More than 100 European industrial companies have warned that proposed changes to the EU Emissions Trading System could add to the risk of factory closures and relocation if carbon costs rise before manufacturers can secure affordable energy and invest in cleaner production.
Industry warns of added pressure
A joint industry intervention reported on 5 November names groups including Covestro, Evonik, Wacker Chemie, Voestalpine and Thyssenkrupp’s steel business. The companies object to aspects of proposed free-allocation reform, arguing that additional conditions attached to emissions allowances could weaken the investment capacity of businesses already exposed to volatile energy prices.
Their position adds direct corporate backing to earlier concerns voiced by energy-intensive industry associations. The central issue is how the EU should protect industrial production against carbon leakage while encouraging manufacturers to reduce emissions and replace older assets.
How free allocation and CBAM interact
Under the existing ETS, eligible installations receive portions of their emission allowances without charge according to applicable rules and benchmarks. Free allocation reduces some immediate carbon costs, although it does not remove the incentive to improve efficiency in every circumstance.
CBAM is intended to progressively address the carbon-cost difference between covered EU products and competing imports. The relationship matters because CBAM certificate obligations and the phase-down of relevant free allocation must be evaluated together when comparing domestic and imported goods.
Companies warn that additional free-allocation conditions could require up-front investment before projects have secure financing, available low-carbon energy or reliable permitting. The risk is most acute for production processes where large capital spending is needed for electrification, hydrogen, carbon capture or replacement of existing equipment.
Proponents of stronger conditionality argue that public support and free allowances should be linked to credible industrial transition plans rather than preserving emissions-intensive production indefinitely. The negotiating debate therefore involves the design and timing of support, not simply whether decarbonisation should take place.
Downstream and regional exposure
Downstream industries face a second problem. A European manufacturer buying steel or aluminium affected by carbon costs may compete against a finished imported product that is outside current CBAM coverage. The EU’s separate proposal to expand coverage to certain downstream products seeks to address parts of that exposure, but its final scope remains subject to legislation.
For producers and exporters in Serbia, Montenegro and other non-EU European markets, future changes in EU free allocation could affect relative production costs and some CBAM adjustments. A change in the internal ETS regime does not itself grant foreign exporters a corresponding exemption or remove their obligation to provide emissions information.
Reform uncertainty for lenders
Industrial lenders therefore need parallel models: one reflecting adopted rules, and others showing plausible reform outcomes for allowance costs, capital expenditure, energy supply and trade competition. Treating unadopted changes as certain could distort project economics in either direction.
The intervention raises political pressure on the ETS reform process, but no change to current free-allocation entitlements or to the definitive CBAM framework follows directly from the companies’ warning.