The CIA gathers industry insights through a quarterly business survey to advocate for our members’ interests with policy makers, regulators and other stakeholders.
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The chemical and pharmaceutical industry is fundamental to modern society. With an immense variety of products, from vital medicines and foods, the construction of buildings, to transport and leisure, the industry truly does have an impact on virtually every aspect of our daily lives.
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The UK should follow the EU’s lead in urgently reviewing the scope of sectors covered by its indirect carbon cost compensation scheme, to afford our manufacturers the same chances that our European competitors will be given. Swift action in this area would support the aims of our Industrial Strategy which seeks to reduce electricity cost to promote industrial decarbonisation, and such a move makes economic sense in the context of any linking agreement that might be pursued between the UK ETS and EU ETS.
It is well understood that the UK Emissions Trading Scheme (ETS) places a direct cost on the emission of carbon dioxide from the on-site combustion of fossil fuels by manufacturers. What is not so widely known is that the ETS also places an indirect cost on electricity consumption in the UK, driving up UK electricity prices for all consumers. This has an outsized impact on manufacturers which depend on electricity to drive motors, compressors and for cooling. It also acts as a barrier to industrial decarbonisation because it increases the cost faced by those looking to reduce their emissions by switching a gas boiler for a heat pump.
The indirect cost comes about because the UK ETS imposes a direct cost on the burning of fossil fuels in the power sector, i.e. at gas-fired power stations. Unlike manufacturers which trade on global markets and face competition from overseas, the power sector has a captured market allowing it to pass-through the cost of its carbon emissions to its customers. The result is that UK manufacturers pay for emissions in the power sector over which they have no control. This is a cost that manufacturers in competing industrial countries do not face and is a part of the reason that the UK has the highest industrial electricity price in the IEA.[1]
In recognition of the detrimental impact of indirect carbon cost to the competitiveness of UK businesses the Government established an indirect carbon cost compensation scheme for energy intensive industries, which provides compensation to industrial processes in specified sectors provided they can demonstrate that they can meet eligibility requirements for electricity-intensity. This scheme helps to mitigate the impact on those most heavily affected but this represents only a handful of firms in a handful of sectors.
The EU operates a similar scheme, to counter the competitiveness impact created by the pass-through cost of carbon pricing in their power sector. In July of this year, in recognition of the importance of the chemical industry to the European economy and the need to support its transition to a clean and circular model, the EU published its European Chemicals Industry Action Plan. A key plank of the EU plan is secure affordable energy for industry and a key proposal is to extend their indirect carbon cost compensation scheme to cover a greater part of their chemical industry, by the end of 2025.
The result would be that EU manufacturing gains a competitive advantage over the UK, with more of its chemical industry, and therefore more of its total manufacturing supply chain, receiving relief from indirect carbon costs. The EU are acting because they understand that chemicals are crucial to strategic sectors such as defence, cleantech and digital, but that the European industry has struggled against global competition owing to higher regional energy prices and more stringent environmental legislation. In doing so, they hope to avoid further carbon leakage of manufacturing, loss of competitiveness and resilience.
The UK should follow the EU’s lead in urgently reviewing the scope of sectors covered by its indirect carbon cost compensation scheme, to afford our manufacturers the same chances that our European competitors will be given. Swift action in this area would support the aims of our Industrial Strategy which seeks to reduce electricity cost to promote industrial decarbonisation, and such a move makes economic sense in the context of any linking agreement that might be pursued between the UK ETS and EU ETS.
[1] ONS (2025) The impact of higher energy costs on UK businesses: 2021 to 2024
Whilst we welcome support through the existing British Industry Supercharger and proposed British Industry Competitiveness Scheme, these only fractionally reduce the electricity price to selected sectors and do not provide the level of reduction required to spur widespread industrial electrification.
The Chemical Industries Association is the organisation representing and advising chemical and pharmaceutical companies located across the UK. Our core membership is a diverse mix of chemical and pharmaceutical companies operating within the UK
