As Brussels accelerates towards climate neutrality, the European Emission Trading System (known as ETS) is under attack from carbon-intensive industries and some European governments, such as Italy. Established in 2005 as a fundamental tool of the European climate strategy for reducing emissions, the ETS is facing one of the most critical moments since its birth.
What is the ETS, the tool for reducing emissions
Covering around 40% of the EU’s total greenhouse gas emissions (energy, aviation and maritime), the system has proven its effectiveness in forcing decarbonisation. And it did so by applying a very simple lever: power plants and factories are required to purchase CO2 permits, then pay when they pollute. In fact, the ETS requires that heavy industries, power plants, airlines and shipping companies pay a price – which rose above 90 euros in January – for each ton of CO2 emitted. Every year, around 30 percent of the proceeds generated by the sale of emission permits by member states could end up in the EU coffers.
Now, at the center of the political debate – Italian and more generally European – is the management of CO2 quotas. Let’s clarify. The key principle of the ETS is the purchase of permits by energy-intensive industries, but at the same time there is a system of free permits, introduced to prevent so-called carbon leakage (the risk that companies move production outside the EU to avoid environmental costs). But under current rules, free permits are expected to be phased out by 2034.
The position of European industries
This is the point that triggered protests from industrial lobbies, raising the level of political conflict. The energy-intensive companies of the Old Continent fear that the end of environmental subsidies could compromise the economic stability and capacity of the sector, while the EU Commission pushes towards the revision of the ETS in the third quarter of this year. A central point, on which companies are pressing, concerns the so-called indirect costs (i.e. the increase in electricity prices caused by the ETS which falls on companies).
BusinessEurope, which brings together national industrial associations such as the German BDI and the Polish Lewiatan, has asked the EU not to tie the granting of permits to companies’ investments in energy saving. The association invites the Commission to expand the list of beneficiary sectors to free emission allowances. Not only that, the framework for compensation of indirect costs should be maintained beyond 2030 and applied in a greater number of Member States, to avoid distortions of competition even within the single market.
The opposition of the Italian government (and not only)
The Italian position is even clearer. Confindustria has urged Brussels to temporarily suspend the ETS, calling for a structural review of the mechanism which, according to the association, risks stifling manufacturing at a time of economic uncertainty. The Meloni government is also on the same line as Confindustria. The ETS system “represents an additional tax borne by European companies, with effects on production costs and competitiveness”. For this reason, the Italian government will ask the European Commission to suspend the mechanism “until its in-depth review”, announced the Minister of Business and Made in Italy, Adolfo Urso, speaking at the meeting of the “Friends of Industry” countries which took place yesterday, 25 February, in Brussels. According to Urso, the review should intervene on the emissions reference parameters and on the mechanisms for assigning quotas, also including the postponement of the gradual elimination of free quotas. In addition to Italy, the meeting was attended by representatives of 11 European countries – including France, Germany, Spain, Poland and the Czech Republic – who are calling for a thorough review of the ETS system to stabilize prices, protect energy-intensive industries and encourage investments in clean technologies.
The clash between Rome and Brussels could become tougher in the next few hours. The Energy Decree, recently approved by the Council of Ministers, provides for the separation of the cost of emission certificates of the ETS system from the determination of the price of electricity, with the aim of containing energy costs for citizens and businesses. But on the Italian measure, the European Commission has started a review to assess its compatibility with European Union rules.
Ursula von der Leyen’s defense
The President of the European Commission, Ursula von der Leyen, in her speech at the Antwerp summit defended the ETS, arguing that it “brings clear benefits” and that “since its introduction in 2005, emissions have decreased by 39%, while the economy in the sectors covered by the ETS has grown by 71%”. “This shows that decarbonisation and competitiveness can go hand in hand,” he underlined. Member States invest less than 5% of ETS revenues in decarbonised production processes. “Reinvesting more ETS revenues into industry will therefore be a fundamental objective of the next reform of the system”, commented von der Leyen.
