Inside the week the EU’s climate foundations started to shake

BRUSSELS — Last week, the very foundations of the European Union’s climate efforts started creaking under pressure.

For months, European capitals have attacked the bloc’s environmental policies, arguing onerous green rules were strangling their economies. But the EU’s single biggest weapon for slowing global warming remained off-limits.

That taboo was broken last week at two back-to-back summits focused on curing the continent’s economic malaise, as leaders argued high carbon prices under the EU Emissions Trading System (ETS) were a worrying symptom that needed to be remedied.

It was a diagnosis that struck at the heart of EU green legislation.

A large chunk of the bloc’s heavy industry has long complained about the ETS, a 20-year-old policy obliging them to pay for the planet-warming emissions of their factories. At a get-together in Antwerp on Wednesday, they mounted their biggest attack yet, calling on EU leaders to bring down the price of pollution. 

“Increasing carbon costs drive value chains out of Europe,” Markus Kamieth, the CEO of German chemicals giant BASF, told the audience in Antwerp, warning the damage was already happening.

While some of Europe’s top politicians rushed to the defense of the ETS, many jumped at the chance to bash the system. Notably, German Chancellor Friedrich Merz positioned himself in favor of far-reaching reforms, though he backtracked somewhat later. 

At an EU leaders’ summit in the Belgian castle of Alden-Biesen on Thursday, several countries went on to describe the bloc’s carbon price as a problem, three diplomats said. 

The attacks spooked the market: The carbon price plunged from €81 on Monday to below €72 on Friday. 

The escalating attacks on the ETS mark a perilous moment for Europe’s Green Deal, which is being hollowed out and defanged as part of a sweeping deregulation drive. So far, policymakers have tinkered with green legislation that sets reporting rules for companies or sub-targets for specific sectors such as cars — but not the load-bearing pillars. 

This year, however, these pillars are up for review. The European Commission will propose revisions to underlying green governance rules, national emissions targets and carbon absorption goals after the summer, and by July has to reassess the ETS. 

Last week “looks like a pretty well-orchestrated campaign against the ETS by parts of the European industry community, in an attempt to lower the bar for the upcoming ETS review,” said Marcus Ferdinand, chief analytics officer at carbon market analysis firm Veyt. 

The European Commission will propose revisions of green governance rules, national emissions targets and carbon absorption goals after the summer. | Nicolas Economou/NurPhoto via Getty Images

Even if some, like Merz, have rowed back on their comments, “the damage is done,” Ferdinand said. “The market lost around €10 over a very short period of time. This is clearly a sign of eroding confidence in the system’s long-term stability.”

Backlash increases with price

A weakened ETS has far-reaching consequences for the EU’s economy and climate ambitions. 

The system regulates around half the EU’s emissions, and has been enormously successful: Since its introduction in 2005, pollution in the sectors covered — factories, power plants, aviation and shipping — has dropped by half. (In contrast, emissions not covered by the ETS have fallen around 20 percent.)

“It says, basically, if you want to pollute, you pay. If you don’t want to pay, innovate. And this is what happened,” Commission President Ursula von der Leyen said in response to the ETS criticism after Thursday’s summit in Alden-Biesen. 

The ETS requires companies to hold a permit for each ton of CO2 they emit. They can buy and trade them on the market, while the number of permits gradually falls over time, slashing total possible emissions. This mechanism, besides shifting the costs of dealing with climate damage from society to those who cause it, encourages investments in clean manufacturing. 

Recent reforms have pushed up the permit price from around €10 in the 2010s to around €80 now. 

The system is beloved even by conservative critics of green regulation, as unlike other climate policies, the ETS is a market-based instrument and fully technology-neutral — it doesn’t tell companies how to reduce emissions. 

The rising price, however, is producing a backlash. 

Higher prices strengthen the incentive for companies to slash emissions, and thus turn expensive clean technologies, such as carbon capture, into sound investments. But they also add to companies’ operating costs — albeit marginally, as Europe’s high energy prices, driven by imported fossil fuel costs, present a far greater problem. 

“If we have high energy prices, giving up the principles on ETS is really like peeing in the pants: Gives short-term relief — but long term punishing ourselves,” said centrist Swedish MEP Emma Wiesner. “Keeping our oil and gas dependency is really the most effective way to keep industry trapped in high prices and large vulnerabilities.” 

Still, with the EU’s carbon price the highest in the world, a growing number of companies and countries argue the ETS puts the bloc’s industry at a competitive disadvantage. 

EUCO goes after ETS

At Wednesday’s Antwerp industry meeting, CEOs called on the EU to bring down “carbon costs,” and while von der Leyen leaped to the defense of the ETS, the system’s critics gained an unexpected ally in German Chancellor Friedrich Merz. 

Friedrich Merz suggested the Emissions Trading System should be revised and that certain elements should be postponed. | Pool photo by Ludovic Marin via EPA

Merz, whose country has been a steadfast supporter of carbon pricing, suggested the ETS should be revised and that certain elements should be postponed. He then rowed back on his comments on Thursday in Alden-Biesen, describing the ETS as the “right tool” even though it needs to be “readjusted again and again” to ensure it continues to work.  

Asked for clarification, the chancellery’s press office said Merz had merely wanted to “start a debate.” In that, at least, he succeeded: Following his comments, the leaders of Austria and the Czech Republic launched renewed attacks on the carbon price. Poland also drafted a missive demanding measures to weaken the ETS. 

Leaders then debated the future of carbon pricing in Alden-Biesen. Changes to the ETS were “very much pushed by certain countries,” said one diplomat. “At €80, for some it is a real nightmare.” Another diplomat said: “Many leaders start to see the downsides of the system.” (Both were granted anonymity to discuss closed-door talks.)

European Council President António Costa said leaders were split on the issue. “It’s true that there are some leaders who don’t like the ETS, but there are several leaders who … took the floor to defend the system.” 

French President Emmanuel Macron, who on Wednesday had also described high carbon prices as problematic, said after Thursday’s summit that the EU must “maintain a carbon market” but tackle rising costs. Due to market “speculation,” he claimed, “the ETS, which should be around €30 to €40, is now over €80.” 

While Von der Leyen didn’t commit to specific reforms, she noted that the ETS reserve can be used to moderate the price, which she said was among the “topics where we will look into when we will have the review” before the summer. 

Price crash consequences

The market-based ETS is also a unique climate policy tool in that it can be weakened by rhetoric alone — as last week’s price crash demonstrated. 

Asked to what extent the political commentary was to blame for the slide in the price, Veyt’s Ferdinand said: “Oh, 100 percent.” 

The price moves were wild enough to disconcert carbon traders, who begged politicians to stop meddling. “The EU ETS must remain protected from ad hoc political interventions that risk undermining investor confidence and weakening Europe’s decarbonization pathway,” said Dirk Forrister, CEO of the International Emissions Trading Association. 

The slide also affected companies that have invested in decarbonization and planned their business strategies around the carbon price. The stocks of cement maker Heidelberg Materials and Danish wind energy company Ørsted were among those losing value last week. 

“This is what I find so dangerous with this current debate,” said Ferdinand. “What the system has achieved over the past years is, it’s giving quite a clear signal to all industrial sectors that decarbonization is a requirement.” 

For companies that acted early to reduce their emissions, “those statements are just extremely painful,” he added. “You basically burn years of capital investments.” 

Giorgio Leali, Zoya Sheftalovich and Gabriel Gavin contributed to this report from Alden-Biesen, Belgium. Josh Groeneveld contributed to this report from Berlin.