The EU\u2019s most effective climate action tool is coming under fire from German industry and political heavyweights as it prepares to enter a tougher new era.<\/p>\n
Since 2005, the EU emissions trading system (ETS) has put a hard and gradually lowering cap on emissions from power plants and industrial installations, forcing operators to buy allowances for the CO2 they emit.<\/p>\n
It has achieved the holy grail of climate policy: decoupling emissions from economic growth. While the bloc\u2019s GDP has surged, emissions have fallen<\/a> by around a billion tonnes a year.<\/p>\n Now, the scheme is growing stricter, with fewer allowances, higher carbon prices, and the phase-out of free industry handouts. And German industrialists are mobilising to demolish it.<\/p>\n \u201cThe CO2 tax must be abolished! It jeopardises at least 200,000 well-paid industrial jobs in Germany,\u201d the CEO of chemicals firm Evonik, Christian Kullmann, said in a recent interview<\/a> with daily Frankfurter Allgemeine Zeitung.<\/p>\n \u201cThe ETS system feels like a lead vest,\u201d Kullmann said.<\/p>\n End of an era<\/p>\n Two things are happening. ETS allowances are becoming more scarce<\/a>,\u00a0with the total volume auctioned decreasing by more than 4% a year. The price of carbon has also more than doubled<\/a> to \u20ac80 per tonne of CO2 or equivalent.<\/p>\n At the same time, free allowances are coming to an end. These were given to domestic heavy industry to shield it from overseas competition, and prevent European companies from relocating abroad to avoid the additional cost.<\/p>\n The handouts will start to disappear next year as the EU rolls out a carbon border adjustment mechanism (CBAM), which will effectively impose a trade tariff based on the estimated carbon footprint of a range of goods imported into the EU. Free allowances will be cut by 2.5% next year, and abolished by 2034<\/a>.<\/p>\n This change will be felt most acutely in the EU\u2019s heavy-industry powerhouse. The end of free allowances is a \u201cthreat to our industry location,\u201d Germany\u2019s Christian Democrat Economy Minister Katherina Reiche said in late September.\u00a0\u201cWe must find a solution quickly in the EU.\u201d<\/p>\n It is perhaps no surprise that Evonik, the publicly listed German chemicals company, said the ETS is becoming a \u201clead vest\u201d:\u00a0chemical producers have been allowed to pump CO2 into the atmosphere almost free of charge in recent years. In 2023, the sector received 90 million allowances to help cover its 92 million tonnes of CO2 emissions, according<\/a> to NGO Sandbag.<\/p>\n Steel and iron received 154 million certificates for free, exceeding their production emissions of 146 million tonnes of CO2 that year.<\/p>\n Cement and lime producers were allocated 108 million for 106 million tonnes of emissions. A welcome windfall because they can be sold on for millions or banked for later years.<\/p>\n Berlin crossroads<\/p>\n Germany, home to much of Europe\u2019s remaining heavy industry, is at a crossroads.<\/p>\n Chancellor Friedrich Merz, another Christian Democrat, has repeatedly stressed<\/a> that \u201cthe CO2 price is to be the central instrument\u201d for EU climate action. But this mantra has become laden with provisos.<\/p>\n \u201cWe still have a number of questions to answer\u2026 including the question of how long free allowances can be allocated,\u201d said Merz while addressing captains of industry at a speech in September<\/a>.<\/p>\n In Brussels, one high-ranking official said German heavy industry would be \u201cwilling to do anything, even topple CBAM, in order to keep their free allocation of ETS certificates\u201d.<\/p>\n Steelmaker Thyssenkrupp said<\/a> the ETS \u201curgently needs to be adjusted\u201d during an ongoing review of the scheme.<\/p>\n The system is currently set to expire in 2039 \u2013 a decade before the EU\u2019s 2050 net-zero goal \u2013 but the company argues it should be extended to 2050, with free allowances continuing into the 2040s.<\/p>\n Workers\u2019 groups are also worried. \u201cIn China, a tonne of CO2 costs only one-seventh of what our companies pay in Europe, and in Japan only one-seventieth,\u201d Michael Vassiliadis, who chairs the influential trade union IG BCE, said in a recent interview<\/a> with daily Welt.<\/p>\n \u201cThere is no emissions trading in the United States at all,\u201d Vassiliadis added. The prominent trade unionist recently called<\/a> for \u201ccontinuing the free allocation of allowances for CO2-intensive businesses until alternatives are available at competitive conditions.\u201d<\/p>\n \u2018Disingenuous\u2019<\/p>\n Sam Van den Plas of Carbon Market Watch, a climate think tank, accused Vassiliadis of being \u201cdisingenuous\u201d in his \u201cattack\u201d on the ETS. \u201cGerman labour unions seem to talk to their CEOs more than their members,\u201d van den Plas said, noting that protecting the climate meant shielding workers.<\/p>\n But even Germany\u2019s Environment Minister Carsten Schneider \u2013 of the Social Democrat junior coalition partner, and often at odds with Merz\u2019s Christian Democrats \u2013 has come out against the ETS. And the negotiating on the issue in Brussels falls within his purview.<\/p>\n \u201cNo more certificates are planned for the chemical industry from 2039 onwards,\u201d he told<\/a> MPs. \u201cI would like us to clarify the issue of jobs and also the issue of certificates for the period after 2039,\u201d he added.<\/p>\n \u201cWe do not have to be climate neutral by then \u2013 we want to be by 2045,\u201d Schneider said, to Berlin\u2019s domestic climate target. \u00a0\u201cBy 2050 in Europe.\u201d<\/p>\n