European climate and energy policies are expected to be key topics when EU leaders meet informally in Belgium on February 12. The European Union is planning to ease emissions-reduction rules for thousands of companies, adjusting the world’s strictest carbon market under pressure from industry and governments concerned about competitiveness.
EU Considers ETS Reforms
Ahead of a summit on boosting the EU economy, discussions are intensifying on reforming the Emissions Trading System (ETS), a key tool to cut greenhouse gas emissions. Less than three years after tightening the market to push green initiatives, governments are now looking to slow pollution cuts and consider measures to reduce costs for industries, according to EU policymakers and diplomats.
The European Commission plans to unveil the details of the reform in the third quarter of this year. The changes, which will affect supply and demand in the market, are expected to spark intense negotiations among member states. Slovakia’s Prime Minister Robert Fico has already called for a pause in the ETS, while Czech Prime Minister Andrej Babis wants measures to reduce price fluctuations. Carbon futures fell as much as 4.6% on Thursday, reaching the lowest level since November 10.
“The EU narrative has shifted — from aspirational targets to implementation and execution, from idealism to pragmatism,” said Ingo Ramming, head of carbon markets at Banco Bilbao Vizcaya Argentaria SA in Madrid.
Political and Economic Pressures
With the EU reassessing its partnership with the US, facing growing competition from China, and increasing defense spending after the Russian invasion of Ukraine, the ambitious green transition has lost some political priority. The strong consensus on climate action from five years ago has weakened, giving way to trade protectionism and policies focused on lowering energy costs.
In December, EU negotiators agreed on a new interim goal to cut emissions by 90% by 2040 compared with 1990 levels. They also indicated that 10,000 installations in the ETS should have more time to decarbonize, preventing caps from dropping to zero in 2039 under the current system — a key point for the upcoming market reform.
Calls for ETS Stability
“All the attacks on the ETS to destroy it or put it on hold are completely irresponsible,” said Peter Liese, a German member of the EPP, the largest political group in the EU Parliament. “But changes are needed, and we can ease pressure on companies without risking our climate targets.”
The European Commission declined to comment on the planned overhaul.
The political sensitivity to carbon prices was evident during the December talks on the 2040 climate goal, when the EU agreed to delay the launch of a new carbon market for road transport and heating fuels. Attention is now on preventing price spikes in the existing cap-and-trade program, where analysts project benchmark carbon contracts could rise to 400 euros ($472) per ton by 2040, up from around 82 euros today.
Managing Carbon Prices
Jos Delbeke, a former senior climate official at the Commission and one of the ETS architects, said the market should be part of a well-designed industrial policy that avoids “prohibitive” carbon prices.
“As market liquidity shrinks with the declining cap, the risk of price spikes may increase,” Delbeke, now a professor at the European University Institute in Florence, said.
He recommends managing the supply of allowances to moderate prices, including the possibility of an implicit price corridor. This would also involve fine-tuning the tool that automatically adjusts the supply of permits and recalibrating the pace of annual emission cuts.
System Overhaul
The pace at which emission caps shrink is determined by the Linear Reduction Factor (LRF), which almost doubled to 4.3% from 2024 under the European Green Deal and is set to rise to 4.4% in 2028. Some policymakers may consider lowering the factor before 2030, but the legislative process for overhauling the system will take at least two years, limiting short-term options to prevent price spikes.
Delbeke also suggested using about 370 million free allowances in a special buffer to support low-carbon investments for companies.
While most allowances are sold at auction, some companies at risk of relocating to countries with looser climate rules still receive free permits. Allocations are based on emissions efficiency benchmarks that reward the cleanest producers. The Commission, due to publish revised benchmarks in April, is under pressure from the chemical industry to freeze them.
The number of free permits in coming years is a major point of debate. It is closely linked to the introduction of a carbon border tax, as the EU plans to gradually phase out free allowances for covered sectors. In the 2040 climate law deal, policymakers signaled they want the phaseout to happen more slowly.
EU Leaders to Discuss Carbon Market
European climate and energy policies will be discussed at the informal EU leaders’ meeting in Belgium on February 12. Ahead of the summit, ambassadors from countries including the Czech Republic, Hungary, Slovakia, Bulgaria, Romania, and Poland expressed concerns that high carbon prices could hurt EU competitiveness, according to sources.
“If we don’t change anything before 2030, some industries covered by the ETS may not survive,” said Krzysztof Bole.
Also Read : Amazon Shares Fall 11% Despite Strong Q4 Results as 2026 Spending Plan Worries Investors
