Nikolaus J. Kurmayer writes on the Politico website about the coming political battle over the future of the EU Emissions Trading System (ETS), with industry groups pushing for weaker carbon pricing while EU climate officials seek to strengthen it and make free allowances more conditional. With industry divided, EU climate officials are hoping to push through a tightening of the ETS.
Brussels bureaucrats get ready for the carbon pricing battle of their lives
The European Union’s pioneering Emissions Trading System (ETS) has been in place for two decades, but its facing down a reckoning amid a global carbon pricing slump.
Currently, almost 30% of global greenhouse gases emitted into the atmosphere are subject to carbon pricing, meaning companies have to pay for every tonne of carbon dioxide they emit. But politicians around the globe are losing their nerve. California has just handed out $4 billion in free pollution permits, New York has slashed its climate targets, and Canada scrapped its consumer carbon price and capped part of its industrial scheme.
In Europe, where 40% of worldwide CO2 pricing revenues are accrued in a ‘cap-and-trade’ ETS system that allows one tonne of CO2 to cost around €80, industrialists and politicians are also keen to bury the scheme, accusing it of wrecking the bloc’s economy.
Industry needs “globally competitive energy prices… these cannot exist within the current system”, said Daniel Tamchyna, who heads the Czech chemical industry association SCHP, in late May.
Tamchyna is just one of many opponents of the ETS who are ratcheting up the pressure ahead of the scheme’s overhaul that will be launched by the European Commission on 15 July. Some are pushing for a carbon price cap, or to reduce Europe’s carbon cost closer to the global average of €20 per tonne.
Others want the system suspended, or even scrapped entirely.
Dogfight
Lawmakers, public officials, lobbyists, and researchers Euractiv spoke to all painted a picture of a group of Brussels bureaucrats, mostly inside the European Commission’s directorate general for climate action (DG CLIMA), who are digging in their heels.
“We will not flood the market,” a combative senior EU climate official told Euractiv on Tuesday in a remarkable show of confidence for what was, after all, a civil servant about to head into a political dogfight.
There was concrete evidence last week when leaked documents revealed a staunch refusal to yield to growing political pressure by maintaining the flow of free emissions allowances to the chemicals and paper industries.
DG CLIMA are so committed to the ETS, which they credit with decoupling the bloc’s economic growth from greenhouse gas emissions, that they devoted a whole book to it in 2024, authored by former and current Commission top brass.
With Ursula von der Leyen’s Commission going all-in for deregulation, one might think officials in the climate directorate would have their hands full merely defending the jewel in the crown of EU climate policy. In fact, however, they want to double down on carbon pricing, starting with restrictions on free allowances.
No more free lunches
For more than a decade, European heavy industry has been allowed to emit CO2 largely for free, on the grounds that forcing them to pay would drive manufacturers out of Europe to places with laxer climate and environmental policies.
This state of affairs never sat well with DG CLIMA officials.
“I regret that free allocation was not made more conditional,” its former chief, Jos Delbeke, told Euractiv in an interview earlier this year.
Beatriz Yordi, who has been in charge of the department’s ETS unit since 2017, noted recently that the scheme had raised €260 billion in revenue and effectively provided “€255 billion for industry in the form of free allowances” since its inception.
With industry pushing hard for more ‘free’ emissions allowances, some EU climate officials are chomping at the bit to reverse what they see as a historic mistake.
Free permits need to come with a “much harder quid pro quo with the conditionality that investments are being made in Europe than we had before,” a senior EU official said while briefing reporters. “Otherwise we’re going to see the same movie all over again.”
Conditionality
Among those who took a substantial slice of that €255 billion is the chemicals industry. But despite the ETS’s purpose of encouraging investment in decarbonisation, the sector hasn’t built a new steam cracker in more than 30 years.
Sources say officials have already shown what the EU’s new conditionality could look like.
When Brussels proposed €600 million in export subsidies to companies, it said firms ought to have made substantial investments in energy efficiency or other purchases with a pay-back time of more than five years.
Climate Commissioner Wopke Hoekstra has previously said that “if you pay as a company or as a sector, you [should] also get part of that money back” as a second layer of conditionality.
Currently, EU governments are almost entirely free to choose how to spend ETS revenue, which has risen to nearly €40 billion a year.
Italy’s earnings of €18 billion over the years have resulted in just €1.6 billion spent on measures to reduce carbon emissions from industry, said Chiara Di Mambro of the think tank Ecco. “We don’t know what happened to the rest.”
Divide and rule
The use – or misuse – of ETS revenues has become instrumental in Brussels’ attempts to deflect some of the pressure from firms regarding the economic impact of carbon prices. The argument runs like this: it’s not the carbon price that puts companies at a competitive disadvantage, it’s the fact that governments don’t channel the money back to help them invest in clean energy and reduce process emissions.
“I believe it is high time that member states step up,” Von der Leyen, the Commission president, told industrialists recently, pointing out that just 5% of revenues made their way back to industry. The rest of the money is presumably spent on schools, bridges, pensions and keeping taxes down.
Pitting firms against their domestic governments is one thing, but companies are also fighting among themselves.
The ETS covers 40% of the European economy, from Greek coal power plants to French aluminium smelters to Swedish oil refineries.
Internal slides presented by DG CLIMA demonstrated how they are being played against one another. Chemical industry demands, backed by Italy and Poland, could cost the cement industry more than €2 billion, the officials argue.
No common interest
The European chemical industry has yet to find a common position on ETS reform. German chemical firms have their own stance, while Eastern European ones have another. Insiders briefed on discussions within other lobby groups point to divergent interests in sectors such as aluminium.
“Industry is actually a container word,” the senior EU official explained.
“The dynamics and the fundamentals of the chemicals industry, which maybe is not even an industry, but a range of industries, is so different from steel, which is, again, so different from fertilisers, and so different from cement.”
And even within a specific sector, not every company shares the same interests.
First-movers, or companies that have begun decarbonising their operations, could find their substantial investments were a waste of money without a solid carbon price to justify them.
Some 100 companies demanded a “robust ETS” in an open letter to EU officials in March. One source said the initiative was actively encouraged by DG CLIMA. “
We need to protect investment cycles, and we need to reward frontrunners,” said Yordi, the head of the ETS unit.
There are also firms planning to clean up their acts before the supply of emissions allowances falls too low, but have yet to take the plunge.
And then there are those with no such ambitions, who are competing with cheap, dirty mass production in Asia, the US, and elsewhere. Such companies and the first movers are poles apart in their positions on ETS reform.
DG CLIMA may also have a secret weapon in director general Kurt Vandenberghe, who is said to be a close ally of Von der Leyen.
The technocrats in the EU executive’s climate action service could yet emerge victorious from the upcoming fight, despite the odds stacked against them. If they do, it will be because their approach to the showdown was years in the planning.
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