Free allocation forms an important exemption from the EU Emissions Trading System (EU ETS). The system is advocated as an effective tool to protect carbon intensive industrial actors from the threat of carbon leakage which would harm the EU’s economy while increasing total emissions because of the exodus of production abroad. The extent of the threat of carbon leakage remains questionable, however, as since the establishment of the EU ETS, the EU has methodically tried to avoid its potential impacts with free emission allowances. With the current EU ETS reform, this strategy is to be changed and gradually replaced by the Carbon Border Adjustment Mechanism (CBAM). The conflict in Ukraine and the related changes in the EU energy sector will have long term consequences that may overshadow any impact of carbon leakage. Therefore, carbon leakage measures must be made sufficiently flexible for a quickly changing environment.