Cefic urges rethink of EU carbon market

The European Chemical Industry Council (Cefic), which represents large, medium and small chemical companies across Europe, has urged EU policymakers to slow changes to the Emissions Trading System (ETS), the EU’s main carbon market for power plants and industrial sites.

In this system, companies must pay for their CO₂ emissions via tradable allowances, and the total number of allowances falls over time to cut emissions. Cefic warns that the current plan to tighten the ETS could accelerate plant closures and drive investment out of Europe without cutting emissions in line.

To manage this risk, energy‑intensive, trade‑exposed industries receive some allowances for free, known as “free allocation”. This is intended to prevent carbon leakage – situations where production, jobs and emissions move from Europe to countries with weaker climate rules, so emissions are shifted rather than reduced. Cefic argues that these safeguards are being weakened too fast.

In a 30 June message, Cefic President Markus Kamieth said the sector has already lost about 10% of European production capacity since 2022, with “unprecedented” restructurings and insolvencies. He cautioned that “Europe cannot succeed in its green transition, if it weakens the industrial base that has to deliver it.”

Call for realistic cap and stronger leakage safeguards

Kamieth argued that the ETS “must get the fundamentals right, well before 2030”. He said the cap on total emissions, updated performance benchmarks and rules on free allocations are tightening faster than industry can realistically transform. Key conditions are still missing, including affordable low‑carbon energy, grid and infrastructure build‑out, and clear market pull for low‑carbon products. In this context, he warned that “investment will leave Europe before emissions do” if companies are expected to make “massive investments to abate emissions – often without a viable business case”.

Cefic’s updated position paper, “The Future of the ETS, priorities for the chemical industry”, calls for a more “flexible, and industry‑supportive” ETS. It sets out principles such as a realistic cap trajectory, strong safeguards against carbon leakage, appropriate benchmarks, removal of the Market Stability Reserve (MSR) invalidation rule, no extra conditionality tied to free allocation, and clearer rules for carbon removals and carbon circularity. Without these changes, Cefic warns, “Europe risks losing industrial capacity without delivering any climate benefit, while increasing dependencies.”

Benchmarks, free allocation and MSR in focus

On the cap, Cefic says the plan for the ETS cap to reach zero by 2039 is “impracticable”. Technology, low‑carbon energy and infrastructure have “not reached the required level for a successful transition based on industrial transformation.” It “urgently asks for a more pragmatic approach”, calling for the cap decline to be slowed “as soon as possible, before 2030” and adjusted automatically when enabling conditions are not met, while still matching EU climate‑neutrality goals.

The paper also warns that tighter benchmark values and lower free allowance volumes are raising carbon costs at a time of high energy and regulatory burdens. In the ETS, most sectors use product benchmarks (for cement, steel, ammonia and other outputs), but some activities are covered by fallback benchmarks – default values for heat and fuel used when no product‑specific benchmark exists. Cefic says effective protection against carbon leakage depends on “a sufficient allocation of free allowances and indirect carbon cost compensation” and criticises the recent 50% cut in these fallback benchmarks for heat and fuel as “excessive, unrealistic, and not supported by the actual transition potential of the chemical sector”, arguing that the new values reflect a small number of highly subsidised projects rather than technologies that can be rolled out widely across chemical installations.

On conditionality, Cefic reiterates that “free allocation is an approach to reduce the risk of carbon leakage and not to incentivize investments.” It calls for avoiding new conditions for access to free allowances. Extra criteria based on energy audits or similar tools would “only increase ETS compliance costs exposure” and further limit CAPEX and OPEX capacity for climate investments. Cefic also supports reform of the MSR to stop allowance invalidation and improve market liquidity, and backs implementation of Article 6 of the Paris Agreement and future ETS linkages, provided international credits meet EU standards and avoid double‑counting.

ETS revenues and market pull for low‑carbon products

Cefic concludes that ETS revenues should be “fully channeled back to the industries in scope” to support reinvestment in climate transition. It notes that only a small share of ETS auction revenues currently returns to industry and calls for stronger demand‑side policies that reward low‑carbon goods, so trade‑exposed companies have a clear business case for major transition investments. Cefic frames the choice in simple terms: ETS reform should “drive industrial transformation in Europe – not deindustrialisation.”