EU Member States Demand Urgent ETS & CBAM Changes to Save Chemicals Sector

The "Friends of Industry" coalition—a bloc of thirteen EU member states led by Germany and Italy—formally declared war on the current trajectory of European climate policy today. In a coordinated statement issued from Brussels, the coalition warned that the European chemicals sector faces an "existential threat" requiring immediate regulatory intervention, specifically targeting the EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM).

This is not standard lobbying. This is a revolt by the continent’s industrial core against the Commission’s flagship climate architecture.

Following Italy’s shock request to suspend the ETS entirely—which sent EU Allowance (EUA) prices crashing 22% to €70.23/mtCO2e—the broader coalition has articulated a specific set of demands to arrest what they term "unprecedented sector collapse." The data supports their desperation: European chemical investment has plummeted 89% in three years, while capacity closures have surged sixfold.

For carbon market professionals, the message is clear: the political floor for carbon prices is being tested, and the scheduled phase-out of free allowances is no longer a guaranteed policy outcome.

The Anatomy of a Collapse

The urgency of the member states' demand is underpinned by catastrophic industry data released by Cefic (European Chemical Industry Council). The sector is not merely contracting; it is being dismantled.

• Investment Evaporation: Confirmed CAPEX for new capacity fell from €7.6 billion in 2022 to just €1.5 billion in 2025.
• Capacity Destruction: Cumulative plant closures reached 37 million tonnes between 2022 and 2025—approximately 9% of Europe’s total production capacity.
• Steam Cracker Crisis: 16% of Europe’s steam cracking capacity—the foundational infrastructure for all petrochemicals—is being shuttered.

The coalition’s joint statement, "Decarbonization Without Deindustrialization," argues that the current ETS trajectory ignores the reality of global competition. With European natural gas prices consistently trading 3x to 4x higher than US benchmarks, the addition of unhedged carbon costs creates a structural production cost disadvantage of 40-50% against North American and Middle Eastern competitors.

The Policy Demands: Free Allowances and Export Rebates

The coalition, which includes France, Spain, Poland, and the Czech Republic alongside Germany and Italy, is demanding three specific regulatory interventions ahead of the scheduled July 2026 ETS review:

1. Freeze the Phase-Out of Free Allowances

Under current legislation, free allowances for CBAM-covered sectors are scheduled to phase out completely by 2034, with reductions accelerating to 5% annually starting in 2027. The coalition demands an immediate postponement of this schedule. Market Implication: If granted, this would flood the market with supply that was expected to vanish, fundamentally altering the scarcity signal priced into the 2027-2030 forward curve.

2. The "Export Gap" Solution

The coalition argues CBAM is failing its primary directive. While CBAM charges importers for embedded carbon, it offers no relief for European exporters selling into global markets without carbon pricing. Chemical producers exporting to Asia are paying full ETS costs while competing with zero-carbon-tax rivals. The Demand: An explicit export support mechanism—effectively a carbon rebate for exports—to level the playing field. The Commission has historically resisted this as a WTO violation, but political pressure is mounting to find a workaround.

3. Market Stability Reserve (MSR) Reform

Member states are calling for a revision of the MSR to prevent price spikes like the €92/mtCO2e peak seen in January. They argue the reserve reacts too slowly to volatility, demanding a "price corridor" approach that ensures predictability for industrial planning.

Corporate Exodus: "Obsolete" Policy Driving Investment Flight

The political revolt is a lagging indicator of corporate strategy. Major producers have already calculated that the EU ETS renders European commodity chemical production unviable.

BASF CEO Markus Kamieth recently termed the EU ETS "obsolete," noting that Europe is the only region charging industry for emissions. BASF’s response is capital reallocation: while it negotiates labor peace in Ludwigshafen, its growth capital is flowing to its €10 billion Zhanjiang site in China.

Dow Chemical is executing a more brutal exit, shutting its Böhlen cracker in Germany and two other assets. The rationale is explicit: "remove higher-cost, energy-intensive portions" of the portfolio.

INEOS has taken the most aggressive public stance, filing ten anti-dumping cases and describing EU policy as "industrial self-harm." Their critique highlights a critical timeline mismatch: the chemicals sector isn't fully covered by CBAM until 2030, yet producers are paying ETS costs now.

The CBAM Failure

The defining failure identified by the coalition is the mismatch between the ETS burden and CBAM protection.

As of January 1, 2026, the CBAM definitive regime is live. However, for the chemicals sector, it is a paper tiger.

• Coverage Gaps: CBAM currently covers cement, steel, and fertilizers. It does not yet comprehensively cover the downstream industrial chemicals now facing closure.
• Cost Pass-Through: Even where covered, the inability to pass through carbon costs in a global market defined by Chinese overcapacity means European producers absorb the hit to margins.
• Import Substitution: Downstream buyers (automotive, construction) are simply importing finished components rather than raw materials, bypassing CBAM checks on intermediate goods—a phenomenon known as "value chain leakage."

Analytical View: The Credibility Paradox

The European Commission faces a binary choice with severe consequences.

If Brussels holds the line on the free allowance phase-out to maintain the ETS's environmental integrity, the data suggests the chemicals industry will continue to liquidate capacity, exporting emissions to China and the US (carbon leakage).

If Brussels caves to the "Friends of Industry" and pauses the phase-out, it shatters the credibility of the cap-and-trade system. A market that believes political intervention will always cap prices at €70-80 will never price in the €120+ signal required for deep decarbonization technologies like green hydrogen or CCS.

The market's reaction today—dumping EUAs down to €70.23—suggests traders are betting on the latter: political survival will trump market purity.

What to Watch

• July 2026 Proposal: The Commission's formal ETS review is the next hard milestone. Expect intense lobbying to include an "industrial escape hatch" in the legislative text.
• German Elections: With Chancellor Merz shifting Germany’s stance away from climate absolutism toward industrial protection, the German position in the European Council will be the decisive variable.
• CBAM Extension: Watch for an accelerated timeline to include organic chemicals and polymers in CBAM. This is the only "pro-climate" concession the Commission can offer to offset the demand for free allowances.
• Inventory Dumping: As plants announce closures, expect short-term dumping of chemical inventories, further depressing prices and potentially triggering more anti-dumping filings.