Europe’s pulp and paper industry has already cut greenhouse gas emissions substantially.

The harder question is how it finances the next reduction.

The Confederation of European Paper Industries, or CEPI, is warning that changes to the EU Emissions Trading System could weaken rather than strengthen the investment case for further mill decarbonization.

CEPI estimates that changes affecting free-allocation benchmarks could reduce the European pulp and paper industry’s available investment capacity by around €1 billion per year between 2026 and 2030.

The association says the problem could be compounded by new conditions attached to free allowances and rules affecting mills that already obtain most of their energy from biomass.

The European Commission sees the policy differently.

Its July 17 ETS revision is explicitly intended to turn Europe’s carbon market into a stronger industrial-investment mechanism, including a planned €100 billion Industrial Decarbonisation Bank and an estimated €30 billion Investment Booster before 2030.

That creates the real industry debate.

Both sides say they want faster industrial decarbonization. They disagree over whether the current ETS design makes the next pulp and paper investment easier or harder to finance.

CEPI Says Paper Has Already Cut Emissions by More Than 55%

CEPI says Europe’s pulp and paper industry has reduced greenhouse gas emissions by more than 55% since 2005.

That performance matters because pulp and papermaking is an energy-intensive industrial process.

Mills require large amounts of heat and electricity for operations including pulping, stock preparation, drying, pumping and recovery processes.

The sector has nevertheless been able to replace significant quantities of fossil energy through efficiency improvements and increased use of bioenergy, including energy recovered from manufacturing residues.

CEPI argues that this history should influence how future ETS rules treat the sector.

The association’s concern is essentially this:

The first half of the decarbonization journey included projects with clearer technologies and economics.

The remaining reductions may require considerably larger capital investments with longer payback periods.

In June, CEPI gave the example of an investment exceeding €250 million at a single mill to reach 98% fossil-free production.

At an assumed carbon price of €70 per tonne of CO₂, it estimated annual savings of around €10 million, implying a payback period exceeding 25 years.

That example does not describe every European mill.

But it illustrates why the next phase may be financially more difficult than simply repeating measures already implemented over the past two decades.

Free Allowances Are at the Center of the Dispute

To understand CEPI’s concern, it helps to understand how free allocation works.

The EU ETS puts a price on greenhouse gas emissions from energy-intensive industries including pulp, paper and board.

Industrial installations receive some emission allowances free of charge to limit the risk of carbon leakage—production or investment moving to regions where manufacturers face lower carbon costs.

The quantity of free allowances is linked to performance benchmarks representing the emissions intensity of the most efficient installations in each product category.

Those benchmarks become tighter over time.

The Commission says this gradually encourages manufacturers to reduce emissions because companies must either improve their performance, buy additional allowances, or both.

For the 2026–2030 allocation period, the annual reduction rates used for benchmark updates are becoming steeper.

The minimum annual rate rises from 0.2% to 0.3%, while the maximum increases from 1.6% to 2.5%.

CEPI argues that almost the entire pulp and paper sector would be affected at the maximum benchmark-update rate under the proposed values.

It wants the 2021–2025 benchmark values effectively frozen for the 2026–2030 period.

From CEPI’s perspective, fewer free allowances mean mills must direct more cash toward carbon compliance at the same time that they need substantially more investment for new decarbonization equipment.

That is where its €1 billion annual investment-risk estimate comes from.

But the Commission Is Also Increasing Decarbonization Funding

This is where the debate becomes more complicated than “Brussels takes money away from industry.”

The European Commission argues that the revised ETS should channel substantially more capital into industrial decarbonization.

Under the July 17 proposal, the Commission plans a €100 billion Industrial Decarbonisation Bank.

Part of that programme would be a roughly €30 billion ETS Investment Booster available before 2030.

Member States would also be required to direct at least 50% of national ETS auction revenues toward decarbonizing ETS sectors.

So the disagreement is not simply about whether money should support decarbonization.

It is about where that money sits and how companies gain access to it.

CEPI would prefer mills to retain more investment capacity through free allocation.

The Commission is increasingly tying support to specific investment commitments and funding mechanisms.

For a mill manager considering a new boiler, heat pump, electrification project or recovery-system upgrade, those two forms of support are not necessarily interchangeable.

A free allowance has a direct value on the installation’s carbon balance.

A funding programme may require applications, qualification, project approval and competition with other industrial projects.

That difference helps explain why manufacturers can support decarbonization funding in principle while still resisting reductions in free allocation.

Conditionality Creates Another Layer

Starting with the 2026–2030 allocation period, free allowances are also increasingly linked to companies taking specific energy-efficiency and decarbonization actions.

Under current rules, an installation can face a 20% reduction in free allocation if it fails to implement relevant recommendations from required energy audits or energy-management systems, subject to defined exemptions.

Installations performing poorly relative to their benchmark can also face a 20% reduction unless they implement an accepted climate-neutrality plan.

The Commission’s July revision goes further in connecting future free allocation with investment.

It proposes continuing free allowances after 2030, but increasingly tying them to approved decarbonization plans and investment inside Europe.

From a policymaker’s perspective, the logic is straightforward:

If companies receive protection from carbon costs, that support should help drive actual emissions reductions.

CEPI’s objection is more operational.

The association says mills may be required to prepare increasingly detailed investment plans even where affordable technologies or supporting infrastructure are not yet sufficiently available.

Failure to deliver those plans could then reduce free allocation and expose the mill to still higher carbon costs.

For smaller mills with limited engineering and administrative resources, CEPI argues that this burden can become particularly significant.

The 95% Biomass Rule Creates an Unusual Problem

Perhaps the most interesting pulp-and-paper-specific issue is biomass.

Many European pulp mills generate energy from secondary biomass and process residues created during fiber production.

That allows some sites to operate with very low fossil-fuel emissions.

Normally, that would look exactly like the outcome climate policy is trying to encourage.

But CEPI argues that a new 95% biomass threshold for excluding installations from the ETS creates an unintended consequence.

A mill whose emissions come almost entirely from sustainable biomass may fall outside the ETS.

That sounds beneficial.

CEPI says the problem is that the mill then also loses access to free allowances that previously helped support the economics of its decarbonization investments.

The association wants the threshold returned to 100%.

Its argument is essentially that the current design can create a perverse incentive:

A company that has already moved almost completely away from fossil fuels can lose a financial benefit because it decarbonized too successfully.

Whether policymakers ultimately accept that reasoning remains uncertain.

But it demonstrates why carbon-market rules can behave differently in a forest-based industry than in sectors whose production processes remain predominantly fossil-fuel dependent.

Biomass Is Not a Side Issue for Papermaking

This point deserves particular attention from the pulp and paper industry.

A modern chemical pulp mill does not only manufacture pulp.

It also recovers energy and chemicals from its production process.

Black liquor and other bio-based process streams can be used to generate heat and electricity, while bark and other wood residues can provide additional renewable energy.

That creates a very different energy profile from an industrial plant relying almost entirely on natural gas or coal.

European ETS policy therefore has to address an unusual question:

How should carbon incentives treat an industrial installation that has already replaced most fossil energy with internally generated bioenergy?

If the system removes its free-allocation benefit, policymakers may argue that the installation no longer needs carbon-leakage protection for those emissions.

The mill may argue that it relied on the existing system when making the capital investment and still needs the economic benefit to finance the next stage.

Neither question can be answered by simply saying biomass is good or bad.

It comes down to how policy rewards an investment over its economic lifetime.

The Market Stability Reserve Is Another Point of Conflict

CEPI is also questioning the future role of the EU ETS Market Stability Reserve, or MSR.

The MSR was created to address an earlier surplus of carbon allowances by removing some allowances from the market when supply becomes excessive.

For the period from September 2026 through August 2027, approximately 190.5 million allowances are scheduled to enter the reserve.

CEPI argues that as the overall ETS cap continues shrinking, withdrawing and invalidating allowances could eventually contribute to carbon costs rising beyond levels necessary to drive emissions reductions.

The Commission itself has acknowledged that a shrinking cap could create future liquidity problems and has already proposed changing the mechanism that invalidates allowances held above the reserve limit.

This is another example where the debate is no longer whether carbon should have a price.

It is about how volatile or scarce allowances should become before the carbon price begins damaging investment rather than stimulating it.

Paper Mills Are Competing Outside Europe’s Carbon System

CEPI’s argument also rests heavily on international competition.

European paper and board producers sell into global markets while competing with mills operating under very different energy prices, environmental rules and carbon-cost structures.

The industry’s competitive environment is already difficult.

CEPI’s final 2025 figures show paper and board production in its member countries declined 1.6% to 77.4 million tonnes.

First-quarter 2026 production then fell another 2.4% year on year.

European imports increased in 2025 while the industry’s trade surplus weakened.

That does not prove the ETS caused Europe’s production decline.

Demand, energy costs, overcapacity, trade flows and structural decline in graphic papers all play roles.

But it explains why manufacturers are particularly sensitive to any policy that increases European production costs relative to imported paper.

Carbon pricing can successfully reduce emissions and still create competitiveness concerns.

Both statements can be true at the same time.

Recycling Adds Another Dimension to the Debate

Europe’s paper industry is also a major consumer of recovered fiber.

CEPI-region mills use tens of millions of tonnes of paper for recycling annually, feeding recovered material back into containerboard, cartonboard, tissue and other products.

In 2025, CEPI reported that use of recovered paper decreased 1.3%, partly because of the structural decline of graphic-paper production, while consumption of recovered corrugated and kraft grades increased.

This matters because Europe’s paper sector does not fit neatly into a simple “heavy industry versus climate policy” narrative.

It is simultaneously:

an energy-intensive manufacturer;

a major biomass user;

a large industrial recycler;

a producer of renewable fiber-based materials;

and an exporter competing in global commodity and packaging markets.

Carbon policy therefore influences not only mill emissions but also investment in infrastructure supporting the wider fiber-based circular economy.

Is CEPI’s €1 Billion Figure Guaranteed?

No.

That distinction is essential.

The €1 billion annual loss of planned decarbonization investment is CEPI’s estimate, not a European Commission forecast and not an amount that has already disappeared from mill investment budgets.

Actual investment will depend on:

the final benchmark values;

carbon allowance prices;

individual mill emissions;

company profitability;

available EU and national subsidies;

interest rates;

energy prices;

and whether specific decarbonization projects receive funding.

It would therefore be misleading to write that the ETS “will cost Europe’s paper industry €5 billion between 2026 and 2030” as an established outcome.

What CEPI is warning is that the policy could reduce investment capacity by approximately €1 billion each year under its modelling.

That is still a significant industry claim.

But it must remain attributed.

The Commission Has Its Own Evidence That ETS Works

The European Commission is equally clear that it sees the ETS as successful.

It says emissions from sectors covered by the scheme have fallen by roughly 50% since 2005.

EU ETS auctions have also generated more than €258 billion between 2013 and the end of 2025, with more than €43 billion raised during 2025 alone. Those revenues support areas including industrial decarbonization, clean technology, renewable energy, grid development and efficiency projects.

The Commission’s broader July energy package also points out that approximately 70% of EU electricity now comes from domestically produced clean-energy sources, while electrification of total energy demand has remained stuck at around 23%.

Its conclusion is that Europe needs stronger—not weaker—carbon and electrification incentives.

CEPI is not fundamentally rejecting that objective.

It is arguing that the mechanism needs to recognize the investment realities of an industry that has already made substantial reductions.

That difference matters.

The Real Question Is What Happens to the Next Euro of Mill Capex

The strongest way to evaluate the ETS debate may be to stop looking only at historic emissions.

Those tell us what has already happened.

The more useful question is:

What does a European mill do with its next €100 million of capital?

Does it invest in:

electrifying process heat;

heat pumps;

energy recovery;

new biomass systems;

carbon capture;

more efficient drying;

on-site renewable generation;

or another project that reduces fossil emissions?

Or does that project fail its return threshold because energy, carbon and financing costs make the payback too long?

That is ultimately where climate policy becomes industrial policy.

A theoretically strong carbon price is valuable only if manufacturers have technologies they can deploy and enough financial capacity to deploy them.

At the same time, generous free allocation cannot become a permanent substitute for actual emissions reductions.

The European Commission is trying to solve the second problem.

CEPI says the current design risks creating the first.

This Is Not Simply Environment Versus Industry

Treating the dispute as “EU climate ambition versus paper-industry resistance” would miss the central issue.

CEPI supports the EU’s climate-neutrality objective.

The Commission wants to maintain industrial production in Europe.

Both sides are talking about investment.

The disagreement is over how quickly carbon protection should decline, how much conditionality companies should accept, and how support should reach actual mill projects.

That is why the next stage of the ETS debate matters to pulp and paper producers beyond Brussels.

A mill deciding whether to approve a €50 million energy project needs policy visibility over years, not months.

The equipment may operate for decades.

Financing may depend on future energy savings.

Carbon prices affect the calculation.

Free allowances affect the calculation.

Government funding affects the calculation.

Change one of those assumptions after investment approval, and a project that previously worked financially can look very different.

What Should European Paper Mills Do Before the Rules Are Final?

For mill managers, energy teams and paper-industry investors, this is the moment to revisit the actual economics of the decarbonization pipeline.

Do not look only at your current ETS cost.

Take every major project planned through 2030 and run it under several scenarios:

How does the return change if free allocation falls faster?

What happens at €70, €100 or a higher carbon price?

Does a biomass-heavy installation risk losing ETS eligibility?

Which projects depend on grants that have not yet been secured?

And how much investment can still proceed if administrative or financing requirements increase?

Then put the results into the policy debate.

The strongest industry argument will not be that carbon regulation costs too much.

It will be evidence showing which investments still go ahead, which are delayed, and which become uneconomic under different ETS designs.

That is also the test policymakers should apply.

If tighter carbon rules generate more low-carbon investment, the system is doing what it was designed to do.

If they instead divert capital away from technically viable mill projects, the design needs another look.

Europe’s pulp and paper industry has already cut emissions by more than half since 2005.

The next test for the EU ETS is whether it can make the remaining half easier to finance—not simply more expensive to emit.

Last Updated on 03/09/2026 by Jota Machinery