For 2026–2030, the EU proposes a 50% reduction in fallback benchmarks, the maximum permitted, which will significantly challenge sites without access to low-carbon heat. The benchmark is based on the top 10% of performers using biomass, cogeneration and imported heat, despite most sites lacking these options and facing carbon leakage risk.
The UK Emissions Trading Scheme (ETS) is a key pillar of UK industrial decarbonisation policy, originating from and generally mirroring the EU ETS. In May last year, recognising the potential benefits of creating a larger, more liquid market, and removing the competitive distortions that arise from having separate markets, the UK Government and European Union agreed to work towards linking the UK ETS and EU ETS
The UK and EU have since begun negotiating on linking our carbon pricing systems and, in December last year, both parties issued a joint statement expressing an aim to conclude talks by the time of the next UK-EU summit, this summer. In parallel to those discussions, the UK ETS Authority has continued to develop and expand the UK ETS, whilst the EU is set to kick-off a wide-ranging review of the EU ETS in July this year.
Whilst the UK Government will not discuss the negotiations whilst they are ongoing, one element that we have clarity on is the UK ETS Authority’s intention to adopt EU benchmarks from 2028, following a review of their impact on UK industry. Given this context, the CIA has significant concerns regarding the EU’s proposed heat and fuel ‘fallback’ benchmarks for 2026 to 2030.
Fallback benchmarks were developed for cases where no product benchmark could be developed, due to the small number of installations or high heterogeneity of products within the same product classification code. A large number of installations within the chemical sector depend on fallback benchmarks to reduce their carbon leakage exposure.
For the period 2026-2030, the EU has proposed a reduction of the fallback benchmarks of 50% - the maximum rate possible in accordance with legislation - which will pose severe challenges to sites without access to low carbon heat. The proposed benchmark has been set at such a low level because it is calculated on the basis of the 10% top performers within the fallback categories, which include sites with access to biomass, cogeneration, and heat imported from exothermal‑processes. Yet the majority of sites do not have access to these sources of heat and, under the proposed benchmarks, would be placed at significant risk of carbon leakage.
Access to the benchmark technologies
Given the fallback benchmarks proposed are set by those with access to biomass, cogeneration, and heat from exothermal‑processes, it is important to consider the availability of these heat sources to wider industry.
The UK’s Biomass Strategy (2023) makes clear that biomass is a limited resource that cannot meet all demands and must be prioritised toward the highest‑value, hardest‑to‑decarbonise uses. By allowing biomass to set the benchmark, the Government would be directing industry to compete for this valuable resource that could be better used elsewhere in the economy, for example as a circular raw material that could displace fossil feedstock in the chemical industry. Those sites that cannot secure sustainable biomass will be left exposed to carbon leakage.
Access to biomass is further constrained to UK sites by the fact that, unlike their competitors in the EU ETS, UK ETS participants are not permitted to lower their emissions through the purchase of biogas from the national grid. This means that UK sites would face a clear comparative disadvantage under the proposed EU benchmarks.
Even where biomass is available, its quality and consistency put limitations on its use in industrial processes which require continuous, high temperature heat. Air quality legislation too can limit the use of solid biomass, for example the Environmental Permitting (England and Wales) Regulations 2016 and Directive (EU) 2015/2193 on Medium Combustion Plants. Moreover, there are some processes where biomass use can risk product contamination.
By comparison, cogeneration is a mature and efficient technology, but its deployment in the UK has remained stable over the past decade, reflecting policy, market and site-specific constraints rather than a lack of technical improvement. Recent investments have been concentrated in the power sector, rather than in heat for industrial processes.
With respect to heat imported from exothermal processes, a UK ETS participant’s ability to import heat from another process depends entirely on its location, and it is likely that these opportunities have already been explored and taken advantage of where they exist.
Other sources of low carbon heat
Accepting that heat from biomass, cogeneration, and exothermal‑processes are not widely available to industry, it becomes important to consider what other sources of low carbon heat might allow industry to meet the benchmark, between now and 2030.
The CIA recognise that low carbon hydrogen could play a vital role in our future energy mix. The UK has a headstart on hydrogen policy and we have an innovative industrial base that would welcome access to clean fuel. But UK industry competes globally on price and low carbon hydrogen comes with a green premium, so long-anticipated policy support must be expedited. Without public support, there is no business case for hydrogen fuel-switching before 2030.
Electrifying industry presents a similar challenge. Grid connection availability and the cost of electricity in the UK are significant barriers. UK industrial electricity prices are five times higher than the comparative gas price. Moreover, a company investing in electrification would naturally prioritise locations with the lowest electricity cost, and the UK is ranked last in the IEA for industrial electricity price. Even the UK ETS itself presents barriers to electrification.
What’s the alternative?
The inclusion of biomass, cogeneration, and heat from exothermal‑processes within the benchmark conflicts with ETS principles of technological neutrality and equal treatment. The sites considered as benchmark-setters are statistical outliers that do not represent the availability and technical viability of these low carbon heat sources for the majority of sites.
Recognising that industry in the UK and EU is in a competitiveness crisis, the CIA urges the UK Government to engage with the EU on this issue, to encourage a proper assessment of the applicability of the proposed fallback benchmarks to the wider industrial community. The fallback benchmarks must represent a challenging but achievable pathway to net zero or we risk further decarbonisation through deindustrialisation.
This could be achieved by, for example, excluding niche technologies and fuel-types. In principle, we also support the EU’s proposed development of sector-specific fallback benchmarks, which could better capture the realities of chemical manufacturing and abatement potential. However, the methodology for sector-specific fallback benchmarks must be developed in collaboration with industry to ensure it is effective.
As the risk of carbon leakage increases, a balanced pace and predictable pathway is needed to give industry the means and time to develop and deliver low carbon technologies. Alongside free allocation, complementary policies will also be required to unlock access to competitively priced low carbon hydrogen and electricity, and to foster demand for clean and circular chemicals
