EU Overhauls Carbon Market Amid Clash Between Climate Goals and Industry Demands
The European Union on Friday unveiled reforms to its carbon market, the Emissions Trading System (ETS), following intense negotiations among member states, industry groups, and environmental activists over the pace of the bloc's climate action.
The ETS, established in 2005, is a cornerstone of EU climate policy. It requires power producers and energy-intensive industries such as steel, cement, and chemicals to pay for their greenhouse gas emissions by purchasing allowances. The number of allowances is capped and decreases over time, with the current price of a tonne of carbon dioxide around 80 euros. Companies receive some free allowances to ease the transition, but these were scheduled to be phased out by 2034.
The reforms come amid rising energy costs linked to the U.S.-Iran conflict and record heatwaves in Europe. While climate advocates pushed for maintaining ambitious targets, the political landscape has shifted since European Commission President Ursula von der Leyen began her second term in 2024, with a more pro-business stance emerging. The European Commission appears ready to grant industries greater flexibility, particularly to appease countries like Italy, Poland, and the Czech Republic, which have raised concerns about the economic impact of aggressive decarbonisation.
Key proposals include a slower phase-out of free allowances, potentially extending beyond 2034, contingent on companies committing to long-term decarbonisation. The Commission also plans to push member states to channel ETS revenues into greening their industries, though performance varies widely across the bloc. Additionally, the EU must decide whether to extend the scheme to cover waste incineration and international flights departing from the bloc—a move strongly opposed by airlines.
Other contentious issues include the role of carbon capture technology and the possibility of allowing companies to use carbon credits from outside the EU to meet their emissions reduction targets.
The reforms have sparked a divide within European industry. Large sectors, notably Germany's chemical industry, have criticised the ETS for driving up electricity prices and adding bureaucratic burdens, calling for a significant overhaul. However, not all sectors agree. Neil Makaroff, a specialist in ecological transition at the Strategic Perspectives think tank, noted that companies which have invested heavily in electrification and decarbonisation—such as in steel, cement, and glass—oppose backtracking, arguing it would erode their competitive advantage.
A separate but related initiative, 'ETS 2'—an extension of carbon pricing to road transport and building heating—has already been delayed from 2027 to 2028 after requests from Poland and Hungary. Further delays or watering down are expected as part of the current reform process.
The EU is also set to announce a new target for increasing the share of clean electricity from renewable sources by 2040. Currently, electricity accounts for only 23% of the bloc's final energy consumption.
