EU Revises State Aid Guidelines for Emissions Trading System to Address Carbon Leakage Risks

On December 23, 2025, the European Commission adopted a revision to its State Aid Guidelines for the EU Emissions Trading System (ETS). The update aims to address the increased risk of "carbon leakage" faced by more energy-intensive industries due to persistently rising carbon costs under the ETS. Carbon leakage refers to businesses relocating production outside the EU to regions with looser emission constraints, or EU products being replaced by more carbon-intensive imports.

Key changes include expanding the list of industrial sectors eligible for compensation for indirect emission costs in electricity prices, adding 20 new sectors and 2 sub-sectors; increasing the aid intensity for some already eligible sectors from 75% to 80%; and requiring major beneficiaries to invest part of the aid in projects that help reduce electricity system costs to foster green transition. These guidelines are a key instrument for the EU to prevent carbon leakage while balancing climate goals and industrial competitiveness.