The European Commission has detailed its plans to update its main decarbonisation strategy, the EU Emissions Trading System (ETS), and while the chemicals industry has welcomed some of the changes it has warned that others risk cutting industrial investment, not emissions.
Under the system, companies must monitor and report their greenhouse emissions and buy enough allowances - permits - to fully cover them. The allowances are mostly sold in auctions, though companies receive some allowances for free, and can buy and sell them as needed. The emissions cap across Europe is reduced annually which means permits become scarcer and emitting greenhouse gases becomes increasingly expensive - with the aim of giving industry a cost incentive to reduce emissions.
The Commission says that up to 2023, the ETS has helped bring down emissions from European power and industry plants by approximately 47%, compared to 2005 levels, and it has also raised more than €270 billion. But it also acknowledges that in recent years an increasingly uncertain geopolitical and economic outlook has put increased pressure on European industry, which led it to propose a series of changes to the system.
The main changes proposed include €100 billion in funding for the Industrial Decarbonisation Bank to provide for industrial decarbonisation projects. Rules around how ETS auction revenues are used will be strengthened so that member states will be required to spend 50% of their national ETS revenues on investments to decarbonise industry. The Commission said the proposed changes would ‘provide relief to industry’ by adjusting the ETS reduction trajectory from 2031, while the purchase of international credits could create additional emissions space in the EU ETS.
“To reach our 2040 target, European industry needs to undergo a significant transformation to modernise, decarbonise and switch to cleaner and more energy-efficient technologies, electrify, use renewable hydrogen, and capture CO₂ from industrial emissions through Carbon Capture Utilisation and Storage (CCUS),” the Commission said, arguing that many investment decisions already take the expected carbon price into account.
The rate at which permits become scarcer is determined by the linear reduction factor; here the Europe is proposing revising the Linear Reduction Factor (currently at 4.3%) to 3.7% for 2031-2035 and 1.7% for 2036-2040.
“This ensures that the carbon market continues to deliver emissions reductions in a predictable and cost-effective way, while providing more time and flexibility for industry to transition and greater certainty for businesses making long-term investment decisions,” the Commission said.
For sectors covered by the Carbon Border Adjustment Mechanism (CBAM), free allocations will continue to be gradually phased out in step with the gradual phase-in of CBAM. For sectors not covered by CBAM but exposed to carbon leakage risks, the proposal extends the carbon leakage framework until 2038. However, from 2031, installations will be required invest in decarbonisation projects in Europe to receive their full allocation.
European chemicals industry association Cefic said that the proposed changes have raised “fundamental concerns” across large parts of the European chemical industry. It said that at a time when the sector is grappling with high energy costs and fierce global competition “the proposal falls short of addressing escalating CO₂ costs in both short and medium-term, without addressing the underlying barriers to industrial transformation”.
It said positive aspects like the flattened reduction trajectory and the possibility of using international carbon credits are being fully offset by a “drastic conditioning” of free allocation. By removing the carbon leakage protection, which companies benefitted from and imposing investment requirements showed that “the Commission’s proposal is disconnected from the realities that industry is facing on the ground: no business case nor enabling conditions,” the association said.
Cefic president Markus Kamieth said Europe’s industry is losing ground at an alarming pace and said the proposals are a missed opportunity to provide a realistic pathway for industrial transformation and restore confidence in Europe as a place to invest and produce, warning: “Every missed opportunity makes it harder to reverse the downswing, and increases the risk that investment, production and innovation leave Europe for good,” he said.
Cefic said for large parts of the chemical industry, the conditions needed to transform are still not in place, including affordable energy, adequate infrastructure, scalable technologies and functioning markets for low-carbon products.
“Without these conditions, additional ETS costs cannot drive the investments needed to decarbonise and instead risk adding further pressure to Europe’s industrial competitiveness,” it said, noting that between 1990 and 2022 Europe’s chemical industry reduced emissions by more than 60% while increasing production by more than 43%.
“Achieving the next phase of emission reductions will require investments of tens of billions of euros in low-carbon technologies before 2030. Yet recent figures show that investments by the European chemical industry dropped by 86% in the past year – a stark indication that the sector is losing ground in global competition and that confidence in Europe as a place to invest and produce is fading,” it said. “The urgency is unprecedented and immediate relief for industry is needed well before 2030. Europe is rapidly approaching a tipping point where lost production capacities, dismantled value chains and foregone investments can no longer be recovered, and beyond with Europe’s climate goals will become increasingly difficult to achieve."
The German Chemical Industry Association (VCI) has also criticised the proposals, warning that the move risks turning industrial transformation into industrial dismantling: if policymakers increase carbon dioxide costs before companies even have a chance to invest in new processes, they will systematically undermine the industry, it said.
VCI said putting a price on carbon dioxide can only reduce emissions if companies are able to invest large-scale in climate-friendly production, and said that in recent years, companies have already built pilot plants, electrified existing ones, and tested low-CO2 processes. The next step involves billions of euros in investments in new generations of plants. VCI said that emissions trading must not outpace reality, warning that as long as electricity and hydrogen networks, CO₂ infrastructure, and markets fail to keep pace, increased pressure will lead to plant closures. Production will continue nonetheless, it said - but abroad and often with a worse climate footprint.
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