Concerned about industrial competitiveness, Germany demands the EU to amend or postpone the carbon emissions market

The EU's climate policy is facing a significant shift, with considerations of industrial competitiveness beginning to outweigh previous consensus on emission reductions.

According to a report by Bloomberg on Thursday, German Chancellor Friedrich Merz stated at the heavy industry summit in Antwerp, Belgium, that if the EU carbon emissions trading system cannot help industries achieve a transition to clean production, the EU should be open to modifying or postponing the market.

The EU carbon emissions trading system (ETS) is being criticized for high carbon prices, with companies in sectors such as chemicals, paper, and cement arguing that it undermines their competitiveness. This issue is expected to be one of the core topics at the informal meeting of EU leaders on Thursday, with some member states calling for measures to lower carbon prices or suspend the program.

The European Commission plans to announce a carbon market reform proposal in the third quarter of this year. Against the backdrop of geopolitical pressures, intensified competition, and rising energy costs, the broad consensus that dominated climate action five years ago has fractured, and the policy focus is shifting towards reducing energy costs.

Germany Clearly Calls for Modification of Carbon Market Rules

Merz emphasized at the Antwerp summit that the original intention of establishing the EU carbon 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 postponing it," he stated, similar to what was done previously for the new carbon market in the building and transportation sectors.

As the largest economy in the EU, Germany indicated last year that it would seek to relax emission rules for the most polluting industries. Merz clearly stated, "I completely agree with those who say we must do more on climate change, but at the expense of our industry and industrial jobs, that is unacceptable."

He added, "That is why I agree with all those who say if this is not the right tool, we must discuss this issue and change it."

High Carbon Prices Raise Competitiveness Concerns

The carbon market is gaining prominence on the EU political agenda, with the European Commission seeking to reform this tool for reducing pollution. According to Bloomberg's report last week, EU policymakers and diplomats familiar with the situation revealed that despite tightening the carbon market in the green push for less than three years, governments are prepared to slow down pollution reduction efforts and consider measures to alleviate industrial costs.

Last year, the EU agreed to postpone the new ETS2 plan for road transport and heating fuels, fearing that rising energy costs would provoke backlash from voters. Currently, some countries are calling for measures to lower emission prices or suspend the program.

French President Macron also raised the issue of emission costs at the Antwerp summit. He stated that Europe cannot allow its industrial base to disappear while setting ambitious climate goals. "The carbon emissions trading system must support decarbonization in the long term, but it must not harm competitiveness and must be predictable," he said. "We must avoid carbon leakage at all costs; for energy-intensive industries like chemicals, uncertainty is as destructive as high prices."

The Reform Proposal Will Involve Several Key Elements

According to the revised EU climate law, carbon market reform should give companies within the system more time to decarbonize and slow down the phase-out of free emission allowances—this is a demand supported by Germany Although most of the allowances in the ETS are sold by the government through auctions, some companies still receive a portion of the permits for free as a protective measure against carbon leakage (i.e., companies relocating to regions with looser climate regulations).

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

The EU Emissions Trading System is a key tool for the region to achieve its climate neutrality goals by the middle of this century, but as the EU reassesses its long-term partnership with the United States, attempts to fend off intensifying competition, and seeks to increase defense spending following the Russia-Ukraine conflict, policies prioritizing lower energy costs are replacing the previous climate consensus