Free allowances are emission permits that regulators give to selected companies without charge. In an emissions trading system, they are used as a transitional measure for sectors that face high compliance costs, intense international competition, or a slower path to decarbonization. The goal is to reduce sudden cost shocks while industries modernize their equipment and processes.
They matter because carbon markets only work if the price signal is strong enough to change behavior. If free allowances are too generous, they can weaken that signal and delay investment in cleaner production. If they are targeted carefully, they can help prevent carbon leakage, preserve industrial output, and give firms time to adapt. In practice, they are often tied to benchmarks so the most efficient plants receive support without rewarding inefficiency.