German chemical industry decries deal to update conditions for free carbon allowances

The German chemicals sector has criticised a deal between EU member states that would change the conditions under which companies receive free CO2 allowances in the EU emission trading system (ETS) as a “punch in the gut” for an industry that struggles to decarbonise. The German Chemical Industries Association (VCI) said an agreement among governments on new benchmarks that decide how many free allowances a company receives would incur hundreds of millions in additional costs in 2026 alone. VCI head Wolfgang Große Entrup said the deal “ignores the reality” of basic chemicals producers, who would be deprived of urgently-needed funds for decarbonisation. “This does not protect the climate but only leads to production relocation,” he argued. While the industry had overcome many technical challenges, high energy prices, inadequate infrastructure and customers’ unwillingness to pay more for low-carbon products are impeding green tech market breakthroughs, he said. The ETS is the EU‘s key emissions reduction policy tool. Companies have to purchase allowances for emitting CO2 and the number of available allowances is constantly reduced to increase prices and the incentive for low-carbon production. A share of the allowances are allocated free of charge to limit competitive disadvantages against non-EU producers, with the number determined through a benchmarking system. A benchmark is based on the average greenhouse gas emissions of the best performing 10 percent of the installations producing a given product in the EU. Companies that meet the benchmarks and are therefore among the most efficient in the EU will, in principle, receive all the allowances they need to cover their emissions.VCI criticised using Scandinavian factories that extensively rely on wood as a renewable energy source as a point of reference for most other companies, which do not have this option. The association said that the EU should limit the burden of purchasing allowances at 2025 levels until conditions for industrial transformation improve, including better electricity grid access and transport infrastructure for CO2 and hydrogen, as well as renewable energy “at competitive costs.” Looking ahead to a broader ETS reform proposal which the European Commission plans to present in July, VCI called on the EU had to adopt a “more realistic” emissions reduction path.Environmental expert councils from several EU countries as well as several environmental NGOs from Germany, meanwhile, called on the EU to stay firm on its ETS reform plans ahead of an EU leaders’ summit later this week. German environmental umbrella organisation DNR and others said chancellor Friedrich Merz must reject any proposals that would interfere with the ETS core functions. In an open letter to the chancellor, the groups said that the energy price pressure caused by the Iran war underlines the economic risks of fossil fuels and that a clear focus on more sustainable energy sources would stabilise industrial resilience in the long run. “A credible CO2 price-signal creates planning security, rewards innovation, directs capital towards the business models of the future and protects investments already made into Germany’s economy,” the NGOs said. Rather than weakening climate protection, governments should support industry by expanding renewable energy supply, backing a subsidy scheme for industry decarbonisation efforts, and shielding against cheap imports with high CO2 footprints, the groups added.The NGO call echoed a joint position by eleven government advisory councils from several EU countries, including the German Advisory Council on the Environment (SRU). The alliance said it “strongly urges policymakers to maintain the current framework and avoid delays or weakening of the existing regulations and commitments,” warning against individual member states pushing to relax the ETS. Weakening the existing ETS or delaying its planned reform would defer essential investments in fossil-free energy and could make steeper carbon price rises and tighter climate targets necessary down the line, the councils argued.

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