EU updates ETS state aid rules, expanding carbon leakage protections to more industries while linking compensation to stronger decarbonisation commitments.
The European Commission has approved a significant revision to its state aid guidelines linked to greenhouse gas emissions under the EU Emissions Trading System (ETS). The updated framework is intended to extend protection to a wider range of energy-intensive industries that are increasingly vulnerable to carbon leakage as emission allowance prices continue to climb across Europe.
Carbon leakage refers to the risk that companies relocate production outside the European Union to jurisdictions with less stringent climate regulations, or that EU-made products are displaced by imports with a higher carbon footprint. While such shifts may reduce emissions recorded within the EU, they do little to cut global greenhouse gas output and can weaken Europe’s industrial base. The revised guidelines aim to counter this trend by balancing climate ambition with economic competitiveness.
According to the Commission, emission costs under the ETS have risen steadily since the current state aid rules were adopted in 2020. At that time, only a limited number of sectors were considered at genuine risk of carbon leakage. However, sustained increases in carbon prices, combined with strong international competition, have altered the risk profile for many industries that rely heavily on electricity. The amendment responds directly to this new reality.
The changes were foreshadowed in the European Chemicals Industry Action Plan, which highlighted the need to adapt carbon leakage protections as market conditions evolve. The Commission stated that the revised rules are designed not only to protect vulnerable sectors but also to reinforce incentives for companies to decarbonise their operations. In this way, the update seeks to support Europe’s climate objectives while safeguarding industrial competitiveness.
Under the ETS State Aid Guidelines, EU Member States are permitted to compensate companies that face high indirect emission costs. These are the higher electricity prices that result when power producers pass on the cost of carbon allowances to consumers. Compensation is strictly limited to sectors that can demonstrate a genuine exposure to carbon leakage and is subject to clear ceilings on aid intensity and total amounts.
One of the most notable elements of the amendment is the expansion of the list of eligible sectors. Twenty additional sectors, along with two subsectors, have now been included. Newly covered activities span areas such as the manufacture of organic chemicals, as well as parts of the ceramic, glass, and battery value chains. This broader scope reflects the growing impact of carbon pricing across diverse industrial segments.
For sectors that were already eligible before the revision, the maximum aid intensity has been increased from 75% to 80%. This adjustment acknowledges that their exposure to carbon leakage has intensified as emission costs have continued to rise. At the same time, the guidelines preserve flexibility by allowing Member States to propose further sectors or subsectors for inclusion, provided they can substantiate a genuine risk of carbon leakage.
The Commission has also strengthened the link between compensation and decarbonisation. Large recipients of aid will be required to reinvest part of the support they receive into projects that help lower electricity system costs or reduce emissions. This ensures that public support does not merely offset carbon costs but actively contributes to the energy transition.
In addition, the amendment updates geographic areas and CO2 emission factors for the period 2026–2030. These parameters are used to calculate compensation levels and have been adjusted to reflect changing power generation mixes across Europe. Where emission factor reductions are particularly sharp, the rules allow for a gradual transition to avoid sudden drops in support.
Overall, the Commission said the revised framework will keep the ETS indirect compensation mechanism fair and effective. By extending protection to more sectors while maintaining strong decarbonisation incentives, the update aims to prevent carbon leakage, support investment, and ensure that Europe’s climate policies continue to align with industrial resilience.
