BASF has warned that proposed changes to the European Union Emissions Trading System may continue to weaken investment in energy-intensive manufacturing, despite revisions intended to protect industrial competitiveness.
The European Commission has proposed slowing the annual reduction in the emissions cap from 4.3% to 3.7% in 2031 and then to 1.7% in 2036. Transitional protection for exposed industries would be extended, while a larger share of the revenue generated by the scheme would be directed towards European industrial investment.
Those changes follow mounting concern over factory closures, weak capital expenditure, and competition from regions where energy, feedstock, carbon, and construction costs are lower. European chemical, steel, glass, ceramics, cement, and refining operations have all faced pressure as the cost of producing within the bloc has increased.
BASF chief executive Markus Kamieth has argued that the revised package does not alter the investment calculation sufficiently. The company remains concerned about emissions allowance prices, the limited availability of affordable low-carbon hydrogen, and the conditions attached to continued free allocation.
Under the proposed system, some free allowances would be linked to the submission and delivery of European decarbonisation plans. An initial proportion could be allocated first, with the remainder released after companies complete specified investments or emissions reductions.
The Commission wants to prevent public support from sustaining inefficient production without producing measurable change. Manufacturers counter that withholding allowances adds financial exposure to projects already affected by volatile electricity prices, lengthy permitting, immature infrastructure, and uncertain demand for lower-carbon products.
European chemical capacity has contracted since the energy shock of 2022, with producers closing or reducing operations that no longer meet internal return requirements. Investment has also moved towards the United States, Middle East, and Asia, where feedstock, power, and project costs may be more predictable.
Carbon policy collides with plant economics
The ETS raises the cost of emitting carbon so that cleaner equipment and processes become more attractive. That mechanism works most effectively when manufacturers have a technically viable alternative and can recover the investment through energy savings, improved productivity, or customer demand.
Many chemical and process operations have not yet reached those conditions. Electrified heat, low-carbon hydrogen, carbon capture, and alternative feedstocks can reduce emissions in selected applications, although each requires substantial infrastructure and may increase operating costs.
A company considering a new European plant must examine more than the future allowance price. Grid capacity, renewable power contracts, hydrogen transport, carbon dioxide networks, water availability, planning, and reliable raw material supply can determine whether a low-carbon process is commercially practical.
Where supporting infrastructure is delayed, the industrial operator carries much of the schedule risk. Equipment may be installed before sufficient low-carbon electricity or hydrogen becomes available, leaving the plant exposed to high capital costs while it continues purchasing emissions allowances.
The Commission proposes directing at least half of ETS revenue towards domestic industry, with further mechanisms potentially making tens of billions of euros available for clean technology and industrial conversion. Such funding can reduce the initial cost of electrolysers, electric furnaces, carbon capture equipment, and related plant modifications.
Capital support does not necessarily close the operating cost gap between Europe and competing regions. A subsidised installation must still buy electricity, hydrogen, feedstock, labour, maintenance, and logistics throughout a life that may extend for several decades.
The chemical industry occupies a central position within European manufacturing because its products feed automotive production, electronics, pharmaceuticals, construction, energy equipment, packaging, agriculture, and consumer goods. Closure of a basic chemical unit can therefore increase import dependence across numerous downstream sectors.
Carbon leakage measures are intended to prevent European producers being displaced by imports manufactured under less stringent conditions. The Carbon Border Adjustment Mechanism covers selected basic products, but complex chemical value chains are harder to measure than steel, cement, fertiliser, or primary aluminium.
Customer purchasing also remains uncertain. Automotive, construction, and consumer goods companies have committed to lower-carbon materials, yet procurement decisions continue to be governed by price, technical performance, volume availability, and delivery reliability.
BASF has already restructured parts of its European operation as high energy and feedstock costs reduced competitiveness. Its latest intervention reflects a wider industrial concern that carbon policy is being developed faster than the energy, grid, hydrogen, and trade infrastructure needed to support compliance.
The Commission’s proposal must still pass through negotiations with the European Parliament and member states, whose positions will differ according to their industrial base, electricity market, public finances, and climate commitments.
Weakening the carbon signal too far would delay emissions reduction and undermine investment already made by early adopters. Raising the cost before practical alternatives become available, however, risks moving production elsewhere while European customers continue consuming the same materials.
The effectiveness of the revised scheme will ultimately be visible in operating plants rather than allowance calculations. If factories continue to close while demand is met through imported production, the industrial capacity will have moved without necessarily reducing global emissions.
