Between climate protection and competitive fears: EU emissions trading under the microscope

Actually, everything seems quite simple: Entities emitting CO₂ in relevant sectors are obligated to compensate for this by dispensing emission allowances – in other words, paying their way. A mechanism agreed by the European Parliament and the Council of the European Union in 2005 when they adopted the Directive on the introduction of the EU Emissions Trading System (EU ETS). In order to enable companies to compensate for the cost disadvantages arising from emissions trading in international competition, a large share of the certificates are allocated to them free of charge. The number of free authorizations, however, decreases over the years. 

This market economy lever works: According to the Federal Environment Agency, energy-intensive industry, the energy sector and aviation have reduced greenhouse gas emissions by more than 50 percent since then – although the economy has grown at the same time. In view of these shifts, Achim Wambach, head of the Centre for European Economic Research (ZEW), also considers emissions trading to be a genuine success story: Emissions trading has developed into an effective climate protection instrument. "Many people abroad are jealous that Europe has managed to implement this emissions trading scheme," as Wambach related to Deutschlandfunk.

ETS coming under pressure

This position is not universally shared: Especially the chemical industry is exerting pressure on the tested and tried control instrument, which has meanwhile proven its worth for more than 20 years. Critics argue that carbon pricing lifts production costs in the EU, putting export-oriented companies at a disadvantage on the global markets. This is because manufacturing companies from regions with less stringent climate regulations are able to offer their products at lower prices. This could result in European companies relocating their production facilities to countries with less stringent climate protection requirements (known as carbon leakage), putting hundreds of thousands of industrial jobs in the EU at risk. The resulting demand: abolish or reform the ETS.

According to the criticism, this is justified by the fact that the Carbon Border Adjustment Mechanism (CBAM) does not create any balance either. The Carbon Border Adjustment Mechanism is an EU climate protection instrument that will levy a CO₂ price on certain imported goods from 2026. And the criticism points out the following: Although it makes imports more expensive, it provides no protection for European exports to third countries. This argument, however, would amount to discarding the social mandate of climate neutrality instead of revising and tightening up an efficient instrument that has proven its worth.

EU Commission wants to relax ETS requirements

In actual fact, Brussels has made it amply clear that the goal of achieving climate neutrality by 2050 is not up for discussion. The EU Commission, however, is proposing adjustments to the issue of emission allowances given that the situation of the manufacturing industry has worsened in connection with the current explosion in energy prices. The Commission plans to issue free certificates for a longer period than previously planned, while the auctioning of certificates is also set to end later. At the beginning of April, the EU Commission took an initial step towards dealing with the so-called surplus certificates in order to stabilize the ETS price. As an emergency measure, the EU intends to adjust the Market Stability Reserve (MSR). This instrument was previously used to cancel surplus certificates as soon as the reserve exceeded 400 million certificates. In future, according to the Brussels proposal, more securities should remain as reserve and the Commission would like to abolish the expiry mechanism to facilitate coping with price fluctuations. This reduces the costs of CO₂-intensive production.

The Commission's proposals must now be approved by the European Parliament and the 27 EU member states. In July, the EU Commission will be presenting a comprehensive proposal on this. Federal Chancellor Friedrich Merz has already spoken out in favor of a reform of CO₂ pricing in Europe at an economic summit in Antwerp – and advocated that the next steps should at least be postponed. With such statements, the Chancellor "speaks from the heart of those in the energy-intensive industry that have put the transformation on the back burner. However, it alienates all the companies that have invested on the basis of political guard rails in recent years," says Katharina Reuter, Managing Director of the Bundesverband Nachhaltige Wirtschaft (BNW e.V.).

Are longer ETS deadlines undermining decarbonization?

Salzgitter AG, for example, ranks as one of the decarbonization pioneers. The Group has committed the largest investment in its history to minimize its carbon footprint in steel production. For Salzgitter, the EU ETS is a central planning foundation on which SALCOS^® – the company's own decarbonization program – is built. The CBAM CO₂ border adjustment is also a functioning measure – albeit with potential for optimization. 

The back and forth "unsettles companies and consumers, paralyzing growth and investment," as Gunnar Groebler, CEO of Salzgitter AG, issues a warning statement. This would prevent Germany from escaping global energy dependencies. The central climate protection instrument ETS must not be undermined at the expense of planning security for decarbonization.

It is difficult, as Groebler went on to state, to change the rules of the game when many investment decisions have long since been made. As a first mover, Salzgitter AG fears that its commitment to the Paris climate targets will not pay off. Consequently, the company is demanding that it should not suffer any economic disadvantages from the extension of the deadline for free certificates. Salzgitter AG is already building a direct reduction plant, an electric arc furnace and an electrolysis facility and is investing large sums in this conversion, which will enable the production of low-CO₂ steel. The argument of selling the CO₂ certificates saved as compensation also does not hold water in view of the expected value reduction of the certificates if the deadlines are extended. Groebler adds: "Green steel is only competitive if the cost of CO₂-intensive steel trends upwards." EU emissions trading is an effective instrument for creating climate-neutral industry. Decarbonization strengthens the resilience of the European economy due to the fact that it reduces the dependence on fossil fuels.