Why Europe is in danger of cementing old industrial structures
The European Commission aims to incentivize heavy industry to invest in decarbonisation – and intends only to grant free CO2 certificates worth billions of euros if companies submit corresponding investment plans. The Commission envisages these and other conditions as part of the reform of the first European Emissions Trading System (ETS 1) for the steel, cement, and chemical sectors.
"This will not substantially accelerate industrial transformation — which is why I would warn against overestimating the proposed investment plans," says industrial researcher Tobias Fleiter in an interview with The Kelvin Report. "You also cannot demand that companies draw up such investment plans and then strictly adhere to them; industry must constantly react to new market situations."
The expert is similarly critical regarding the demands of the European People's Party (EPP). The background: the most powerful group in the EU Parliament wants to link the free allocation of CO2 certificates for corporations to investments in existing industrial sites. Why Fleiter considers this counterproductive can be read in the interview in today's edition.
Conditions for billions of euros are also at stake in the debate on the next EU budget: EU fiscal expert Nils Redeker from the Jacques Delors Centre doubts that a larger EU budget would be "unaffordable" for Germany – responding to statements by Federal Chancellor Friedrich Merz (CDU), who, together with the Netherlands, Sweden, Denmark, Austria, and Finland, is calling for cuts worth hundreds of billions of euros.
In her upcoming "State of the Union" address, EU Commission President Ursula von der Leyen is also expected to address the EU budget. An alliance of more than 180 European renewable, cleantech, and climate protection organisations is calling for von der Leyen to also announce a fossil fuel exit plan for Europe on 16 September – ensuring that the fossil fuel price crisis resulting from the war with Iran becomes Europe's last fossil fuel crisis.
Welcome to the first edition of The Kelvin Report, Europe's energy, industry, and climate briefing. Written here by Sinan Reçber in Berlin.
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Snapshot
- Interview: "It doesn't help if Europe cements old industrial structures"
- MFF: Fiscal expert criticises German debate on EU budget
- Energy storage: Reuse of car batteries can make a circular value chain competitive
- ETS 2: No clear CO₂ price signal is emerging
- ETS 2: Commission approves Greece’s €4.8 billion Social Climate Plan
- Energy price crisis: Alliance demands European fossil fuel exit plan from von der Leyen
- Coming up: What’s next in energy, industry and climate
"It doesn't help if Europe cements old industrial structures"
By Sinan Reçber
Tobias Fleiter researches the transformation of heavy industry at the Fraunhofer Institute for Systems and Innovation Research (ISI) in Karlsruhe, Germany. His research findings are listened to in both Berlin and Brussels. In an interview with The Kelvin Report, the expert warns the European Union against attempting to cement old industrial structures with the reform of the European emissions trading system (ETS 1) — advocating instead for the clever development of value chains within Europe.
Mr Fleiter, European heavy industry is under massive pressure in the face of high energy costs, global overcapacities, US tariffs and competition from China. At the same time, sectors like steel, cement and chemicals need to invest heavily in decarbonisation. Is the situation for Europe's energy-intensive industries as bad as it seems?
That depends entirely on the industrial branch. The chemical sector, for example, is struggling significantly in this situation and needs a fundamental overhaul. However, the technological direction for climate-neutral and competitive production is not as clear there as it is in the steel industry: chemical value chains, with their multitude of products and intermediates, are completely complex and opaque. This makes it difficult for policymakers to set guardrails for the transformation and to create a framework for climate neutrality.
Where are the main sticking points?
The chemical industry has an enormous demand for fossil raw materials. However, the sector is still grappling with viable, climate-neutral alternatives to fossil materials such as naphtha. Many studies have outlined hydrogen, biomass or chemical plastic waste recycling as options for restructuring. But all these options are still in their infancy — and are projected to be very expensive. To make these technologies market-ready, a carbon price of 200 euros or more would foreseeably be necessary, which means it would have to be more than three times higher than it is now.
What would a way forward look like for Europe's chemical industry in this uncertain situation?
The sector needs to gain experience and scale up projects to industrial scale using e.g. financial support from EU member states and the EU Innovation Fund. From this, the chemical industry can learn and explore a technological direction for the shift towards climate neutrality.
With a reform of the first Emissions Trading System (ETS 1), the EU Commission wants to ensure that industry invests in transformation rather than relocating its production outside Europe. Companies would then only receive free carbon allowances worth billions if they submit a decarbonisation investment plan. Can that provide the necessary momentum?
This will not substantially accelerate industrial transformation — which is why I would warn against overestimating the proposed investment plans. You also cannot demand that companies draw up such investment plans and then strictly adhere to them; industry must constantly react to new market situations. What is more important is an overall reliable carbon price signal. This is not only about the actual carbon price but also about the future price trends companies expect when making investment decisions. However, if the Commission weakens emissions trading too much by extending free allocation and introducing more allowances into the market, it will lead to great uncertainty and cause the carbon price to fall. Companies that have already invested will then face problems because climate-friendly solutions become less economically viable overall.
The European People's Party (EPP), as the largest group in the EU Parliament, wants to go a step further with the ETS 1 reform: they want industry to receive free carbon allowances only if it invests in established locations. For example, if the German chemical group BASF were to invest in a modern plant in another EU country like Romania instead of its site in Ludwigshafen, it would cost BASF more. How sensible is this approach?
Such requirements are counterproductive: it does not help industry if Europe uses incentives to cement old structures while new challenges are simultaneously facing the sector. On the one hand, the chemical industry in particular needs guardrails and a degree of pressure to truly commit to the transformation. On the other hand, it also needs a certain degree of freedom to set up entire value chains and production systems in a way that keeps them internationally competitive.
What would such a competitive setup look like within Europe?
Individual very energy-intensive production steps in heavy industries could partly relocate to sites with greater renewable energy potential within Europe — to Spain, for instance. Such clever relocation within Europe offers enormous potential and would be an important element of European industrial policy. For existing industrial sites, such restructuring is always painful. However, Europe must not use high subsidies to create a transformed industry that is completely non-competitive globally — that would be fatal.
With the ETS 1 reform, the EU Commission also wants to set up a 100-billion-euro "Industrial Decarbonisation Bank" to fund the transformation of heavy industry between 2028 and the end of 2034. How should it ideally be designed?
It would be very important to continue promoting the decarbonisation of the industrial heat supply — the first round of the so-called "Heat Auctions", with 400 million euros, was already very promising. At the same time, when awarding funding, Europe must not look solely at costs. It must scale different decarbonisation projects across various sectors industrially right from the start to gather experience and facilitate technology learning.
Industrial process heat must become clean to continue producing basic chemicals with steam crackers. However, out of around 30 active steam crackers in Europe, only one is currently set to be converted from fossil gas to electricity and thus electrified. Why isn't it moving faster?
Electrifying steam crackers is a central technological option for climate neutrality in the chemical industry. But with such a switch, companies would consume vast amounts of electricity overnight, become massively dependent on electricity prices, and face new uncertainties and funding requirements. At these locations, the power infrastructure must also be sufficient — meaning power lines and grid connections must be ready. The chemical industry would therefore need a high level of confidence that electrification as a technological direction is truly viable for investment. And like all other energy-intensive sectors, the chemical industry is extremely risk-averse because these are ultimately very large, strategically vital investments. But there are intermediate steps as well.
What do those look like?
Many electrification projects in the chemical, paper or food industries do not require state subsidies at all to be viable. For example, if companies add an electrode boiler to an existing natural gas boiler, they can operate the new system flexibly when electricity prices are low, or run it alongside battery storage or thermal storage. In the electrification debate, people often focus heavily on average annual electricity prices. But that is not the decisive factor — we already have many hours in Europe where electricity prices are competitive compared to natural gas especially now, given the stalled deliveries from the Gulf region following the war in Iran and the accelerating deployment of solar PV. But EU Member States like Germany must also reform network charges in a way that supports the flexible use of electrification technologies.
How do industries benefit from this?
Such flexible partial electrification is a key strategy for heavy industry to bring competitiveness and resilience together. This makes the sector more resilient because it operates across two energy markets, and it lowers costs by utilising electric power whenever it is cheaper than natural gas. This allows companies to take the first step towards decarbonisation and in the future ramp up their systems in line with electricity market signals — without major risk.
Fiscal expert criticises German debate on EU budget
EU fiscal expert Nils Redeker from the Berlin-based think tank Jacques Delors Centre casts doubt on assertions by Federal Chancellor Friedrich Merz (CDU) that a larger EU budget would be "unaffordable". In a blog post on Friday, Redeker estimates that German contributions for the years 2028 through the end of 2034 could rise by roughly 14 to 15 billion euros per year, adjusted for inflation – "mind you, these would then come from a federal budget that will be significantly larger than the current one due to economic growth." Germany is the largest net contributor to the EU budget within the bloc.
The fiscal expert points to the fact that the German federal government already spends 20 billion euros annually in federal subsidies on the so-called "Mütterrente" (mothers' pension) – which recognizes child-rearing periods leading to higher monthly pensions. The measure has faced criticism due to its high costs, unclear long-term financing, and minimal impact on combating old-age poverty.
According to Redeker's assessment, the EU Commission's proposal for the next EU budget provides, among other things, more funds for research and infrastructure. Furthermore, if Europe acts more cohesively on industrial policy, the German federal budget could avoid "expensive going-it-alone strategies," the expert notes. "That would above all be in Germany's own interest," Redeker points out.
On Thursday, Germany, together with the governments of the Netherlands, Sweden, Denmark, Austria, and Finland, called for a cut of several hundred billion euros to the EU budget.
European Council President António Costa is pushing for a compromise on the EU budget by the end of the year. "We must reach an agreement before the end of this year so that European Union funding for our farmers, businesses, students, researchers, and innovators is not interrupted in 2028," Costa stated on Wednesday.
In accordance with its proposal for the next EU budget, the EU Commission intends to allocate significantly more funds for the expansion of cross-border electricity grids: the energy branch of the EU funding tool Connecting Europe Facility (CEF-E) for the construction of new interconnectors is set to increase fivefold – from around six billion euros in the current EU budget to approximately 30 billion euros in the 2028 to end-2034 budget period.
At the same time, the EU Commission aims to pool several EU funds and resources into a European Competitiveness Fund worth more than 500 billion euros – including the Innovation Fund funded by revenues from the first European Emissions Trading System (ETS 1). snr
Reuse of car batteries can make a circular value chain competitive
Various cost drivers currently still prevent a circular European battery value chain from being competitive. This is the conclusion reached by a research team following a study involving the HHL Leipzig Graduate School of Management and other scientists.
For instance, the recycling of a battery frequently used in electric cars (NMC811 battery pack) represents an economic loss for the recycling company, as calculated by the researchers. However, the recycling technology itself is not the actual bottleneck. "Key cost drivers include dangerous-goods transport, pack-to-cell disassembly, and uncertainty in material content, recovery rates, and costs," writes the team of authors led by researcher Dima Smirnov at the HHL Leipzig Graduate School of Management.
Companies that operate exclusively in the battery recycling business are also financially worse off than recycling companies with broader business areas. The researchers also calculated that the costs per industrial battery would rise by six percent if the EU were to mandate a recycling quota of 20 percent.
On the other hand, the systematic reuse of such batteries in the form of stationary energy storage systems could increase the economic value of their lifespan by 64 percent. "However, this value is not captured by the actors who need to pay upstream circularity costs," the study states. This added value of the circular economy ends up primarily with vehicle and storage system operators rather than with specialized recycling companies.
To solve the problem, the researchers propose an idea: companies that manage battery packs across both life phases – electromobility and stationary battery storage – thus better distributing costs and revenues in the value chain among those involved. "Europe needs not only better battery processes, but market-based business models that make circularity economically viable," explained lead author Smirnov in a press release last Friday. snr
No clear CO₂ price signal is emerging in ETS 2
Europe's economy still lacks fundamental price signals for the start of carbon pricing in road transport, buildings, and small-scale industry in 2028. This is indicated by a report published on Thursday by the Norwegian analysis firm Veyt. According to the report, there has been virtually no trading in futures for the second European Emissions Trading System (ETS 2) since August. These forward transactions for buying or selling ETS 2 certificates have been possible since mid-2025, allowing companies to hedge against price fluctuations. Due to the standstill, prices have remained static at around 72 euros per tonne of CO2, slightly below the current price for a tonne of CO2 in the first European Emissions Trading System (ETS 1).
"The result is a market that, in effect, lacks a meaningful market-based price signal," writes Veyt analyst Florian Baier. According to calculations by the analysis firm, the maximum quantity of ETS 2 certificates in 2028 will amount to emissions of 1,266 million tonnes of CO2 equivalent (MtCO2eq). By way of comparison: total greenhouse gas emissions in Germany, as the largest EU member state, amounted to roughly half as much in 2025, at around 649 MtCO2eq.
Out of the maximum 1,266 million certificates, approximately 450 million in 2028 are reserved for the Social Climate Fund (SCF), which is intended to support financially vulnerable households during the transition to clean heating and clean mobility. However, according to Veyt, the actual number of available ETS 2 certificates ultimately depends on whether EU member states like France or Poland transpose the EU law into national legislation in time. Governments there fear backlash at the ballot box should the ETS 2 lead to noticeably higher costs for fossil fuel heating and petrol. Implementation of the ETS 2 in Paris and Warsaw before their upcoming 2027 elections is therefore considered unlikely.
Marine Le Pen, the figurehead of the French far-right Rassemblement National, is currently leading in recent opinion polls for the French presidential elections – and is a staunch opponent of the ETS 2. Proponents of the ETS 2 view it as a core instrument for reducing Europe's reliance on fossil fuels and driving investment into climate-friendly heating and clean mobility. snr
Commission approves Greece’s €4.8 billion Social Climate Plan
The European Commission approved the fifth and largest national Social Climate Plan in an EU member state to date last Thursday. Under Greece's Social Climate Plan (SCP), around €4.8 billion in funding is to be allocated by 2032 to finance socially tiered support for heat pumps, solar water heating systems, and other measures such as energy-efficiency renovations.
Three-quarters of the funds are to come from the EU level, with the remaining quarter provided by national sources. The measures aim to make 460,000 vulnerable households less dependent on fossil fuels and to prevent rising living costs when CO2 pricing on fossil heating and transport fuels takes effect from 2028 under the second European Emissions Trading System (ETS 2). Moreover, up to 800,000 households annually are set to receive a form of heating allowance.
In addition to the Greek plan, Brussels has also approved the Social Climate Plans of Sweden, Lithuania, Latvia, and Malta. Of the four largest economies in the EU, only Italy has so far submitted a Social Climate Plan, with a volume of €9.3 billion. snr
Alliance demands European fossil fuel exit plan from von der Leyen
An alliance of more than 180 European renewable, cleantech, and climate protection organisations is calling on the European Commission for a comprehensive plan to phase out fossil fuels. The alliance addressed a corresponding open letter, signed by organisations including the electricity industry association Eurelectric and Climate Action Network (CAN) Europe, to EU Commission President Ursula von der Leyen – a few weeks ahead of the so-called "State of the European Union address", a key speech in which the President sets out her political priorities and usually announces new initiatives.
"We [...] urge you to use your upcoming address to announce the launch of a comprehensive, science-based and independent report with one clear objective: to make this fossil fuel crisis Europe's last," the letter states with a view to the speech expected on 16 September. "This report should provide a shared strategic vision for the remainder of the mandate, and deliver a fossil fuel exit plan."
According to the alliance, the report should meet several requirements: firstly, it should quantify the economic burden placed on households, industries, and national budgets by fossil fuel reliance. Secondly, the report should identify the greatest vulnerabilities sector by sector, set the pathway for a complete phase-out, and build on renewables, energy efficiency, and the circular economy.
At the same time, the alliance demands that public funds from EU and national budgets be aligned with the phase-out, that vulnerable households receive financial support during the energy transition, and that investments be made in natural climate protection in the form of forests, wetlands, and soils. snr
Coming up: What's next in energy, industry and climate
- 01/09/2026, anytime between 09.00 and 12.00: Presentation of the Council Presidency’s programme in the EP’s Committee on Industry, Research and Energy (ITRE): Exchange of views with Darragh O'Brien, Ireland’s Minister for Climate, Energy and the Environment and Minister for Transport (energy)
- 01/09/2026, 11.00 – 13.00: Workshop in the EP’s Committee on the Environment, Climate and Food Safety (ENVI): Cleantech Innovation, Industrial Decarbonisation and Global Competition: Where does the EU stand in the race towards net-zero compared to the US and China? Stream it here.
- 01/09/2026, 15.15 – 17.30: ENVI committee: Exchange of views with the Commission on the implementation of the Nature Restoration Law, with a focus on nature restoration plans. Stream it here.
- 02/09/2026, 9.00 – 12.30: INTA committee
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