Portugal is pressing the European Commission to reconsider its decision to reduce free carbon allowances for industry under the Emissions Trading System (ETS), arguing that the cuts come at a time when Europe's energy-intensive sectors are already struggling with high energy prices and production costs. In a letter seen by European Pulse, Energy Minister Maria da Graça Carvalho warns that the review of free allocations for the 2026–2030 period could weaken companies' ability to invest in decarbonisation.
The ETS requires industries to pay for their carbon pollution but grants free allowances to prevent production from moving to countries with weaker climate policies—a phenomenon known as carbon leakage. The Commission's decision to tighten these allowances, Carvalho argues, adds pressure on firms already facing elevated energy costs, intense international competition, and the financial burden of transitioning to greener production methods.
A Call for a Temporary Freeze
Portugal is proposing a temporary freeze on current carbon allowance volumes until the broader ETS review, due on 15 July, is completed. The government suggests that any freeze should be tailored to each industrial sector to ensure companies continue receiving meaningful protection from excessive compliance costs. “The ETS no longer reflects current global realities. Europe is effectively acting alone in imposing rapidly rising carbon costs on its industry already facing structural cost disadvantages like higher energy prices and regulatory costs. This combination is eroding competitiveness at an accelerating pace,” reads the letter.
Lisbon does not oppose climate action but advocates for a “more gradual and realistic” transition that aligns environmental objectives with economic and technological realities. The letter focuses on the ceramics, glass, and cement industries, which are especially vulnerable to the proposed changes. The ceramic industry receives particular attention due to its significance to Portugal’s industrial economy and regional employment. According to the government, many ceramic facilities are already relatively low-emission installations, yet they remain heavily exposed to ETS carbon costs.
While acknowledging that many operators have invested in efficiency improvements and adopted lower-carbon fuels such as biomass, Portugal contends that commercially viable alternatives—including renewable gases and hydrogen—remain insufficiently available and often prohibitively expensive for widespread industrial deployment. “This could significantly increase compliance costs, reduce the financial capacity of operators to invest in decarbonisation,” reads the letter.
The European Ceramic Industry Association (CERAME-UNIE) warned that if the Commission goes ahead with the proposed changes, it could result in an “unjustified increase in carbon costs, amounting to a surge in carbon costs by over €500 million in 2026 compared to 2025 and total additional costs of €2.5 bn during 2026–30.” In recent years, the sector has experienced a sharp decline in activity across the EU, with production falling by approximately 30%, trade balance shrinking by more than 50%, and employment decreasing by 10%.
Lisbon argues that cutting carbon allowances could create a significant gap between what industries are obliged to comply with and the technological realities of industrial operations. Higher compliance costs could reduce firms’ financial capacity to fund decarbonisation investments and increase incentives for production to relocate outside the EU. Portugal also suggests that the EU executive's revision of free allowances immediately before a broader review of the ETS due in mid-July would introduce unnecessary regulatory uncertainty.
Meanwhile, a coalition of European industrial groups is urging EU leaders to halt what it describes as a “dangerous escalation in carbon costs,” warning that the bloc's flagship carbon market is becoming a threat to competitiveness rather than a driver of industrial transformation. “Europe’s industrial base is under acute pressure. In view of the upcoming reform of the EU ETS, we call on you to take immediate action to halt the escalation of ETS-related costs and avoid further damage to Europe’s manufacturing base,” reads a letter signed by 33 heavy-industry players spanning the chemicals, steel, and metals sectors.
This debate comes as the EU faces broader economic challenges. IMF Chief Georgieva recently urged the EU to invest collectively as growth outlook dims, highlighting the need for coordinated action to support industrial competitiveness. The outcome of the ETS review will be closely watched by member states and industry alike, as it will shape the pace and cost of Europe's green transition.
