What Free Allocation Reform Means for UK Industry

Written by Tim Atkinson | 1 December 2025

The response to the UK Emissions Trading Scheme (UK ETS) free allocation consultation was published by the UK ETS Authority on 26 November 2025.

The response maintains the existing allocation framework for now, offering a stable environment for businesses to plan up to 2027.

But from 2028–2030, expect carbon compliance exposure to increase, especially for sectors on the carbon leakage list as the forthcoming UK Carbon Border Adjustment Mechanism (CBAM) comes into force.

UK Emissions Trading Scheme: free allocation review - GOV.UK

Free allocations under UK ETS were originally designed to shield energy-intensive and trade exposed industries from excessive carbon costs and prevent carbon leakage.

With these changes, efficiency, decarbonisation efforts and proactive carbon risk management strategy will become essential to stay competitive.

CFP Energy is an award-winning carbon compliance organisation with specialised support for businesses covered by the UK ETS, to get immediate support with aligning your strategy, you can reach us by entering your details, here.

Key Decisions

The recent review by the UK ETS Authority assesses how free allocations, and the underlying methodology, should evolve from 2027 onwards.

The review balances two major policy goals: providing industry with predictability and aligning with the UK’s broader net-zero and CBAM objectives.

Retaining the current carbon leakage list.

No early phase out of free allocations for sectors not on the carbon leakage list.

The retention of current benchmarks for 2027, with the in-principle intent to adopt updated EU benchmark values from 2028-2030.
A gradual phase out of free allocations for sectors covered by the UK Carbon Border Adjustment Mechanism beginning in 2027, with an indicative phase out trajectory of 9 years.

Free Allocation Industry Impact

Decision / Change	What It Means for Industry
2027 uses existing methodology (historical activity level (HAL) + fixed benchmarks)	Short-term stability for planning and budgeting; no immediate compliance shock.
Pandemic years (2020 or 2020–2021) can be excluded from baselines	Companies affected by COVID related downturns avoid unfairly low baselines — protects free allocation eligibility.
Benchmarks remain unchanged for 2027; will be recalibrated 2028–2030	Allows time to adapt — but signals tougher emissions efficiency expectations soon.
Free allocation phase-out for CBAM sectors begins in 2027	Gradual exposure on imports to carbon costs; higher compliance costs for sectors like steel, cement, aluminium, fertilisers.
No new conditionality or performance based eligibility rules yet	Lower administrative burden in the short term; decarbonisation is currently optional rather than mandatory.

Considerations for Industry

For 2026, focus remains on planning and strategy.

With no abrupt changes next year, companies should use this time to:

Review emission profiles and operational efficiency,

Forecast future carbon exposure,

Plan capex for decarbonisation or efficiency upgrades.

Explore risk management solutions to hedge future UKA needs

Efficiency becomes a competitive edge

As benchmarks tighten, efficient operations — modern processes, fuel switching, heat recovery, electrification — will yield greater advantage.

Carbon cost passthrough likely

Sectors such as steel, cement, chemicals, glass and aluminium may pass increased carbon costs to customers — potentially raising price of carbonintensive materials.

Strategic supply chain reassessment

Buyers and importers may start favouring lowercarbon materials or suppliers with strong emissions strategies — influencing longterm procurement and investments.

Risk exposure for CBAM sectors increases

Firms in CBAM covered industries need to budget for rising ETS-related costs and consider decarbonisation investments or shifting production strategies.

CFP Energy also provides support for CBAM, learn more about our services, here.

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