EU Gives Heavy Industry More Time

The European Commission moved on 17 July to give Europe’s heavy industry more time inside the EU’s carbon market, proposing a slower emissions squeeze and an extension of free pollution permits until at least 2037. In return, factories would have to show they are putting money into cleaner production (Commission press release, Le Monde).

That is the bargain on paper. The awkward part is that the public rulebook is not there yet. The proposal does not spell out what will count as a credible investment plan, or what happens if a company takes the free permits and then drags its feet (Commission impact assessment).

A slower squeeze

The EU’s Emissions Trading System, or ETS, is the bloc’s main carbon-pricing machine. Power plants and factories must hold one permit for every tonne of CO₂ they release. The number of permits is capped, and that cap is meant to shrink each year, making pollution gradually more expensive and cleaner production more attractive.

The Commission now wants that cap to fall more slowly. From 2031 to 2035, it would shrink by 3.7% a year. From 2036 to 2040, the annual reduction would drop to 1.7%, compared with the 4.3–4.4% currently planned (Commission press release, Reuters). More permits would remain in circulation, and the carbon price pressure on factories would ease.

For steel, cement and chemicals, the free permits would come with conditions. Companies would receive 80% once they submit an approved investment plan, with the final 20% released only after they prove they have delivered on it (Commission impact assessment). A new Industrial Decarbonisation Bank would also distribute 400 million allowances as extra investment support (S&P Global).

Who gains, who pays

The immediate winners are energy-intensive manufacturers. Germany, with its deep base of steelmakers and chemical plants, has most to gain (Deutschlandfunk). Poland, which led a twelve-country coalition arguing for slower reductions, called the proposal a "milestone" (Energetyka24).

The companies that moved early into greener production are in a colder place. Swedish steelmakers SSAB and Stegra invested heavily in hydrogen-based steel, betting that a rising carbon price would eventually make their cleaner product cheaper than conventional steel. If conventional producers now get more free permits and more time, that crossover point moves further away.

National exchequers lose some room as well. ETS auction revenues have brought in roughly €260–270 billion since 2013, with much of that money flowing into ordinary government budgets (Update EU). The Commission now wants at least 50% of future auction income directed towards industrial decarbonisation instead (Europa Press, Commission press release). That leaves less for national climate funds and general spending.

The missing rulebook

There is a reasonable economic case for some flexibility. A steel plant cannot switch to hydrogen before the pipelines, power supply and supporting infrastructure exist. Buying time for that change is not, in itself, irrational.

The problem is the enforcement. This investigation found no public template in the proposal setting out what qualifies as a credible investment plan. Who writes the criteria? Who checks whether the work was done? What sanction applies if a company takes the permits and delays? The Commission says it will define the rules through delegated acts, a form of secondary legislation drafted by the Commission without a full Parliament vote. For a deal of this scale, the discipline arrives late.

Environmental groups Bellona and the European Environmental Bureau argue that the proposal weakens the carbon market from several directions at once: a slower cap, more free permits, and a softer mechanism for removing surplus permits from circulation (Bellona, EEB). If industry cuts less, the gap has to be closed elsewhere, in areas such as transport and home heating, where reductions are often harder and more expensive.

The Commission has proposed an industrial subsidy paid for through a weaker carbon signal. It has not yet produced the rulebook that would turn that subsidy into investment.