Polluter pays or taxpayer pays? Weaker EU carbon prices widen the funding gap
Carbon prices across the European Union are falling. As political pressure mounts to protect energy-intensive industries from rising compliance costs, the EU Emissions Trading System is delivering a weaker price signal than many expected just months ago. For companies considering carbon capture and storage, that shift has direct financial consequences.
The Institute for Energy Economics and Financial Analysis has calculated what lower carbon prices mean for the economics of industrial decarbonisation. Its findings highlight a basic tension in EU climate policy: measures designed to ease the burden on heavy industry may also reduce the market revenue available to finance the technologies those same industries need to cut emissions.
This tension is not hypothetical. It affects investment decisions being made today across cement plants, refineries, chemical facilities and steelworks. Moreover, it raises a fundamental question about who ultimately pays for the transition. If the polluter pays principle weakens, the gap will need to be filled by public budgets, higher product prices, or lower returns for investors.
Carbon prices have dropped sharply in recent forecasts
Dutch bank ABN AMRO publishes regular forecasts for the price of EU allowances. In September 2025, the bank expected allowances to trade at €145 per tonne by 2030. By May 2026, that figure had fallen to €138 per tonne. Three months later, in August 2026, the forecast dropped again to just €91 per tonne.
That represents a decline of more than a third in under a year. Consequently, the expected revenue from avoided emissions has fallen in parallel. For industrial operators weighing up whether to invest in carbon capture, the business case now looks markedly different.
The EU Emissions Trading System works by requiring companies to surrender allowances for each tonne of carbon dioxide they emit. When a facility captures and permanently stores emissions, it avoids that compliance cost. In addition, governments can recycle auction revenues into support programmes for low-carbon technologies.
However, capturing emissions at source, compressing and transporting the gas, then injecting it into secure geological storage is expensive. The Institute for Energy Economics and Financial Analysis estimates full-chain costs of between €191 and €265 per tonne of carbon dioxide. That range sits well above the current forecast allowance price for 2030.
A €142 billion funding gap under revised assumptions
The Institute for Energy Economics and Financial Analysis modelled an illustrative portfolio capable of capturing and storing 50 million tonnes of carbon dioxide each year. That figure is broadly comparable to the EU's 2030 target for injection capacity. Over a 25-year period, the total cost of operating such a portfolio would reach approximately €351 billion.
Under earlier carbon-price assumptions, the organisation estimated that revenue from the Emissions Trading System would leave a funding gap of €103 billion between 2030 and 2054. Using ABN AMRO's revised August 2026 forecast, that gap widens to €142 billion. The increase amounts to roughly 38%.
To put that in context, annual costs for the illustrative portfolio would reach around €11 billion in 2030. Meanwhile, the associated value from avoided allowance purchases would amount to only €3.8 billion in the same year. The shortfall would need to be covered through some combination of lower construction costs, higher product prices, reduced investor returns, or direct public subsidy.
The analysis keeps project scale and operating costs constant. It tests only the effect of changing carbon-price expectations. Therefore, the widening gap reflects weaker market signals rather than rising project costs or increased ambition.
How the EU's policy framework is responding
European policymakers have recognised that carbon pricing alone may not drive sufficient investment in capital-intensive decarbonisation technologies. In February 2024, the European Commission adopted an industrial carbon management strategy designed to coordinate action across capture, transport, utilisation and permanent storage.
The strategy covers the entire carbon dioxide value chain. It acknowledges that storage sites, cross-border pipelines and capture facilities must develop in parallel. Carbon dioxide transport projects can qualify as Projects of Common Interest or Projects of Mutual Interest under the trans-European energy infrastructure framework. That designation can help unlock planning approvals and access to finance.
Several EU funding instruments now support industrial carbon management. The Innovation Fund allocates grants for large-scale demonstration and deployment of low-carbon technologies. Horizon Europe funds research and development. The Connecting Europe Facility can support cross-border infrastructure. National governments may also provide state aid under EU climate and energy rules, provided projects meet eligibility criteria.
As of October 2026, the Commission reported that more than €5 billion in regular Innovation Fund grants had been allocated to over 40 projects across the value chain. A separate progress report indicated that Innovation Fund-supported projects were expected to capture more than 25 million tonnes of carbon dioxide annually for permanent storage.
In addition, the EU is developing a proposed Industrial Decarbonisation Bank. Commission materials describe an ambition to mobilise up to €100 billion for clean industrial technologies. An initial Investment Booster would be backed by 400 million Emissions Trading System allowances, valued at around €30 billion for the first period through 2030.
Implications for UK businesses and supply chains
UK companies do not participate directly in the EU Emissions Trading System. Nevertheless, developments in EU carbon policy affect competitiveness, procurement and cross-border trade. Many UK manufacturers sell into European markets or source materials from EU suppliers. If European producers face lower carbon costs, UK competitors may need to adjust pricing or investment strategies accordingly.
Conversely, if the EU shifts toward greater public subsidy for industrial decarbonisation, UK policy may face pressure to keep pace. The UK Emissions Trading Scheme operates independently, but expectations around carbon prices and government support are influenced by what happens across the Channel. A widening funding gap in Europe could prompt similar debates in Westminster.
UK businesses bidding for public contracts are already subject to carbon-reporting requirements under Procurement Policy Note 06/21. Suppliers competing for central government contracts above £5 million per year must publish a carbon reduction plan. If European competitors receive substantial state support for carbon capture projects, UK suppliers may face a relative disadvantage unless similar mechanisms are available domestically.
Furthermore, UK supply chains are deeply integrated with European industry. If EU cement, steel or chemical producers delay decarbonisation because projects cannot secure finance, embedded emissions in imported materials may remain higher for longer. That affects Scope 3 reporting for UK companies and complicates efforts to demonstrate supply chain progress.
Key facts about the funding gap
- The illustrative portfolio models 50 million tonnes of annual carbon dioxide storage capacity over 25 years, at a total estimated cost of €351 billion.
- Full-chain carbon capture and storage costs are estimated at €191 to €265 per tonne of carbon dioxide, covering capture, transport and permanent geological storage.
- ABN AMRO's forecast for 2030 EU allowance prices fell from €145 per tonne in September 2025 to €91 per tonne by August 2026.
- Under earlier carbon-price assumptions, the funding gap between project costs and Emissions Trading System revenue was estimated at €103 billion for the period 2030 to 2054.
- Using revised lower carbon-price forecasts, the gap widens to €142 billion, an increase of approximately 38%.
- In 2030, annual costs for the illustrative portfolio would reach around €11 billion, while associated Emissions Trading System value would amount to only €3.8 billion.
- More than €5 billion in Innovation Fund grants had been allocated to over 40 industrial carbon management projects as of October 2026, with expected annual capture exceeding 25 million tonnes.
Industrial competitiveness and the weakening price signal
Energy-intensive industries have argued that high carbon and energy costs undermine their ability to compete with producers in regions with cheaper energy or weaker climate requirements. Those concerns have influenced calls for reforms that reduce cost pressures and increase public backing for industrial decarbonisation.
The result is a weaker price signal. A lower allowance price reduces the immediate financial benefit of avoiding one tonne of emissions. That makes it harder for companies to justify capital-intensive projects whose costs are incurred today but whose benefits depend on future carbon prices remaining high enough to cover operating expenses and generate a return.
Project owners must then close the gap through lower construction costs, higher prices for industrial products, reduced returns, or direct public support. The last option shifts risk from polluters to taxpayers. If companies expect governments to restrain prices whenever industrial costs rise, they may place less confidence in the market as a durable signal for long-term investment.
That could increase demands for contracts for difference, tax credits, regulated transport and storage networks, or other mechanisms that guarantee revenue independently of the allowance price. Such instruments can accelerate deployment, but they create fiscal and political trade-offs. Government support may be justified where infrastructure produces broader climate benefits, yet poorly designed subsidies could transfer risks to taxpayers while allowing companies to retain gains.
Competing priorities for public budgets
Carbon capture and storage competes with other decarbonisation options for limited public funding. Alternatives include direct electrification, renewable power, hydrogen, energy efficiency and industrial process innovation. Public support may be most defensible where carbon capture addresses unavoidable process emissions or where it can deliver permanent storage with robust monitoring.
The European Commission's policy framework includes both carbon capture and storage and carbon capture and utilisation. However, its stated objective is broader industrial carbon management rather than support for every proposed project. Governance questions arise around how support should be allocated and what conditions companies should meet in return.
Possible safeguards include competitive allocation of subsidies, emissions-performance requirements, transparent cost reporting, clawback provisions and limits on support for projects that would prolong fossil-fuel dependence. The Council of the European Union has argued that Emissions Trading System revenues should be reinvested more extensively in innovation, clean technology and industrial decarbonisation.
This approach acknowledges that carbon pricing alone may not suffice for technologies with high upfront costs and uncertain long-term returns. It also reflects a recognition that preserving industrial competitiveness without weakening the incentive to cut emissions requires careful policy design.
What UK SMEs should consider
For UK businesses, the immediate takeaway is that European carbon policy is in flux. Price expectations have fallen sharply, and public funding mechanisms are expanding to compensate. That combination may allow strategically important projects to proceed, but it changes the distribution of risk. Companies may face less exposure to carbon-price volatility, while governments and taxpayers assume more of the cost if projects underperform or prices remain subdued.
UK suppliers to European markets should monitor how competitor jurisdictions structure support for industrial decarbonisation. If EU producers benefit from subsidised carbon capture infrastructure, UK manufacturers may need to demonstrate equivalent emissions performance or seek comparable domestic support to remain competitive in tenders and supply chains.
Businesses subject to carbon reporting requirements under Procurement Policy Note 06/21 should also consider how developments in European carbon management might affect expectations around Scope 3 emissions. If embedded emissions in imported materials remain high because European suppliers delay investment, UK companies may need to adjust sourcing strategies or engage suppliers more actively on decarbonisation plans.
For sectors with significant process emissions, such as chemicals, cement or food manufacturing, the European debate offers a preview of challenges likely to emerge in the UK. Technologies needed to cut industrial emissions are expensive. If carbon prices alone do not justify investment, businesses will need to navigate a patchwork of grants, loans, tax incentives and contracts for difference. Understanding how that landscape is evolving in Europe can inform planning for similar policy shifts domestically.
Additionally, companies considering capital investment in low-carbon technologies should factor in the possibility of lower-than-expected carbon prices. Relying solely on future compliance costs to justify investment carries risk if political pressure leads to price caps, free allowance allocations or other measures that reduce the effective cost of emissions. Diversifying the business case to include energy savings, product differentiation, supply chain requirements or access to green finance may provide more resilience.
Where to find further information
The Institute for Energy Economics and Financial Analysis published its analysis of the carbon capture funding gap in a report examining the impact of weaker carbon-price forecasts on project economics. The Department for Energy Security and Net Zero provides updates on UK carbon pricing and industrial decarbonisation policy.
Information on the EU Emissions Trading System, including price data and policy developments, is available from the European Commission's climate action pages. The Innovation Fund website lists supported projects and open calls for proposals.
UK businesses can find guidance on carbon reduction plans and Procurement Policy Note 06/21 through compliance support services that help suppliers meet public sector requirements. Training on Scope 3 emissions and supply chain reporting is available through structured learning programmes designed for sustainability professionals and procurement teams.