As the war in the Middle East keeps energy prices at punishing highs, critics of the EU’s carbon market, the Emissions Trading System, have gained fresh ammunition in their push to scrap a scheme they say inflates businesses’ energy bills and weakens the bloc’s industrial competitiveness.
Since the U.S. and Israel launched a war on Iran on Feb 28, global crude prices have climbed roughly 40%, breaching the $100 a barrel threshold twice over the last three weeks. Several countries have pledged to tap their oil reserves, but the impact on prices has been minimal. Since the start of the conflict, European gas prices have soared 66%, moving from roughly €30 to €50 on Monday.
Even before the war in Iran, Europe was battling energy prices two or three times higher than those in the U.S. and China — partly reflecting the fallout from the war in Ukraine, which forced Europe to replace cheap Russian gas with more expensive imports.
“With the outbreak of the crisis in the Middle East, the issue of energy prices has taken on an even greater relevance, which is why, at European level, we are also calling for the urgent suspension of the application of the ETS to electricity production,” Italian Prime Minister Giorgia Meloni told Italian lawmakers last week.
The question of whether and how to overhaul the EU’s flagship climate policy will be high on the agenda during this week’s European Council meeting, with news reports suggesting leaders may ask the European Commission to deliver a review by July 2026 aimed at curbing carbon price volatility and limiting its impact on electricity costs.
But the attack on what’s arguably the bloc’s foundational climate policy hasn’t been well received by everyone. In a pointed rebuke of claims that carbon pricing could hurt the bloc’s competitiveness, over a hundred businesses — including Tata Steel, Volvo Cars and wind developer Ørsted — signed a letter urging European leaders to defend the policy.
“Undermining it [the ETS] would not aid the competitiveness of European industries – it would erode investment certainty and damage Europe’s industrial future,” read the missive sent last week.
Launched in 2005, the Emissions Trading System requires power generators, energy-intensive industries, ships and airlines to pay for the carbon they emit. The scheme caps the total number of emissions permits, which is reduced over time. As permits become scarcer and more expensive, companies are incentivized to reduce energy use or switch to lower-carbon alternatives.
Europe’s carbon market under fire
But many politicians argue this isn’t the time to pile extra costs on businesses under the banner of the green agenda.
Last month, addressing a cohort of CEOs gathered in Antwerp, Germany’s Chancellor Friedrich Merz said the EU needed to rethink a system designed for a different reality.
Merz argued that the original aim of ETS wasn’t merely to reduce CO2 emissions but also to enable companies to jumpstart carbon-free production. So, he said, “if this is not achievable, and if this is not the right instrument, we should be very open to revising it, or at least to postpone it.” However, Merz walked back his statement only days later, as his hint at relaxing rules caused the market to plummet.
A couple of weeks later, Italy’s industry minister, Adolfo Urso, called for an outright suspension of the mechanism, arguing that it amounts to little more than a tax and a “burden on energy-intensive industries.”
Together, both remarks caused carbon prices to slump from roughly €81 to €72.
While the carbon market is no stranger to criticism, such attacks have usually come from anti-establishment groups and lacked support from large members states like Germany.
Earlier this year, Slovakian Prime Minister Robert Fico and Czech Prime Minister Andrej Babiš expressed similar criticism, demanding a four-to-five-year freeze of what Fico called a "structural burden on Central European industry.”
The ‘crown jewel’ of climate policy
The assault on the bloc’s carbon market has prompted a host of CEOs, politicians and experts to leap to the defense of a scheme widely seen as the bloc’s chief instrument in cutting planet-warming emissions.
Even Commission President Ursula von der Leyen, who has largely turned away from the green focus of her first term to instead championing industrial competitiveness, reminded industry representatives at a gathering in Antwerp that the ETS carried “clear benefits.”
“Since it was introduced in 2005, the emissions dropped by 39%, while the economy in sectors covered by ETS has grown by 71%,” Von der Leyen said. “So this shows that decarbonization and competitiveness can go hand in hand.”
Still, gone are the days when Climate Commissioner Wopke Hoekstra praised the instrument as both the “workhorse and the crown jewel of our climate policies” in 2024.
Since the start of the Commission’s new mandate, the EU has diluted key climate policies — rolling back plans to ban the sale of new combustion-engine cars by 2035, delaying a parallel carbon market for heating and transport, and pushing a broader deregulation drive.
A hard-to-kill carbon market
Even if calls to suspend the carbon market were to gain broader political backing, it would still face significant legal and policy hurdles.
“How can you adopt 2040 targets of 90% in one day and ask for the ETS to be suspended the next?” asked Marcus Ferdinand, a chief analytics officer at Oslo-based Veyt, an energy intelligence firm. “It doesn’t add up.”
In early March, the Council adopted a binding target to reduce the bloc’s greenhouse gas emissions by 90% by 2040 compared to 1990 levels — a goal that analysts say will be impossible to reach without the pressure of making companies pay for their pollution.
Unraveling the 20-year-old carbon market would also pose a legal headache for the bloc, said Jos Delbeke, a retired director general of the Commission’s climate department, often hailed as the “godfather” of the EU’s carbon market.
Killing the ETS is virtually “impossible,” said Delbeke, adding that cancelling existing permits would trigger complex liability issues, as companies across the bloc hold allowances they would expect to be compensated for.
“It is in nobody’s interest to put the system on hold.”
What ETS critics really want
Many experts see the noise around the carbon market as political posturing ahead of a reform that could raise costs for industries covered by the scheme, particularly the chemical sector. At issue are technical metrics, including how quickly the EU should phase out free allowances that let companies pollute.
Under the ETS, companies were long granted a quota of so-called free allowances to avoid firms relocating production to countries with weaker climate and environmental rules, known as carbon leakage. But with a new carbon levy kicking off earlier this year, policymakers had previously agreed to overhaul this practice.
Another battleground is who should benefit from the market’s bountiful revenues, with some firms demanding funds to be redirected into their own competitiveness.
So far, most of the revenue — €39 billion in 2024 — has flowed into national budgets, with limited oversight over whether the money is reinvested in climate and energy projects.
Paradoxically, considering their criticism, Germany and Italy rank among the top three recipients of ETS revenues, collecting roughly €5 billion and €2.5 billion respectively, according to data from the European Environment Agency.
A case for decarbonization
Yet the surge in energy prices also highlights the cost of Europe’s stubborn dependence on fossil fuels, analysts say.
“Decarbonizing Europe has increased in strategic relevance with the situation in the Middle East,” said Ferdinand, the Oslo-based analyst.
To Ferdinand, the dilemma facing policymakers at the European Council summit this week is to decide “whether a potential marginal relief outweighs the strategic benefits of an accelerated independence from fossil fuels.”
Linda Kalcher, executive director at the Strategic Perspectives think tank, agreed that, by targeting the ETS, politicians are simply misdiagnosing the problem: “Fossil- fuel dependencies and policy uncertainty are the real cost for businesses.” Instead, she said, “the solutions are clear: reform the ETS, boost electrification and stop wasting billions on oil and gas imports.”
Meanwhile, Julian Popov, Bulgaria’s environment minister, said on LinkedIn that the debate on the EU ETS is “no longer a narrow climate-policy debate,” but rather a “question of capital allocation, innovation capacity and economic security.”
As such, he said, the “strategic choice is not simply [whether to] keep or weaken ETS. It is whether Europe uses ETS as a price signal and a funding engine for innovation in the next industrial era.”
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