The EU reaffirms the central role of the ETS in the climate transition. “Temporary and tailored” measures to address energy costs are ready

Brussels – If not quite a complete failure, certainly a glass half empty. EU leaders—and the leaders of France, Germany and Spain—have rebuffed the Italian government’s attack on the ETS, the carbon emissions trading scheme. However, following the summit of heads of state and government, Giorgia Meloni returns to Rome with a concession on the energy bill decree, currently under review by the European Commission, and with confirmation that Brussels will present a reform of the Emission Trading System by July. 

Setting aside a debate that the Italian Prime Minister described as “useful” and the various concessions—to be made in the very short term—that Ursula von der Leyen will propose to accommodate energy-intensive industries, the Italian government’s defeat is a political one. The new crisis in the Middle East and the resulting surge in fossil fuel prices have confirmed the validity of the Green Deal that Italy is trying so hard to dismantle. “The recent spikes in the prices of imported fossil fuels demonstrate that the energy transition remains the most effective strategy for achieving Europe’s strategic autonomy, structurally reducing energy prices and ensuring the clean, abundant and domestically produced energy needed to power the economy of the future,” state the summit’s conclusions. 

Yet, “there are governments exploiting this energy crisis to try to weaken climate policy. Spain can demonstrate that renewable energy makes it possible to suffer less from the impact of the war,” claimed triumphantly the Spanish Socialist Prime Minister, Pedro Sánchez, upon his arrival at the summit. Emmanuel Macron merely argued for the need for greater “flexibility” in the ETS, whilst Friedrich Merz was categorical: no structural intervention in a market that “has existed for 20 years and is a great success.”

Alongside them were the Nordic countries, Portugal and the new Dutch Prime Minister Rob Jetten. However, it was the EU leaders, Ursula von der Leyen and Antonio Costa, who shut the door on the “substantial” changes requested by Meloni, together with the leaders of Austria, Croatia, Hungary, Romania, Bulgaria, Poland, the Czech Republic and Slovakia. The ETS “works; it has drastically reduced gas consumption. Thanks to this, it has reduced our dependence on fossil fuel imports and our vulnerability,” the President of the European Commission made clear. Moreover, as data held by the European Commission show, carbon charges account, on average, for only 11 per cent of final energy prices. Rather than the ETS, the (asymmetric) rise in energy prices in Member States stems from the share of hydrocarbons in their energy mix.

However, unsustainable energy costs are a reality faced by everyone, and leaders have asked the European Commission to put forward a series of short-term measures to cushion the effects of the crisis triggered by the Israeli and US attack on Iran. “It is essential that the measures are temporary and tailored,” said von der Leyen. The EU executive’s plan is to take action on “all four” components that determine electricity prices. To offset the rising costs of energy sources themselves, “we will make the use of state aid even more flexible”, von der Leyen assured. To cut network costs, “we will prepare a legislative proposal to improve the productivity of infrastructure.”

The third component of energy prices is more complex, as it consists of national taxes and duties. “The situation varies considerably from one Member State to another: in some cases, electricity is taxed much more heavily than gas—up to 15 times more—and that simply cannot be allowed to continue,” admitted von der Leyen, announcing a proposal to “lower tax rates on electricity to ensure that it is taxed less than fossil fuels.” 

Finally, carbon pricing. To “modernise and make the system more flexible,” the Commission will present some very short-term measures “in the coming days.” “We will update the benchmarks for free allowances and take industry concerns into account,” said von der Leyen. The crux of the matter is that, as things stand, the EU aims to phase out free allowances by 2034—allowances introduced to prevent companies seeking to avoid environmental costs from relocating outside the EU. The reduction in free allowances makes purchasing allowances at auction or on the market increasingly expensive. And less sustainable for businesses.

To this end, Brussels is working, in the medium term, on “a review of the ETS, including a more realistic trajectory, free allowances for industry beyond 2035 and a level playing field for our maritime sector,” the EU leader announced. According to the summit’s final document, agreed by the 27 heads of state and government, this review must be presented “by July 2026 at the latest.” However, it must “at the same time preserve the essential role of the ETS in the climate and energy transition through a market-based price signal for carbon emissions that stimulates investment and innovation.” To achieve this latter objective, von der Leyen announced that she will propose establishing a €30 billion fund, the ETS Investment Booster, through which—using “400 million ETS allowances”—member states, particularly the most vulnerable, will be able to finance decarbonisation projects. 

The reform of the ETS, as von der Leyen herself emphasised, “will address issues of relevance to Italy, such as the extension of free allowances for energy-intensive industries.” The EU, should Meloni abandon her battle against the ETS, appears ready to make another concession: approval of the Italian energy bill decree adopted in February, which introduced a mechanism to offset the cost of the ETS for electricity producers using natural gas. The measure is on the verge of illegality under state aid rules. But under the umbrella of “national specificities” and “targeted measures”, von der Leyen might step aside. “There will be negotiations, but I am confident,” said Meloni. A few minutes later, at a press conference, the EU leader confirmed that consultations between Brussels and Rome would begin as early as Monday, expressing confidence in the possibility of “addressing Italy’s specificities in the short term.”