EU ETS free allocation for CBAM-covered sectors reduces from 97.5% in 2026 to 0% on January 1, 2034, and each percentage point of that reduction directly increases the net certificate cost importers pay under the EU carbon border adjustment mechanism. The phase-out does not happen in equal annual steps: the steepest acceleration occurs between 2029 and 2030, when the CBAM factor jumps from 22.5% to 48.5% in a single year. Understanding the exact year-by-year schedule is essential for importers who are calculating multi-year compliance budgets and for exporters who need to benchmark their carbon costs against EU domestic producers.
Caption: EU ETS free allocation for CBAM sectors declines over nine years, with the 2029 to 2030 period representing the steepest single-year drop in the schedule.
What Is EU ETS Free Allocation and Why Does It Affect CBAM?
EU ETS free allocation is the provision of EU allowances to domestic EU producers at no charge, a mechanism established under Article 10a of Directive 2003/87/EC to protect energy-intensive industries from carbon leakage while the EU carbon price was still developing. Steel, cement, aluminium, and fertilizer producers inside the EU received a portion of their required allowances free each year, reducing their actual net cost of compliance.
Free allocation creates an asymmetry problem. A domestic EU steelmaker who receives free allowances pays only the fraction of their carbon obligation not covered by the free share. A non-EU steelmaker exporting the same product to the EU previously faced no carbon cost at all. CBAM addresses this asymmetry by requiring importers to purchase certificates proportional to the embedded emissions of their goods, using a price linked to the EU ETS. Free allocation and CBAM are therefore deliberately linked: as free allocation declines, CBAM phases in at an equal rate.
The legal connection is explicit. Article 30d of the EU ETS Directive mandates the parallel phase-out, and Implementing Regulation (EU) 2025/2620 establishes the SEFA (Specific Embedded Free Allocation) methodology, which calculates the exact reduction in CBAM certificate obligations that corresponds to the remaining free allocation in any given year.
Complete Year-by-Year Free Allocation Phase-Out Table (2026–2034)
The 9-year phase-out schedule is defined in Article 10a(1a) of Directive 2003/87/EC as amended. The CBAM factor represents the fraction of free allocation that has been removed; the free allocation remaining is what domestic EU producers still receive at no charge. Both values apply simultaneously starting January 1 of each year.
The complete free allocation phase-out schedule across all CBAM sectors is shown in the table below.
| Year | CBAM Factor | Free Allocation Remaining | Net Certificate Obligation vs Gross |
|---|---|---|---|
| 2025 | 0% | 100% | 0% |
| 2026 | 2.5% | 97.5% | 2.5% |
| 2027 | 5% | 95% | 5% |
| 2028 | 10% | 90% | 10% |
| 2029 | 22.5% | 77.5% | 22.5% |
| 2030 | 48.5% | 51.5% | 48.5% |
| 2031 | 61% | 39% | 61% |
| 2032 | 73.5% | 26.5% | 73.5% |
| 2033 | 86% | 14% | 86% |
| 2034 | 100% | 0% | 100% |
Source: Article 10a(1a) of EU ETS Directive 2003/87/EC as amended. Full phase-out takes effect January 1, 2034.
Three features of this schedule require specific attention for compliance planning. First, 2026 and 2027 represent a low-cost window: net obligations are 2.5% and 5% of gross, respectively. Second, the 2029-to-2030 jump of 26 percentage points is the single largest annual increase in the entire schedule. Third, the full 100% CBAM factor is reached in one step on January 1, 2034, not phased in gradually over 2033 and 2034.
How Free Allocation Determines Net CBAM Cost Year by Year
The net CBAM certificate obligation in any given year equals the gross embedded emissions cost multiplied by the CBAM factor for that year. Free allocation remaining has no direct effect on importers' calculations. The SEFA methodology applies only to domestic EU producers, adjusting their ETS compliance costs. For importers, the CBAM factor is the operative number.
The net cost formula is straightforward: net CBAM cost = (embedded emissions in tCO₂e) x (EU ETS certificate price) x (CBAM factor). Using blast furnace steel (BF-BOF) at an EU ETS price of approximately €70 per tCO₂ as of late March 2026, with an emission factor of 2.0 tCO₂ per tonne of steel, the net costs per tonne across the schedule are as follows.
The 4 most consequential years for importer financial planning produce these net costs for BF-BOF steel at €70/tCO₂:
- 2026: 2.0 t × €70 × 2.5% = €3.50/t net
- 2028: 2.0 t × €70 × 10% = €14.00/t net
- 2030: 2.0 t × €70 × 48.5% = €67.90/t net
- 2034: 2.0 t × €70 × 100% = €140.00/t net
The 2026 net cost of €3.50 per tonne grows to €140.00 per tonne by 2034 at the same ETS price, a 40-fold increase. If ETS prices rise to the analyst consensus of €100–€126 per tCO₂ by 2030, the 2030 net cost for BF-BOF steel rises to €97.00–€122.22 per tonne. Importers sourcing 10,000 tonnes of BF-BOF steel annually face a CBAM cost increase from approximately €35,000 in 2026 to €1.4 million in 2034 at today's ETS price alone.
The same calculation structure applies across all CBAM sectors. Urea fertilizer with an emission factor of 2.5 tCO₂/t produces a net cost of €4.38/t in 2026 and €175/t in 2034 at €70/tCO₂. Primary aluminium at 1.5 tCO₂/t produces €2.63/t in 2026 and €105/t in 2034. These are gross figures before any Article 9 deduction for carbon prices paid in countries of origin.
The 2029–2030 Cliff: Why This Period Requires Planning Now
The 2029-to-2030 acceleration from 22.5% to 48.5% is the critical planning window for importers currently operating under the low-cost 2026–2027 phase. Free allocation for domestic EU producers drops by more than half in a single year, and CBAM obligations for importers follow identically. Importers who treat 2026 and 2027 as stable baselines and do not plan for the 2030 step will encounter a cost doubling in one annual transition.
Three factors compound the 2030 exposure. First, ETS prices are projected to be higher in 2030 than in 2026, with analyst consensus at €100–€150 per tCO₂. Second, the default value mark-up under Implementing Regulation (EU) 2025/2621 reaches its maximum level of 30% above calculated values from 2028 onward, making default-based compliance progressively more expensive. Third, CBAM certificates sold under the certificate mechanism (which begins February 1, 2027) will price at the weekly average of EU ETS auction prices from 2027 onward, meaning importers absorb full price volatility with no averaging cushion.
The compliance preparation the 2029–2030 cliff requires includes the following actions:
- Obtain verified actual emissions data for all production installations by 2027 to avoid the 30% default value mark-up
- Model CBAM costs under ETS price scenarios of €70, €100, and €130 per tCO₂ for years 2028–2032
- Build supplier carbon cost conversations into procurement contracts before the 2029 renewal cycle
- Monitor EU ETS reform proposals from member states, since any ETS price changes affect CBAM certificate prices directly and proportionally
How CBAM Certificates Interact with the Free Allocation Schedule
CBAM certificates are the financial instrument through which importers settle their CBAM obligation. Each CBAM certificate corresponds to one tonne of CO₂e of embedded emissions, purchased at the EU ETS price. The free allocation schedule determines what fraction of the gross obligation must actually be settled in certificates in a given year.
In 2026, with a CBAM factor of 2.5%, an importer with 1,000 tonnes of embedded emissions across all CBAM goods pays for 25 certificates (1,000 × 2.5%), not 1,000. The remaining 975 tonnes are effectively offset by the free allocation that domestic EU producers still receive. Certificate sales begin February 1, 2027, which means 2026 embedded emissions are covered by certificates purchased and surrendered after that date, with the first CBAM declaration due September 30, 2027.
The quarterly holding requirement requires importers to hold CBAM certificates equal to at least 50% of cumulative embedded emissions at each calendar quarter end. In 2026, applying the CBAM factor, this means holding certificates for 50% of (cumulative emissions × 2.5%). The obligation is small in 2026 but the operational requirement to monitor, calculate, and hold certificates begins immediately and does not scale down with the factor.
What Happens After Free Allocation Reaches Zero in 2034
Free allocation reaches 0% on January 1, 2034, and remains at 0% permanently. From that date, CBAM importers bear 100% of the gross embedded emissions cost in certificates, and domestic EU ETS participants in CBAM sectors bear 100% of their carbon obligation at auction prices with no free allowances.
The post-2034 period introduces a structural symmetry that was the original design intent of the CBAM-ETS connection. A domestic EU cement producer and a non-EU cement producer exporting to the EU both face a carbon price equal to approximately the EU ETS clearing price per tonne of CO₂ embedded in their product. The deduction mechanism under Article 9 of Regulation (EU) 2023/956 allows importers to reduce their CBAM obligation by the carbon price effectively paid in the country of origin, so exporters in countries with robust carbon pricing (South Korea, Switzerland, and Norway among them) gain a partial offset.
The downstream product expansion proposed in COM(2025)989, which would add approximately 180 steel and aluminium-intensive downstream products from January 2028, does not alter the free allocation phase-out schedule for currently covered sectors. It extends the CBAM mechanism to new product types while the same 2026–2034 schedule governs the existing 6 sectors.
How Does Free Allocation Affect EU Domestic Producers Differently Than Importers?
Free allocation affects EU domestic producers and importers through entirely different mechanisms. This is the contextual border between the two sides of the CBAM-ETS interaction.
EU Producers: Declining Cost Shield
EU domestic producers in CBAM sectors receive declining free allowances under the ETS. In 2026, a steel producer in Germany receives 97.5% of their benchmark allowances free and purchases only 2.5% at auction. By 2030, they purchase 48.5% at auction. By 2034, they purchase 100%. The free allocation phase-out increases the actual cost of carbon compliance for EU producers, creating a growing financial incentive to decarbonize or to pass carbon costs downstream.
The SEFA methodology ensures that CBAM import costs mirror this domestically rising cost profile. An importer's net CBAM cost rises in the same proportion as the domestic producer's net ETS cost rises. This parallel structure is what prevents carbon leakage from persisting through the transition period.
Does the Free Allocation Phase-Out Apply to All ETS Sectors or Only CBAM Sectors?
The accelerated free allocation phase-out schedule applies specifically to CBAM-covered sectors, namely iron and steel, cement, aluminium, fertilizers, electricity, and hydrogen. Other ETS-covered sectors, including aviation and downstream chemical production, follow a different free allocation trajectory not linked to the CBAM mechanism. The CBAM-specific phase-out in Article 10a(1a) of the ETS Directive is distinct from the general ETS free allocation rules.
Is Free Allocation Being Eliminated for All EU Industries by 2034?
Free allocation for non-CBAM ETS sectors is not eliminated by 2034. The accelerated 2026–2034 phase-out is specific to the 6 CBAM sectors as the price of CBAM protection. EU industries outside the CBAM scope retain free allocation beyond 2034 under the standard ETS Directive provisions, subject to separate benchmark reviews. This distinction matters for companies with production processes that span both CBAM and non-CBAM ETS installations.
Frequently Asked Questions: CBAM Free Allocation
What percentage of ETS free allocation remains in 2026?
97.5% of EU ETS free allocation remains in 2026 for CBAM-covered sectors. The CBAM factor for 2026 is 2.5%, meaning importers pay certificates for only 2.5% of their gross embedded emissions obligation. This is the lowest CBAM factor in the entire 2026–2034 schedule.
When does EU ETS free allocation for CBAM sectors reach zero?
EU ETS free allocation for CBAM sectors reaches 0% on January 1, 2034, as mandated by Article 10a(1a) of Directive 2003/87/EC as amended. From that date, the CBAM factor is 100% and importers bear the full certificate cost for all embedded emissions in their CBAM goods.
Does EU ETS free allocation in 2026 mean CBAM costs nothing?
CBAM does not cost nothing in 2026, but the net cost is very small because 97.5% free allocation remains. A BF-BOF steel importer paying approximately €70/tCO₂ in EU ETS-linked certificate prices faces a net cost of €3.50 per tonne of steel in 2026. That same cost reaches €140 per tonne in 2034 at the same ETS price. The 2026 figure is the baseline, not the ceiling.
Which sectors does the ETS free allocation phase-out cover?
The accelerated 2026–2034 free allocation phase-out covers the 6 CBAM sectors: iron and steel, cement, aluminium, fertilizers, electricity, and hydrogen. These sectors are listed in Annex I of Regulation (EU) 2023/956. Other EU ETS sectors follow a separate free allocation trajectory not governed by the CBAM phase-out schedule.
What is the biggest single-year jump in the ETS free allocation phase-out?
The largest single-year jump is the 2029-to-2030 transition, where the CBAM factor increases from 22.5% to 48.5%, a 26 percentage point acceleration. This is more than double the 2028-to-2029 increase of 12.5 percentage points and represents the point at which free allocation for domestic EU producers drops below 52% for the first time.
Can importers reduce their CBAM certificate obligation based on carbon prices paid abroad?
Importers reduce their CBAM certificate obligation under Article 9 of Regulation (EU) 2023/956 when the goods' embedded emissions have been subject to a legally binding carbon price in the country of origin. The deduction applies to the carbon price effectively paid, converted to EUR. This deduction is independent of the free allocation phase-out schedule and stacks on top of the CBAM factor reduction.
Related Resources
For context on how CBAM certificate prices are set and the EU ETS market that drives them, see EU ETS and CBAM certificate prices.
For the technical rules on what counts as embedded emissions under the CBAM certificate calculation, see CBAM embedded emissions.
For the full regulatory text and legal basis of the CBAM mechanism, see CBAM regulation.
For the full importer compliance workflow from authorization through annual declaration, see CBAM compliance for importers.
Caption: EU ETS prices determine the gross CBAM certificate cost; the free allocation phase-out schedule determines what fraction of that gross cost importers actually pay each year.