Estonian MEP Jüri Ratas proposes removing new investment conditions for free emissions allowances and additional protections for industry

Estonian MEP Jüri Ratas, of the European People’s Party group, proposes removing the new decarbonisation investment obligations that the European Commission wants to introduce for the allocation of free emissions allowances from 2031. In his draft opinion for the European Parliament’s Committee on Industry, Research and Energy, he also calls for mechanisms to halt or partially reverse the reduction in free allocations when protection for European industry against external competition proves insufficient.

In short, the Commission proposes granting 80% of the free allocation after approval of a decarbonisation plan, and the remaining 20% after verification of investments and emissions reductions. Ratas calls for the removal of this mechanism, which would require investments at least equal to the value of the entire free allocation over the five-year period. For sectors covered by the Carbon Border Adjustment Mechanism, the rapporteur proposes retaining a larger share of free allocations in 2030–2032. Assessments every two years could trigger a freeze on reductions and, if problems persist, their partial reversal. The overall emissions cap would decline more slowly than the Commission proposes in 2031–2035, with a linear reduction factor of 3.2% instead of 3.7%. From 2036, however, Ratas proposes 2.2%, compared with 1.7% in the Commission text, meaning a faster pace in the second stage. Installations with emissions below the average of the sector’s 10% most efficient installations would receive a 10% supplement to their free allocation, according to another amendment. The document is the rapporteur’s draft opinion and does not represent a position adopted by the committee or Parliament.

The dispute concerns how industry would continue to receive support under the European emissions trading system, known as EU ETS. According to the Commission, free allocations aim to limit the risk that production and emissions will be transferred outside Europe. Quantities are calculated using efficiency benchmarks, and allowances required by an installation that it does not receive for free must be purchased.

The Commission’s proposal would introduce, from 2031, a general investment condition for decarbonisation in the EU. Operators would have to prepare a plan verified and approved by the competent authority, and eligible investments would have to reach at least the economic value of all free allowances for the five-year period. The plan would have to provide for measures and interim targets compatible with climate neutrality.

The mechanism known as “80/20” concerns when allowances are granted, not the division of emissions between a free and a taxed portion. After the plan is approved, 80% of the allocation for the period would be distributed in annual instalments. The remaining 20% would be granted after confirmation of eligible investments in the EU and significant emissions reductions, with verification taking place no later than two years after the end of the period. The proposal includes exemptions, among others, for the most efficient installations and certain projects supported by EU funds.

Ratas calls for the deletion of the provisions establishing this mechanism. In the draft’s justification, he argues that rigid obligations and reinvestment deadlines could lead some energy-intensive companies to reduce operations or close installations. His argument is that the technologies needed to reduce emissions, including hydrogen, carbon capture and storage, and the electrification of high-temperature processes, are not yet available at sufficient scale or commercially viable for all sectors.

A second change concerns the gradual withdrawal of free allowances for products covered by the Carbon Border Adjustment Mechanism, CBAM. This mechanism concerns imports, while European exporters may remain exposed to competition from producers in countries without a comparable carbon cost. The draft seeks to introduce separate protections for this part of production as well.

The Commission already proposes extending free allocations for CBAM sectors until the end of 2037. Ratas retains their elimination from 2038 in the basic timetable, but changes the interim stages. The factor applied to the free allocation would be 70% in 2030, instead of 59%; 58% in 2031, instead of 48%; and 40% in 2032, instead of 37.5%. These percentages apply to the allocation calculated under ETS rules; they do not represent a guaranteed share of each factory’s actual emissions.

The timetable could be interrupted through a new mechanism for assessing CBAM’s effectiveness. The Commission would conduct the first assessment by 30 November 2028 and repeat it every two years, analysing capacity expansion outside the EU, declining European production, the growing share of imports, export trends and the difference between the carbon costs borne by producers.

For indicators concerning production, imports, exports and investment relocation, the draft uses thresholds of more than two percentage points compared with developments during the reference period, with adjustments specific to each indicator. For the difference in carbon costs, the proposed threshold is an increase of more than 15% during the assessment period. The rapporteur thus seeks to distinguish further deterioration from trends that already existed before the withdrawal of free allocations.

Triggering an indicator would halt the reductions scheduled for the following two years in the affected sector. If the problem persisted at the next assessment, the Commission would have to raise the allocation factor again, up to the level applicable in the year preceding the first assessment. Where only export-related indicators are affected, protection would cover the portion of the allocation corresponding to export exposure, not the sector’s entire production.

Separately from the free distribution of allowances, Ratas proposes changing the rate at which the system’s overall cap declines. The linear factor would be 3.2% in 2031–2035 and 2.2% from 2036, compared with 3.7% and 1.7%, respectively, in the Commission’s proposal. The change would reduce pressure in the first half of the decade, but accelerate the reduction compared with the Commission text in the second half. The percentages describe the trajectory of the ETS cap and do not constitute identical reduction obligations for each company.

The draft also includes an incentive for high-performing installations. Those whose emissions are below the average of the sector or subsector’s 10% most efficient installations, based on 2026 and 2027 and the relevant product benchmarks, would receive 10% more free allowances than the amount normally calculated. The supplement is presented as a reward for early decarbonisation efforts.

However, the text contains an inconsistency between the justification and the amendments regarding relocation. Ratas says he wants to retain the obligation for companies that move production outside the EU to surrender allowances. Amendment 28 nevertheless calls for the complete deletion of the paragraphs proposed by the Commission for the new mechanism, including the paragraph containing this obligation, without reintroducing it separately in the amendments presented.

The draft opinion, dated 18 September, is addressed to the Committee on the Environment, Climate and Food Safety, which is responsible for the legislative file. Ratas’s proposals must be examined through the parliamentary process; publication of the document does not change companies’ current obligations and does not establish Parliament’s final position in negotiations with the Council.