Geopolitical changes have recently increased the focus of policymakers within the EU on the competitiveness of industry. As Draghi (2024) points out, without countervailing measures, the EU risks capital flight and the loss of technological leadership in critical industries. One of the proposals was to support the competitiveness of the energy-intensive industry by reducing energy costs through tax cuts or lower network charges, but also without compromising EU climate policy.

Nowadays, governments across Europe are increasingly thinking and acting to implement government support to help industry remain competitive on the global market. In a new study published by the Netherlands Bureau for Economic Policy Analysis (CPB) and the Netherlands Environmental Assessment Agency (PBL) we show that both goals cannot be met using a single instrument, and trade-offs exist depending on how precisely the support is provided (Olijslagers et al. 2026).

Subsidy options and model characteristics

In Olijslagers et al. (2026), we examine four forms of support: a production subsidy, subsidies to lower energy costs (both fossil fuels and electricity), targeted subsidies to lower electricity costs, and subsidies to implement CO2 reduction technologies. We examine what happens if the Netherlands, Germany, and France jointly (the ‘coalition’) provide support to their energy-intensive industries for five years. In this way, we can distinguish in the results between countries that introduce support measures and EU countries that do not. We assume that the coalition makes a total of €5 billion in subsidies available annually for the energy-intensive industry from 2026 to 2030 and thus for a total of €25 billion.

We use the applied multiregional and multisectoral global general equilibrium model GREENR to calculate the implications for the competitive position of the industry and for emissions from various sources in these countries, in the rest of Europe, and globally. Our model has a particularly rich representation of different energy markets, including fossil fuel markets for coal, gas, and oil, but also their interaction with the electricity market and specific CO2-abatement technologies (Olijslagers and Brink 2024). Furthermore, the model explicitly accounts for the EU ETS as it is designed in Phase 4 with all the newly added features under the Green Deal such as the Carbon Border Adjustment Mechanism (CBAM) and the so-called Market Stability Reserve (MSR). This representation of the Emissions Trading System (ETS) is particularly relevant because the MSR has fundamentally changed the waterbed effect that characterised the interaction between overlapping national (climate) policies and EU ETS outcomes in Phase 3 (see also Perino et al. 2025).

Interaction of industrial policy with the EU Emissions Trading System

The EU ETS plays a crucial role in European climate policy because it limits greenhouse gas emissions from energy-intensive industries in the EU by making a limited number of emission allowances available. This emissions cap decreases by a fixed percentage each year and will reach zero around 2040. Such a fixed emissions cap guarantees that this EU reduction target will be reached, but at the same time creates a waterbed effect within the EU. If emissions increase due to industrial policy in one country under a standard cap and trade, the increase in demand for allowances in that country would lead to a higher ETS price causing other countries to emit less CO2. This way the overall balance is fixed.

The addition of the Market Stability Reserve since 2019 has changed this picture strongly. The overall European emissions cap is no longer fixed in the case of overlapping policies such as local carbon taxes or subsidies (see also Perino et al. 2025). So, if the coalition’s industrial policy leads to increased production in these EU countries, and thus to higher emissions, the number of unused allowances will decrease. As a result, the MSR will remove fewer allowances from the market, and total emissions within the ETS as a whole may increase on the path until 2040.

Competitiveness outcomes

The three subsidies that lower costs for the energy-intensive industries do improve the companies’ competitive position and increase production (see Figure 1). Only the CO2 subsidy for clean technology does little to improve their position in the global market. The largest impact is seen when output costs are reduced. Note also that increased output in the coalition crowds out industrial output in the rest of the EU and in non-EU regions.

Figure 1 Percentage change of industrial output due to specific types of subsidies

Cumulative emissions in the EU and abroad

The impact on emissions is particularly interesting. Apart from the cost of raising taxes elsewhere in the economy to finance the additional expenditures, providing subsidies that lower cost of the industry also comes at a climate cost. Only the subsidy that addresses CO2 reduction technologies directly reduces overall emissions in the coalition and the EU as a whole and turns out to be very effective. Table 1 summarises the main findings on emissions within the coalition, the EU, and the world as a whole.

Table 1 Cumulative emission changes in MtCO2

A subsidy for clean technologies reduces emissions because of lower costs for investments in abatement technology. As more allowances are invalidated by the MSR from the carbon market compared to the current baseline, this results in a lower cap. The other support measures aimed at reducing industrial costs have the exact opposite effect. These support measures increase demand for allowances, which decreases the number of allowances in the market. Now the MSR effect works in the opposite direction: fewer allowances are invalidated from the market than foreseen in the baseline and so (cumulative) emissions will rise. This effect is greatest with a reduction in energy costs because in that case fossil fuels also become cheaper.

While a reduction in electricity costs makes industrial production cleaner, it also simultaneously increases emissions from electricity production. On balance, this support measure leads to more demand for emission allowances and thus less invalidation via the MSR. Of all the support measures, the decrease in the invalidation of emission allowances is lowest with a general reduction in production costs.

The support measures also lead to changes in emissions outside the EU. If the industry in the coalition manages to increase its market share at the expense of the industry in countries outside the EU, this reduces production there, and consequently less emissions outside the EU. This is because the industry in the coalition produces much cleaner than in other parts of the world (such as China and India). Relatively clean industry in the coalition therefore replaces more polluting production from outside the EU. As a result, global emissions may even decrease on balance. With a subsidy that lowers energy costs regardless of the energy carrier, the emission intensity of the industry in the coalition increases, making this effect much smaller and causing global emissions to increase on balance.

Lessons for EU ETS reform in Europe

The observed interaction between industry support measures and the EU ETS points at an important robustness of its current design. In current turbulent times where industries face strong challenges, the carbon market is likely to free up allowances relative to the existing emission reduction path if governments decide to subsidise industries for competitiveness purposes. In other words, the invalidation of allowances will be slowed down by providing subsidies and more cumulative emissions are possible. So, our results illustrate the importance of such indirect effects when considering EU ETS reform both in the short and long term. This effect would even be larger if more countries would join the subsidy coalition as proposed by Draghi.

Another lesson from our analysis is that providing subsidies does help competitiveness but does not help to reduce (cumulative) emissions over the current horizon of EU ETS. Europe will be responsible for more direct emissions from its territory, although global emissions may even be reduced if subsidies that make fossil fuels cheaper are avoided. Only subsidies that directly address abatement of carbon emissions do contribute to lower emissions for the EU and the world in a very cost-efficient way. A subsidy package that would address both ambitions at the same time is likely to be designed such that electricity costs would be lowered in combination with abatement subsidies.

References

Draghi, M (2024), The future of European competitiveness, European Commission Report on the competitiveness of the European Union.

Olijslagers, S and C Brink (2024), “Documentation Green-R”, CPB-PBL Publication.

Olijslagers, S, C Brink, X Li and H Vollebergh (2026), “Industry energy support and its interaction with EU ETS”, CPB/PBL Discussion Paper.

Perino, G, R A Ritz and A A van Benthem (2025), “Overlapping climate policies”, The Economic Journal 135(671): 2122-2160.