The Italian government has secured approval from the European Commission to more than double a compensation scheme aimed at energy-intensive manufacturers, raising the total envelope from €1.5 billion to €3.6 billion. The decision, which falls under EU state aid rules, reflects growing alarm over the risk that high electricity costs tied to carbon pricing could drive Italian heavy industry to relocate abroad—and take emissions with them.
Why This Matters
• Budget tripled: Annual spending cap rises from €140 M to €600 M, with payments running through 2031.
• Higher payouts: Eligible sectors already in the scheme will now receive up to 80 % reimbursement of indirect carbon costs, up from 75 %.
• Wider eligibility: New industrial sectors deemed at risk of carbon leakage will qualify for support.
• Market anchor: The scheme aims to keep Italian factories competitive against rivals in countries with looser climate rules.
The Carbon Cost Squeeze
The scheme addresses a specific pinch point in the EU Emissions Trading System (ETS): when power generators buy carbon allowances, they pass part of that cost onto electricity prices, hitting manufacturers that consume large volumes of power. Steel mills, paper plants, chemical producers, and aluminium smelters are particularly exposed. Without compensation, these firms face a choice between absorbing higher costs or shifting production outside the EU—a phenomenon regulators call carbon leakage.
Italy's updated programme reimburses a portion of these indirect carbon costs based on energy-efficiency benchmarks. That structure is designed to reward companies that cut electricity consumption, rather than simply handing out blanket subsidies. The final tranche of payments is scheduled for 2031, aligned with the current phase of the ETS.
What This Means for Manufacturers and Investors
For plant managers in sectors already covered—including iron and steel, refined petroleum products, pulp and paper, base chemicals, and primary metals—the change translates to a five-percentage-point increase in the share of costs the state will cover. That may seem modest, but on high-volume operations the cumulative effect is significant, especially when electricity prices remain volatile.
More important is the expansion of eligibility. The revised list now mirrors the updated ETS state-aid guidelines, which bring in additional subsectors the Commission considers vulnerable to relocation pressure. While Brussels has not published the full amended annex, earlier tranches of the guidelines included leather apparel manufacturing, specific polyether alcohols, and certain non-ferrous metals. Companies operating in these niches should check whether their NACE codes now qualify.
Investors and lenders evaluating Italian industrial assets should note the structural shift: the annual cap has quadrupled, signalling that Rome expects to deploy far more capital to retain manufacturing capacity. That backstop reduces the near-term risk of plant closures driven purely by energy economics, though it does not eliminate exposure to raw-material costs, labour trends, or demand shocks.
Italy in the European Context
Italy's move follows a broader pattern across the bloc. Germany operates the largest such scheme in Europe, with a €27.5 billion envelope approved by Brussels and 31 eligible sectors, nearly triple the original list. Berlin raised its reimbursement rate to 80 % for existing beneficiaries and widened the net to cover more manufacturers. France has channelled 44.1 % of its ETS auction revenue—some €909 M in 2023 alone—into indirect-cost compensation, often coupling it with exemptions from renewable-energy levies for the most electricity-intensive users. Spain secured clearance for a scheme worth up to €8.51 billion covering 2021–2030, likewise set at a 75 % baseline with carve-outs to cap residual costs at 1.5 % of a company's gross value added.
Italy's historical approach has been more conservative. Until this update, Rome allocated a smaller share of ETS proceeds to indirect-cost relief compared to its northern neighbours. The new parameters close part of that gap, though the €3.6 billion total still trails Germany's commitment in absolute terms. The expanded budget also comes alongside a separate Energy Decree that proposes compensating gas-fired power stations directly for their carbon costs, effectively stripping that charge from consumer and business electricity bills. That measure, valued at over €3 billion, has drawn scrutiny from market analysts who warn it could distort wholesale pricing and reduce incentives to shift away from fossil generation.
The Competitive Calculus
Even with higher subsidies, European energy-intensive industries face a structural disadvantage. In February, industry associations called for electricity prices around €50 per megawatt-hour to match competitors in North America and Asia—a target far below current spot rates in many EU markets. Investment in low-carbon industrial technology reached €534 billion in 2025, covering only 61 % of the annual requirement to meet the bloc's 2030 climate goals. High and unpredictable power costs continue to delay capital spending on electrification, with some manufacturers citing electricity prices three times higher than natural gas on an energy-equivalent basis.
The carbon-leakage risk is not hypothetical. Several European producers have announced or explored relocations to Eastern Europe and the Balkans, drawn by lower labour costs, national incentives, and lighter regulatory frameworks. Italy's scheme, like its counterparts elsewhere, is a defensive measure designed to buy time while the bloc builds out renewable capacity and lowers the marginal cost of clean power.
Compliance and Efficiency Guardrails
Brussels requires member states to tie compensation to consumption efficiency metrics, ensuring that the most wasteful plants do not receive the largest checks. Italy calculates aid using sectoral benchmarks for electricity intensity, a formula intended to push recipients toward energy-saving investments rather than simply cushioning legacy operations. The Commission concluded that the updated Italian scheme remains proportionate, limited to the minimum necessary, and unlikely to distort competition within the single market beyond what climate policy already entails.
There is no blanket conditionality requiring beneficiaries to invest a fixed share of the subsidy in decarbonisation projects—unlike Austria's regime, which mandates that 80 % of aid flow into efficiency upgrades or emission-reduction measures. Whether Italy will layer on similar requirements in future iterations remains to be seen, particularly as political pressure mounts to ensure public funds accelerate the energy transition rather than simply preserve the status quo.
Outlook Through 2031
The scheme's extension to 2031 provides a decade-long planning horizon for capital-intensive sectors. For companies weighing whether to retrofit an Italian plant or build greenfield capacity elsewhere, the predictability of state support is often as valuable as the subsidy itself. That stability may prove especially important as the EU prepares to tighten ETS caps further and phase in the Carbon Border Adjustment Mechanism (CBAM), which will levy charges on imports from countries without equivalent carbon pricing.
Plant operators and finance teams should monitor two variables closely: annual ETS auction prices, which determine the size of indirect costs, and benchmark revisions, which set the efficiency thresholds for reimbursement. A sharp rise in allowance prices or a tightening of benchmarks could leave companies with larger unreimbursed bills, even under the 80 % coverage rate.
For policymakers in Rome, the challenge is to calibrate support generously enough to prevent an exodus of industrial jobs, yet strictly enough to avoid locking in high-carbon production pathways. The €3.6 billion commitment signals that, for now, the first concern outweighs the second.
