<- Back
Summary

Why are there free EUAs in the EU ETS?

Summary

The EU Emissions Trading System (ETS) initially used free carbon allowances to educate stakeholders, protect industrial competitiveness, and ensure macroeconomic stability. As the Carbon Border Adjustment Mechanism (CBAM) is introduced, the EU ETS is transitioning to a market-based approach, reducing the need for free allowances. This shift reflects a move towards a more global and environmentally driven system within green finance.

Return to Blog
Sommaire
Book a call

Carbon allowances are issued by regulators, with a portion allocated for free to covered installations. The EU ETS balances environmental goals with economic realities.

Teaching the rules of the game 

Initially, free allocations were important for educating stakeholders about the EU ETS functioning. When the scheme was launched in 2005, as a novel system, these free allowances helped installation representatives learn about the cap-and-trade compliance mechanisms without immediate financial implications. This gradual approach minimized initial costs and facilitated a smoother transition to a fully operational market-based system.

Protectinging industrial competitiveness

Free allowances protect the competitiveness of European industries. Introducing a carbon cost too abruptly can significantly increase operational expenses for industries, leading to higher prices for EU products. This could disadvantage European businesses compared to those in regions without such stringent carbon costs, potentially leading to a loss of market share for the bloc. Free allowances act as a buffer, making sure that the transition to a carbon neutral economy does not harm European competitiveness.

Macroeconomic stability

Free allowances contribute to macroeconomic stability by preventing sudden spikes in energy production costs that could be driven by high carbon prices. By moderating these costs, the EU ETS helps to avoid inflationary pressures from rapidly rising energy prices. It is important for the EU bloc to keep a macroeconomic balance as it works towards its ambitious environmental objectives.

The debate over free EUAs

Free carbon allowances, within a scheme based on the "polluters pay" principle, have not always been well-received. Many stakeholders and NGOs argue that these allowances effectively weaken the EU ETS’ effectiveness and do not sufficiently drive industries to optimize operations and invest in greener technologies. Regulators have aimed to balance holding every installation accountable for its CO2 emissions with maintaining economic stability.

Free EUAs will not be needed in the future 

While free allocations have been essential for the introduction and past evolution of the EU ETS, the system is now progressing. The Carbon Border Adjustment Mechanism (CBAM) is being introduced to address carbon leakage by imposing carbon costs on imports from countries with less stringent climate policies. As the role of free allowances in protecting EU competitiveness is no longer needed, the EU ETS is adopting a more global, exclusively market-based approach.

Do you like this article?

Share it with your network and introduce Homaio to those interested in impact investing!

The Homing Bird

A newsletter to help you understand the key challenges of climate finance.

Sign up to our newsletter

Utimate guide to carbon markets

Dive into the world of carbon markets, where economics, finance, and environmental science converge. Get your ultimate guide now.

Thank You !
Find our guide with the following link 👉
Download whitepaper
Oops! Something went wrong while submitting the form.
White Paper homaio

Do you like this article?

Share it with your network and introduce Homaio to those interested in impact investing!

Understanding in depth

Start Investing in the Stock Market Successfully on a Small Budget
August 18, 2025

Start Investing in the Stock Market Successfully on a Small Budget

You don’t need a finance degree or large capital to start investing. This article guides beginners through the basics of stock market investing—why it matters, how to manage risks, and which tools to use. Learn how to build a diversified portfolio with small sums using ETFs, choose the right tax wrapper (PEA, CTO, life insurance), and adopt simple strategies like DCA. Investing becomes a tool for both personal growth and sustainable impact—especially when combined with Homaio’s offer to invest in carbon allowances and help accelerate decarbonization.

Wealth Diversification

Boost Your Monthly Income with Smart Investments
August 18, 2025

Boost Your Monthly Income with Smart Investments

This guide explores how to turn your savings into reliable monthly income. From safe options like life insurance and SCPIs to higher-yield strategies such as dividend stocks and bonds, it explains the tools available for building passive income. You'll also discover how to optimize taxation, assess risk, and even align income generation with climate impact through carbon allowance investing. Whether you're seeking stability or performance, this article helps you design a personalized strategy to generate income that supports both your financial goals and your values.

Wealth Diversification

Eco ETFs: Understanding and Investing in Sustainability
August 18, 2025

Eco ETFs: Understanding and Investing in Sustainability

This article decodes how ecological ETFs work, how to spot truly sustainable funds, and how to align your investments with your environmental values. It explains key approaches like best-in-class, exclusions, and thematic strategies (renewables, water, hydrogen), as well as how to choose funds based on your goals. It also highlights tools like Greenfin and Article 9 classification to avoid greenwashing. Finally, it shows how ETFs and carbon allowances—available via Homaio—can work together to build a portfolio that drives impact and performance.

Climate Finance

Understanding in depth

No items found.

You might also like

Start Investing in the Stock Market Successfully on a Small Budget
August 18, 2025

Start Investing in the Stock Market Successfully on a Small Budget

You don’t need a finance degree or large capital to start investing. This article guides beginners through the basics of stock market investing—why it matters, how to manage risks, and which tools to use. Learn how to build a diversified portfolio with small sums using ETFs, choose the right tax wrapper (PEA, CTO, life insurance), and adopt simple strategies like DCA. Investing becomes a tool for both personal growth and sustainable impact—especially when combined with Homaio’s offer to invest in carbon allowances and help accelerate decarbonization.

Wealth Diversification

Boost Your Monthly Income with Smart Investments
August 18, 2025

Boost Your Monthly Income with Smart Investments

This guide explores how to turn your savings into reliable monthly income. From safe options like life insurance and SCPIs to higher-yield strategies such as dividend stocks and bonds, it explains the tools available for building passive income. You'll also discover how to optimize taxation, assess risk, and even align income generation with climate impact through carbon allowance investing. Whether you're seeking stability or performance, this article helps you design a personalized strategy to generate income that supports both your financial goals and your values.

Wealth Diversification

Eco ETFs: Understanding and Investing in Sustainability
August 18, 2025

Eco ETFs: Understanding and Investing in Sustainability

This article decodes how ecological ETFs work, how to spot truly sustainable funds, and how to align your investments with your environmental values. It explains key approaches like best-in-class, exclusions, and thematic strategies (renewables, water, hydrogen), as well as how to choose funds based on your goals. It also highlights tools like Greenfin and Article 9 classification to avoid greenwashing. Finally, it shows how ETFs and carbon allowances—available via Homaio—can work together to build a portfolio that drives impact and performance.

Climate Finance

You might also like

No items found.