The European Parliament’s largest group is weighing whether power generators should once again receive free carbon allowances, a question the bloc settled in the negative more than a decade ago. That the idea is being floated at all, and by the EPP rather than a fringe, is the signal worth reading, because it lands weeks before the Commission’s comprehensive ETS review on 15 July and recasts the competitiveness debate from heavy industry, where free allocation already exists, onto the one sector built from the start to buy every tonne it emits.
Full auctioning for electricity has been the load-bearing wall of the system since 2013. Generators surrender allowances against output and pass the carbon cost through to the wholesale price, and that pass-through is precisely the mechanism that has driven coal-to-gas switching and, latterly, the renewables build-out. Removing it, even partly, touches the part of the ETS that has done the most measurable work.
The one precedent, and how narrow it was
There is a single carve-out worth recalling, and its limits are instructive. Article 10c let ten lower-income member states hand transitional free allowances to power plants to modernise generation. In the current phase only Bulgaria, Hungary and Romania took it up, the option ran out at the end of 2024, and any unused allowances reverted to those states’ auction shares. So the existing template for free power allocation is small, geographically confined to the east, tied explicitly to modernisation investment, and now expired. Anything broader than that would not be a revival of 10c. It would be a new principle.
That distinction matters for how the idea travels. A targeted, conditional, eastern-modernisation instrument is defensible within the system’s logic and has a precedent. A general reintroduction of free allocation to generators sits against everything the post-2013 design was built to do, and would be read in those terms by the institutions that have to sign off.
Why now: the July review and the pressure behind it
The timing is not coincidental. The Commission’s benchmark update, proposed in May, already extends free allocation to cover indirect electricity emissions across fourteen product benchmarks, worth roughly €4 billion to industry over 2026 to 2030, and the parliamentary committee took the lower end of the benchmark-decline range when it cleared the draft in June. Czechia, Greece, Poland and Romania have been pressing for more free allocation linked to decarbonisation plans while opposing the benchmark revision. The orientation debate among Commissioners on 24 June confirmed how politically charged the 15 July package has become. Into that current, an EPP move on power-sector allocation reads as an attempt to widen the free-allocation conversation while the legislative window is open.
The framing will be competitiveness and electricity prices. The read here is that this is where the argument is weakest. The carbon component is a real cost to fossil generation, but it is not the main driver of high European power prices. Gas-fired plant sets the marginal price across much of the year, and it is the gas price, not the EUA, that does most of the work at the top of the merit order. Free allowances to generators would transfer value to those generators without reliably lowering the wholesale price consumers pay, because the marginal unit still prices in its full carbon cost as long as the system remains a cap. The instrument is poorly matched to the stated problem.
What this means for the EUA balance, utilities and the review’s direction
For the carbon market, the first-order price effect of any realistic version of this idea is modest. Power-sector volumes handed back as free allocation would be small beside the industrial free-allocation pool, and a tightly conditional eastern instrument smaller still. The more consequential effect is on signalling. The market has been pricing the 2026 review as the moment the system either holds its cap-and-invest trajectory or bends toward accommodation, and a serious push to free up power allocation would read as the latter, marginally bearish for the curve and, more importantly, corrosive to the long-horizon scarcity expectation that underpins forward EUA value.
There is a sharper contradiction underneath. The Commission is spending €4 billion of benchmark headroom to push electrification, on the theory that moving industrial load onto the grid is how Europe decarbonises and cuts exposure to volatile fuel costs. Shielding fossil generators from the carbon price at the same time works against that, because it weakens the very signal that makes clean electricity the cheaper marginal choice. An EPP that wants both electrification and free power allocation is holding two positions that pull in opposite directions, and the July review is where that tension will have to be resolved rather than papered over. For utilities with clean-heavy fleets, the quiet risk is that free allocation to laggard fossil peers erodes the relative advantage their decarbonisation was supposed to earn them under the cap.
