— By Heather Arnest Liesch — 

The European Commission’s 17 July review of the Emissions Trading System (ETS) proposes stronger funding for decarbonisation projects, a more gradual reduction trajectory, and an extension of free allocations beyond 2030.

The centrepiece is a EUR 100 bn Industrial Decarbonisation Bank, with an estimated EUR 30 bn earmarked for early movers. It also proposed maintaining the Innovation Fund and requiring Member States to spend 50% of national ETS revenues on decarbonising ETS sectors.

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A second change flattens the Linear Reduction Factor to 3.7% for the 2031–2035 period and 1.7% for 2036–2040. This is a particular relief for industry, as allowances will continue to be issued past 2040, according to the Commission.

The use of high-integrity international carbon credits from 2036 is also under consideration, according to the Commission.

For sectors not covered by the Carbon Border Adjustment Mechanism (CBAM) – covering most of the chemical and plastics industries – the carbon leakage framework is extended until 2038, with companies able to claim up to 100% benchmark-based free allocation.

“At the same time, free allocation becomes conditional on investing in decarbonisation in Europe,” the Commission said. From 2031, companies will be required to invest an amount equal to 100% of the allocation value and file verified plans.

This is a deliberate trade-off: “Together, these measures protect European industry against carbon leakage, maintain a level playing field with international competitors, while at the same time driving investment in Europe’s industrial transition,” the Commission noted.

European chemical industry association Cefic (Brussels; www.cefic.org), which had recently called for urgent adjustments to the ETS, has levelled heavy criticism at the review. It said the positives of flatter emissions trajectory and the option to use international carbon credits are “fully offset” by a conditioning of free allocation.

While the carbon leakage protection remains in place, Cefic said requiring investments and adding bureaucracy removes its effectiveness. 

For SMEs, in particular, the organisation noted that the additional pressures affecting all chemical players can be a matter of survival. “Companies should not be forced to make investment commitments in exchange for regulatory support,” it said.

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Cefic notes that the industry has cut emissions over 60% between 1990 and 2022 while raising output 43%. Meanwhile, investment has fallen 86%, and Europe has lost 10% of its chemical production capacity.

With intensifying global competition leaving companies unable to pass on costs, the industry grouping said the ETS proposal missed the mark on providing a realistic pathway for transformation. “Every missed opportunity makes it harder to reverse the downswing,” said Cefic president Markus Kamieth.