On July 17, the European Commission is expected to present the proposal to revise the ETS, the EU system for trading carbon dioxide emission allowances. It is one of the pillars of the Union’s climate policy, which aims to reduce the bloc’s greenhouse gas emissions by 90 percent by 2040, but it is often criticized because it entails additional costs for companies.
POLITICAL DIVISIONS ON THE ETS REFORM
However, modifying the ETS is not simple because not all EU member states share the same views. The Central-Eastern European countries – including Poland and Hungary, but also Italy – are calling for a structural reform because the current system penalizes them: their energy mixes are largely based on fossil fuels and therefore they particularly feel the economic impact of the mechanism.
Conversely, Nordic countries such as Finland and Sweden – and also Spain – oppose a deep modification of the ETS, considering it penalizing for those who have already invested in decarbonization and manufacturing innovation. Essentially, they want the system to remain as it is to preserve regulatory certainty, considered an essential condition to encourage investments.
– For further details: All internal clashes within the European Union over the ETS mechanism
WHAT THE ETS IS AND WHAT IT IS FOR, IN A FEW WORDS
The ETS is the European system that puts a price on CO2 emissions through a market for buying and selling allowances. Every year, companies receive allowances – “emission permits,” one might say – authorizing them to emit a certain amount of CO2. However, since the total number of allowances decreases progressively over time, the most polluting companies will have to buy additional permits if they want to continue emitting CO2 without incurring penalties; the “cleaner” companies, on the other hand, have the opportunity to sell their unused allowances.
The purpose of the ETS is to make the use of fossil fuels uneconomical and to promote the spread of low-carbon sources and technologies. The economic impact of the mechanism is especially felt by energy-intensive companies (which consume large amounts of energy in their processes) and hard-to-abate (difficult to decarbonize because their cycles are not easily electrifiable): for this reason, the ETS has long been accused of damaging the economic competitiveness of the bloc.
WHAT THE EUROPEAN COMMISSION WILL DO ABOUT THE ETS…
The European Commission, still led by Ursula von der Leyen, has long initiated a process of “lightening” the green regulatory framework introduced in recent years. Regarding the ETS, Brussels would now like to postpone the end of the free allocation of emission allowances to companies: the distribution of these permits was supposed to end in the 2030s, but it seems it will continue into the following decade.
Such an adjustment would favor companies that have struggled most with decarbonization so far, but would penalize those that have already invested billions in restructuring their production processes.
…AND WHAT IT ASKS IN RETURN FROM MEMBER STATES
In exchange for this concession, the Commission wants more transparency from member states on the use of the money raised from ETS allowance auctions. And, above all, it wants this money to be actually spent on promoting industrial decarbonization and the adoption of clean technologies, rather than for other purposes (such as financing infrastructure construction, for example, or supporting the public budget).
Commission estimates say that currently less than 5 percent of the funds raised from ETS auctions are spent on supporting companies in reducing their emissions, on average. A study by the think tank Ecco pointed out that Italy has spent only 9 percent of the revenues generated by the ETS between 2012 and 2024 on policies related to the energy transition.
PROTESTS FROM ENERGY-INTENSIVE INDUSTRIES
Last month, four large energy-intensive companies – steel producers ArcelorMittal, Thyssenkrupp and Voestalpine, plus the chemical company Basf – sent a letter to European Council President Antonio Costa asking for the suspension of the ETS.
Their position is that the mechanism is harmful to European competitiveness because it increases costs for companies – adding the cost of CO2, which is priced at about 75 euros per ton – in an already difficult context, characterized by high energy prices compared to other parts of the world and various regulatory burdens. The European disadvantage is worsened by the fact that no other country has adopted equally strict climate policies, neither China nor a partner like the United States.
However, the companies signing the letter have been allocated many free emission allowances. According to Carbon Market Watch, in 2023 ArcelorMittal obtained 3.8 billion euros through so-called free allowances, while Thyssenkrupp received 1.8 billion and Voestalpine 795 million. But eliminating CO2 from the steel production cycle is technically difficult and quite costly.
