. Where the analysis pointed in a different direction from other contributions, we set out the data: that new and legacy production techniques competed for the same markets, and that inputs for cleaner production were available at a scale relevant to the whole sector.
The Outcome
The outcome, published in the EU Official Journal on 4 April 2024, fundamentally reshaped how free allowances are distributed across several key benchmarks. In the iron ore sector alone, I helped revise the main ETS benchmark in such a way that around 9 million free CO2 permits per year would shift away from higher-emission iron ore routes, and up to 3 million additional free permits per year would flow to clean iron ore producers over 2026 to 2030. In addition, breakthrough technologies such as renewable hydrogen now qualify for free allocation for the first time. All in all, a win-win for the climate and for sustainable business cases.
