Legitimacy and Consistency of Free Allocation in the EU ETS: The Role of Substitutes in Product Benchmarks

The EU emission trading system (ETS) is the primary tool for reducing greenhouse gas emissions (GHG) and combating climate change. Free allocation of emission allowances plays an important role within this system, and will continue to do so, also after the European Commission’s ‘Fit for 55’ proposal package. This article discusses the determination of free allocation by use of product benchmarks, and the assessment of substitutability under the product benchmark system, and how they relate to the legitimacy and proper functioning of the ETS. It is argued that a coherent, ETS-specific test should be applied when the Commission assesses the substitutability that underpins the product benchmarks, and that full judicial review is warranted going forward, akin to that deployed by the EU courts in competition cases. Emission trading system, EU ETS, free allocation, benchmark, substitute