EC Draft Eyes 17% Cut in Free Carbon Allowances as Industry Faces Higher Compliance Costs

EC Draft Eyes 17% Cut in Free Carbon Allowances as Industry Faces Higher Compliance Costs A leaked Commission benchmark proposal and official confirmation of a 12% allowance reduction signal structurally tighter EU carbon markets from 2026. The European Commission is weighing a 17% tightening of the benchmarks that determine how much carbon industry receives for free under the EU emissions trading system, according to a leaked draft seen by Montel. Iron casting is among the sectors named as facing stricter thresholds in the text.⁷ That matters because benchmarks set the floor below which an installation must buy allowances in the open market. Tighten them and the shortfall grows, pushing structural demand for EUAs higher across steel, cement and other heavy industry that still relies heavily on free allocation.⁷ The scale is substantial. A senior EU official who declined to be identified told reporters in Brussels that total free allowances available to eligible operators would run around 12% below volumes issued over the previous five-year period, with the full allocation block carrying an estimated value of around €200 billion.¹ Climate Commissioner Wopke Hoekstra has framed the broader ETS review, due in July, as delivering "targeted improvements" while maintaining "stable long-term signals" for investors. The language is calibrated to reassure industry without signalling a rollback, but the leaked benchmark figures make clear that the adjustment pressure on heavy emitters will increase materially over the 2026-2030 allocation window.² Carbon traders took the direction in stride this week. European carbon prices recovered from an early decline to post strong afternoon gains, with traders citing positive fundamental sentiment, while UK allowances rose to a three-month high.³ The benchmark discussion is running alongside a parallel tightening of the carbon border adjustment mechanism. European Parliament members voted to delete a draft clause that would have allowed CBAM to be suspended for specific goods in emergency circumstances, backing a stricter and more permanent design for the import levy.⁶ The Commission has already simplified CBAM's reach by excluding shipments under 50 tonnes — removing roughly 90% of firms from scope — but the goods that remain inside face a harder regime if the MEP position holds.⁵ The methane question adds another layer of friction. U.S. LNG exporters have formally asked Brussels to delay enforcement of its methane emissions rules until at least 2028, arguing that compliance infrastructure is not yet in place and that the regulations are already creating uncertainty for suppliers.⁴ The request puts the Commission in an awkward position: American LNG is central to European gas security, but extending carve-outs for foreign exporters sits uneasily alongside tighter domestic carbon benchmarks for European industry. For EUA traders, the directional read is cleaner than the politics. A 17% benchmark tightening combined with a 12% reduction in total free volumes translates directly into higher structural demand from obligated installations over the coming allocation cycle.^7,1 The Commission has separately awarded €400 million to heat decarbonisation projects funded through the ETS, illustrating how revenues generated by the system are being recycled into industrial transition — which in turn signals policy commitment to keeping the cap tight rather than loosening it under competitiveness pressure.⁸ The unresolved risk is how much of the leaked benchmark proposal survives lobbying. Industrial groups have demonstrated they can blunt or delay Commission texts, and the combination of a 17% benchmark cut and a 12% reduction in overall free volumes will generate significant pushback from energy-intensive sectors already squeezed by high power and gas costs. Watch for the formal proposal text and any shift in Hoekstra's language on industrial competitiveness in the July review — that is where the next EUA price signal will come from.