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The European Commission has amended its State aid guidance for compensating energy-intensive industries for the indirect costs of the EU Emissions Trading System (EU ETS), widening eligibility to cover more industrial activities exposed to higher electricity prices linked to carbon costs.
Under the EU ETS, electricity producers typically pass through the cost of buying emission allowances into wholesale power prices. Some member states run national “indirect cost compensation” schemes to reimburse part of those additional electricity costs for sectors considered at risk of “carbon leakage”, where production shifts outside the EU or domestic output is displaced by more carbon-intensive imports. The Commission’s guidelines set the conditions under which such schemes can be approved under State aid rules.
More eligible sectors, higher aid intensity
The Commission has extended the list of industrial sectors eligible for compensation to include 20 additional sectors and two new subsectors. The Commission cited, among the newly covered areas, the manufacture of organic chemicals and certain activities in ceramics, glass and battery-related industries.
Alongside the expanded eligibility list, the amended guidelines raise the aid intensity for sectors that were already eligible. The maximum share of indirect ETS costs that can be compensated increases from 75 per cent to 80 per cent for these sectors, reflecting what the Commission describes as a higher assessed risk of carbon leakage driven by rising carbon and energy costs.
The revisions also give member states a route to seek coverage for sectors not included in the Commission’s amended list. Under the changes, governments may notify additional sectors or subsectors for approval if they can demonstrate that the activities face a genuine risk of carbon leakage under the criteria set out in the guidelines.
Conditions linked to investment and updated carbon factors
The Commission has maintained and strengthened conditionality requirements for larger beneficiaries. In the updated approach, large recipients are required to contribute to the “green transition”, including by investing a share of the aid in projects that contribute to reducing electricity-system costs. The guidelines also reiterate the principle that compensation should be linked to measures that reduce firms’ exposure to carbon costs over time.
Separately, the Commission has updated the CO₂ emission factors and geographic areas used for calculating compensation for the period 2026–2030. These regional factors, which reflect the emissions intensity of fossil generation in particular zones, are part of the formula used to determine the eligible indirect cost and, therefore, the potential compensation amount under national schemes.
A growing line item in ETS-linked support
The revisions come as indirect cost compensation has become a more visible component of how ETS revenues and national budgets interact with industrial policy. In its recent reporting on the EU carbon market, the Commission noted that member states operating these schemes must notify them for State aid assessment and publish totals paid, including breakdowns by beneficiary sector or subsector.
The same reporting shows the scale of recent disbursements. In 2024, 15 member states provided aid for indirect costs incurred in 2023, and total payments in 2024 amounted to about €5.52 billion, an increase of 40 per cent compared with €3.95 billion disbursed in 2023.
The Commission’s move followed pressure from industry and some member states, against a wider backdrop of EU efforts to recalibrate the cost of climate-related regulation for manufacturers concerned about competitiveness. The Commission framed the amendments as a response to higher emissions-related power costs and an expanded set of sectors judged to be exposed to leakage risks.
Competing views over climate funding and competitiveness
Industry groups have argued during the year that broader eligibility is needed to reflect the electricity dependence of more parts of Europe’s manufacturing base. The European chemical industry association, Cefic, has previously pressed for the inclusion of chemical activities on the grounds of electricity costs and international competition, as the Commission reviewed the guidelines.
Environmental organisations and some analysts have taken a different view, warning that expanding indirect cost compensation could redirect ETS-related revenues away from emissions reduction investments. In a joint intervention ahead of the Commission’s decision, groups associated with Sandbag argued that widening the scheme risked channelling public funds into untargeted support rather than accelerating industrial decarbonisation, and called for tighter reform if coverage was expanded.
The Commission’s amended guidelines sit alongside other carbon-leakage instruments, including free allocation of EU ETS allowances and the Carbon Border Adjustment Mechanism, which begins its definitive phase on 1 January 2026. The balance between domestic cost relief and decarbonisation incentives is likely to remain a central issue as member states decide whether—and how fully—to apply the expanded compensation options within their national schemes.
