Clash over ETS ahead of European Council: eight EU governments oppose suspension proposal

Brussels – ETS yes or ETS no? Ahead of the upcoming European Council meeting on 19 and 20 March, eight EU countries (Denmark, Finland, Luxembourg, Portugal, Slovenia, Spain, Sweden, and the Netherlands) signed today (12 March) a joint non-paper (which countries produce to facilitate debate), in which they reject the idea of temporarily suspending the European CO2 emissions trading system. 

The EU Emissions Trading System (ETS), in operation since 2005, is one of the European Union’s main climate policy instruments. It aims to facilitate the energy transition of the continent’s industrial system by charging companies operating in particularly energy-intensive sectors a price for each tonne of carbon dioxide emitted into the atmosphere. The trading system works through emission “licences” that companies can purchase through public auctions, on secondary markets or free of charge. However, the latter purchase mechanism has been gradually reduced by Brussels, with the aim of completely dismantling it by 2034. In light of this, the price of permits that can be purchased at auction or on the market has risen significantly in recent months,  exceeding the €90 threshold last January. 

It is precisely on this point—the alleged unsustainability of the “carbon cost” for businesses in Europe—that friction arises between the ‘yes’ and ‘no’ camps, between countries in favour of maintaining the current version of the trading system and those calling for changes. The non-paper is, to all intents and purposes, a response to the opposing initiative launched by a group of eleven European governments, calling themselves “Friends of Industry” and led by Italy: in a joint statement with ten other “Friends of Industry” governments, the Minister for Enterprise and Made in Italy, Adolfo Urso, and his counterparts had called for the ETS to be frozen “until it has been thoroughly reviewed to ensure that it no longer represents an additional tax on European businesses.” 

The eight countries that signed the new informal document, on the other hand, define the European emissions trading system as “the cornerstone of EU climate policy” and argue that “making fundamental changes to the ETS, calling the instrument itself into question or suspending it, would be a very worrying step backwards.” 

It is not just a question of climate ambition: “the risk,” the document continues, “is also that of weakening the carbon price signals that support investment and market stability.” 

Put simply, the reasoning behind the “no” camp is as follows: to date, many companies have invested in becoming more sustainable (green hydrogen, green steel, electrification) and have been driven to do so by the fact that carbon has a cost, and a rather high one at that. If the system were to be revised or suspended, the price of CO2 would plummet, making this type of investment much riskier. Finally, for the authors of the non-paper, there is also a question of a “level playing field”. Fundamental changes to the ETS would “severely penalise pioneers who have already invested and innovated in decarbonisation,” unjustifiably benefiting those who have lagged behind. 

In any case, the eight countries welcome “targeted adjustments to the system that help preserve stability in periods of volatility and do not compromise its overall objective.” In particular, any revision of the ETS “should support decarbonisation, investment and employment in Europe, while minimising the risk of carbon leakage.”