At a time when Europe seems to be turning towards more conservative positions in policies related to climate change, a group of five countries —including Spain— has slammed its fist on the table. They demand to keep the current community green architecture intact, including the emissions trading system, in the face of opposing stances such as Italy's.
Spain, Denmark, Finland, Portugal and Sweden consider that this carbon credit system continues to be the most “effective and efficient” instrument available to the European Union to reduce emissions and guide investment. These countries point out that a robust carbon price is one of the “indispensable” pieces for Europe's industrial transformation.
Pressure from Italy against the carbon market
In February, the Italian minister Adolfo Urso called for an end to the carbon market, at least until the European Commission presents the new reform planned for the next quarter. “We are all aware that the ETS mechanism, as currently drafted, is just a tax, a fee for high energy-consuming companies that struggle to remain competitive,” he said then.
The Government of Giorgia Meloni, along with Hungary or Poland, tries to warn of an alleged “collapse of the chemical industry” so that community institutions do not wait until the time of negotiations “to find a solution”. Also part of this alliance are Bulgaria, Romania, Slovakia and Slovenia, which aim to protect their strategic industries and grant them what they call “immediate relief”.
Given this scenario, the capitals signing the text sent to the President of the European Council, António Costa, maintain that these attempts would undermine investor confidence, would penalize those who have advanced in the transition and would slow down the transformation of European economies. The countries point out that the progressive elimination of free allocation of emission allowances would guarantee incentives for industry to advance in decarbonization.
However, they leave the door open to “technical adjustments” as long as they do not compromise the predictability or integrity of the system. For the Spanish delegation, these adjustments should only be considered to preserve the stability of the price signal in periods of volatility, without compromising their purpose or their capacity to incentivize decarbonization.
Sources from the Government of Pedro Sánchez underscore that the revenues from ETS auctions are relevant to support the development of clean technologies in Europe.
A EUCO on the horizon
This position comes one week before the meeting of the European Council in Brussels, which brings together the heads of State and Government of the Twenty-Seven and which will have energy policy at the center of its agenda. Spain wants the meeting to serve to reaffirm the collective commitment to climate ambition. “We trust that our conclusions reflect that vision and set the course towards decisive action in the coming months,” concludes the letter sent this Thursday.
From La Moncloa they assure that advancing towards decarbonization is essential to preserve economic competitiveness, guarantee the future of European industry, strengthen the security of the Union and reduce the price of energy.
Keys of the review of the law of the carbon price
Conversations about the revision of the carbon pricing law in the European Union, which regulates how much industries must pay for their emissions, will extend throughout the first half of the year. There are critical points, as the regulation directly affects the most polluting industries. Among the aspects under discussion is the progressive elimination of the free allocation of emission allowances, which will disappear completely in 2034.
Additionally, when the Carbon Border Adjustment Mechanism (CBAM) is fully operational, there will be total control over imported and produced CO₂. One of the central debates revolves around the speed with which companies must reduce their emissions, as well as the possibility of offsetting them through CO₂ reduction projects elsewhere.
Scope of the reform
The reform represents a profound change in the European business ecosystem. The system goes from being a primarily environmental tool to becoming a central pillar of the European Union's economic and financial strategy. The European Commission aims to cover approximately 75% of greenhouse gas emissions, through the inclusion of new sectors and the strengthening of existing ones.
The ETS already includes the maritime sector for large vessels from 2024, with the obligation to surrender 100% of emission allowances from 2027. Companies must also prepare for the possible inclusion of smaller vessels.
In the aviation sector, non-CO₂ related effects are starting to be monitored, such as nitrogen oxides, which could broaden the scope of the system and increase compliance costs.
Ahead of July, the Community Executive will also evaluate the inclusion of municipal waste incineration in the ETS, which would imply compliance requirements from 2028. Companies in the sector would then have to invest in energy efficiency or carbon capture technologies to maintain their profitability.
Furthermore, the Commission's services are analyzing the possible inclusion of installations with a capacity below 20 MW, which would affect sectors such as oil refining and non-ferrous metal processing, until now exempt.
Incentives to innovation
In Brussels, the design of new mechanisms to incentivize technological innovation is being studied, allowing negative emissions to become strategic assets. Currently, methodologies are being defined to certify technologies such as direct air capture and bioenergy with carbon capture and storage (BECCS).
For the business sector, this would open the door to business models based on negative emissions to offset hard-to-eliminate emissions. Companies will also be able to reduce their emission allowance surrender obligations if CO₂ is chemically fixed permanently in products, such as the mineral carbonates used in construction.
At the same time, the Commission is studying how to also incentivize the non-permanent use of CO₂ (CCU) along the value chain.
From the ETS to the CBAM
The European industry protection model is evolving from the free allocation of allowances towards the CBAM mechanism. Sectors not covered by this system will continue to receive free allocations, but based on the standards of the 10% most efficient installations.
One of the most sensitive points for business planning is the so-called “final scenario”, in which the supply of emission allowances would tend to zero. The market stability reserve mechanism (MSR) currently regulates the supply of allowances to avoid volatility. The review scheduled for July will adjust its thresholds, which could directly affect the price of carbon and the cash flow of energy-intensive companies.
Brussels does not solely seek to impose costs. Part of the revenue generated by the auction of allowances is allocated to innovation and modernization funds to support low-carbon projects. To this will be added the Industrial Decarbonization Bank, proposed for 2026, which aims to mobilize up to 100 billion euros in investments for energy-intensive sectors.