Strengthening ETS in upcoming reform “pivotal” for EU’s economic future, German govt advisors say

The upcoming reform of the European Emissions Trading System (EU ETS) is “one of the most important economic policy decisions of this decade” because it will determine Europe’s economic future and climate resilience, economists advising the German government and the EU have said. Weakening the bloc’s carbon pricing system amid geopolitical tensions not only undermines climate targets, but also puts industry’s long-term future at risk, warned Andreas Löschel, chair of the German government’s expert commission on energy, Ottmar Edenhofer, chair of the European Scientific Advisory Board on Climate Change, and Stefan Kolev, a member of the scientific advisory council to the economy ministry. Governments, including Germany's ruling coalition, have called for a revision of the ETS to support domestic industry, which faces rising carbon costs. The European Union is starting to overhaul its climate and energy rules to make them fit for the years after 2030 and ensure that climate targets for 2040 and greenhouse gas neutrality by 2050 can be reached. The ETS reform is arguably the most important element of these reforms, as emissions trading remains the EU’s decisive instrument in the fight against climate change. The European Commission is set to present its eagerly awaited proposal on 15 July, starting what is shaping up to become a heated legislative reform process that could take more than a year. The authors said that “Germany’s economic problems are serious” because of high energy costs, skills shortages, bureaucracy, and weak investments. They added that political pressure is mounting to call key pillars of climate policy into question, for example by postponing Germany’s national climate neutrality target, far-reaching interventions in the ETS, and suspending the planned emissions trading scheme for buildings and transport (ETS2). “These debates fall short. The challenge is not to abandon targets or roll back successful climate instruments, but to successfully combine competitiveness, resilience, and climate protection while incentivising investment,” said the economists’ joint statement, which was also signed by Bernd Weber, head of think tank EPICO.The economists said the ETS must be strengthened rather than weakened, and outlined four priorities for the ETS reform: 1) strengthen carbon leakage protection, 2) use free allocation more strategically to incentivise industrial investment, 3) increase flexibility through carbon removals and international cooperation, and 4) use ETS revenues more effectively to support industry and citizens. Carbon pricing should remain the guiding instrument at the centre of the agenda, rather than ever more granular regulation, technology-specific mandates, and permanent subsidies, they argued. They said that none of Germany’s economic problems would be solved by reversing course on climate policy. “Quite the opposite,” they wrote.“Europe currently accounts for around 25 percent of the world’s pipeline of industrial decarbonisation projects. In the steel sector, that share is roughly 50 percent; in cement, over 70 percent. A large share of these projects are located in Germany or involve German companies. At the same time, more than 90 percent of these projects have yet to reach a final investment decision,” they said.The economists said the ETS creates a reliable framework for long-term investment decisions, combining climate action with technology openness and market-based efficiency. “Germany must take responsibility now,” they wrote. “If Germany calls its climate neutrality targets or EU-wide market-based carbon pricing into question, the upcoming EU reform risks turning into a fundamental debate about the ETS itself. The consequences for Europe as a business location would be severe.”The EU ETS puts a price on emitting carbon dioxide (CO2) in the energy and industry sectors. Companies must submit a permit to emit one tonne of CO2, and while most of these "allowances" are auctioned, a share has been allocated free of charge to certain industries in international competition. The EU is reportedly considering extending these free CO2 allowances beyond the agreed phase-out period, and extending the system as a whole. According to current rules, overall auctioning in the ETS is scheduled to end in 2039.

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