Concerned about industrial competitiveness, Germany demands that the EU revise or delay the carbon emissions market.

The EU's climate policy is undergoing a major shift, with considerations of industrial competitiveness beginning to outweigh the previous consensus on emission reduction.

According to a Bloomberg report on Thursday, German Chancellor Friedrich Merz stated at the heavy industry summit in Antwerp, Belgium that if the EU Emissions Trading System cannot help industries transition to clean production, the EU should be open to modifying or delaying the market.

The EU Emissions Trading System (ETS) is under criticism for high carbon prices, with companies in industries such as chemicals, paper, and cement believing it undermines their competitiveness. This issue is expected to be one of the core topics at Thursday's informal meeting of EU leaders, with some member states calling for measures to lower carbon prices or suspend the ETS program.

The European Commission plans to announce a reform proposal for the carbon market in the third quarter of this year. Against the backdrop of geopolitical pressure, intensifying competition, and rising energy costs, the broad consensus that dominated climate action five years ago has broken down, and policies are shifting focus towards reducing energy costs.

Germany clearly demands modification of carbon market rules

Merz emphasized at the Antwerp summit that the original intention of the EU Emissions Trading System was to reduce carbon emissions while helping regulated companies transition to pollution-free production. "If this cannot be achieved, if this is not the right tool, we should be very open to modifying it, or at least delaying it," he said, just as previously done with the new carbon markets for buildings and transport.

As the EU's largest economy, Germany had already stated last year that it would seek to relax emission rules for the most polluting industries. Merz made it clear: "I fully agree with those who say we must do more on climate change, but at the cost of our industry and industrial jobs, it is unacceptable."

He added: "That's why I agree with everyone who says that if this is not the right tool, we must discuss this issue and change it."

High carbon prices raise competitiveness concerns

The carbon market's status is rising on the EU's political agenda, and the European Commission is seeking to reform this pollution reduction tool. According to Bloomberg last week, EU policymakers and diplomats familiar with the situation revealed that despite tightening the carbon market less than three years ago as part of the green push, governments are ready to slow the pace of pollution reduction while considering measures to ease industry costs.

Last year, the EU agreed to delay the launch of the new plan ETS2 for road transport and heating fuels amid concerns that rising energy costs could trigger voter backlash. Currently, some countries are calling for measures to lower emission prices or suspend the plan.

French President Macron also raised the issue of emission costs at the Antwerp summit. He said Europe cannot set ambitious climate goals while letting its industrial base disappear. "The Emissions Trading System must support decarbonization in the long term, but cannot harm competitiveness and must be predictable," he said. "Carbon leakage must be avoided at all costs, and for energy-intensive industries such as chemicals, uncertainty is just as destructive as high prices."

Reform plans will involve multiple key elements

Under the revised EU climate law, carbon market reforms should give companies within the system more time to decarbonize and slow the elimination of free emission allowances—a demand supported by Germany.

While most allowances in the ETS are sold by governments via auction, some companies still receive part of them for free as a safeguard against carbon leakage (i.e., companies relocating to regions with looser climate rules).

As part of the reforms, policymakers will also discuss incorporating negative emissions, allowing international credits, and changing automatic supply controls in the market—all factors that will affect carbon prices.

The EU Emissions Trading System is a key tool for achieving climate neutrality in the region by mid-century, but as the EU reassesses its long-term partnership with the US, tries to withstand increasingly fierce competition, and seeks to increase defense spending after the Russia-Ukraine conflict, policies prioritizing lower energy costs are replacing the previous climate consensus.

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