EU ETS Faces Scrutiny Over Competitiveness Amid High Energy Costs
Europe's carbon market, the EU ETS, faces intense scrutiny as high electricity costs impact industrial competitiveness. The debate centers on how the system affects power prices and investment, with carbon costs contributing significantly to industrial electricity bills. The EU must balance maintaining a strong carbon price with addressing affordability, infrastructure needs, and competitiveness concerns during the energy transition.
Europe's carbon market, the EU Emissions Trading System (ETS), faces increasing scrutiny regarding its suitability for the energy transition, as high electricity costs pressure the bloc’s industrial base. The debate now focuses on how the ETS interacts with electricity pricing, investment incentives, and European industry's competitive position, rather than the principle of carbon pricing itself.
The European Commission maintains the ETS is crucial for climate policy, reducing emissions, and generating auction revenues. However, concerns persist about carbon costs' impact on electricity prices and the system's function in a tighter market post-2030. A Joint Research Centre (JRC) analysis found gas-fired plants set EU wholesale electricity prices 55% of the time in 2022, despite accounting for only 19% of total generation. Carbon costs are passed through to power prices, directly affecting industrial consumers. The Draghi report noted carbon costs comprised about 10% of EU industrial retail electricity prices in 2023.
Europe’s electricity prices remain high; the IEA expects EU industrial prices in 2025 to be roughly double those in the U.S. and 50% higher than in China. This exacerbates concerns over investment leakage and the cost of decarbonization. Weakening the carbon price signal, however, risks delaying the transition. The policy question is how to adjust the ETS without compromising its climate function.
Infrastructure demands further complicate the issue. ENTSO-E highlights the need for flexible thermal capacity as electrification and renewables grow. Germany plans 10 GW of dispatchable capacity, Poland supports gas, and the Netherlands may need up to 3 GW more. Meeting climate-neutrality goals requires annual investment of around €1.5 trillion from 2031 to 2050. KOBiZE analysis suggests projected ETS auction revenues would cover only about 11% of the energy sector’s investment needs, indicating a significant financing gap. Since 2013, the ETS has generated over €250 billion in auction income. The challenge for the next phase of ETS discussions is to maintain a robust carbon price while ensuring the system supports decarbonization and addresses affordability, infrastructure, and competitiveness concerns.