This report investigates why the offshore oil and gas sector receives free allowances in the EU ETS, during phases 3 (2013–2020) and 4 (2021–2030). From the outset, free allocation has been undermining the environmental effectiveness of the ETS and few arguments supported that the offshore oil and gas production was exposed to so-called ‘carbon leakage’; risk of industrial relocation to non-mitigating countries due to ETS costs. While allowances are distributed through auctioning as the principle rule, certain carbon leakage exposed industries, like the oil industry, are instead granted free allocations.

The continuation of free allocation to the offshore oil gas sectors until 2030 is explained by theoretical frameworks from historical institutionalism and policy entrepreneurship. In-depth interviews with 20 informants and process-tracing from 2006–2017 gives most support to institutional explanations. In the phase 3 revision process in 2006–2008, the establishment of severe carbon leakage risk and the alliance of energy-intensive industries pressured EU policymakers to continue free allocation. The offshore industry’s strategies barely made any impact. During the phase 4 revision between 2014–2017, the negative feedbacks on carbon leakage risk convincingly explains why oil extraction gets prolonged free allocation, while the oil industry exercised ‘failed entrepreneurship’ to preserve gas production’s free allowances. These findings suggest that business power in climate policy is facilitated by institutional perceptions, and less so by the industry’s own strategies. This indicates that global corporations cannot just ‘set the rules’ in international climate policy