The EU is about to slam the brakes on the rising cost of carbon under its Emissions Trading System (ETS).
According to reports circulating last week, the European Commission will soon announce a plan to bolster the level of carbon allowances being sold through the system, in order to keep prices down.
The EU ETS is also up for a broader review this year, with the Commission expected to publish a legislative proposal on its post-2030 design by the summer.
As part of that discussion, lawmakers are under pressure from industry and political leaders to weaken the regime further – with some calling for companies to be given free carbon allowances for longer, and others demanding an end to the entire system.
But not everyone agrees. Earlier this month, nearly 150 companies – including asset managers Robeco and Mirova – wrote to Europe’s heads of state, urging them not to succumb to the demands.
“The EU ETS is a competitiveness engine for Europe as well as being the cornerstone of the EU’s decarbonisation framework,” the group said in an open letter.
“It has driven billions of euros of investments by early movers, has provided a market signal for innovation and can be the demand signal for European cleantech solutions to scale.”
The group argued that mere speculation over the EU ETS’s future was “having a chilling effect on capital markets and financiers’ willingness to finance decarbonisation investments”.
It’s hard to tell how significant the pullback from climate transition investments has been, but recent stock-market activity appears to back up the letter’s claim.
Since February, when major figures including corporate CEOs and the Italian prime minister came out against the EU ETS, the share price of some of Europe’s green industrial champions has plummeted.
“Share price movements are a reflection of investor appetite, and the drop suggests they’re worried that, by investing in CCS and low-carbon technologies, companies in the hard-to-abate sectors could end up wasting capex,” says Luke Sussams, head of EMEA sustainability and transition strategy at investment bank Jefferies.
Even before efforts ramped up to lower Europe’s carbon price, investors were worried about the financial future of some of the leaders in green cement and steel, and energy storage.
“Companies have been indicating that projects aren’t economically viable, at this point in time, and the carbon price not being high enough is a big part of it,” says Sussams.
He’s referring in part to announcements from companies like Stegra, a high-profile green steel firm that’s struggling to finance its flagship project, and Northvolt, a battery storage firm that went bankrupt last year despite raising $15bn.
Such updates have spooked investors, driving down both share prices and the cost of carbon allowances themselves, as the private sector loses faith in the industrial trajectory the EU has been promising.
The price of carbon under the EU ETS has dropped significantly in recent weeks, and the European Central Bank revised its forecast down to €72.9/t for 2026 – nearly 12% less than its December forecast – and €75.5/t in 2028, down nearly 14%.
Oil prices
All these developments must also be seen in the context of global oil prices. The review of the EU ETS comes amid skyrocketing costs for Brent Crude, as a result of the incipient war in Iran.
“The price of fossil fuels almost serves as a carbon price in itself at the moment,” says Ben Dear, the CEO of green asset manager Osmosis Investment Management.
It means, in essence, that European companies are being charged twice for their fossil-fuel use: once through the eyewatering cost of buying oil, and again for their emissions under the EU ETS.
But, Dear hastens to add, that doesn’t mean regulators should cave to pressure from industry to abolish the latter.
“The oil price will almost certainly drop back down at some point,” he says, adding that reducing the clout of the EU ETS in the meantime would alter the commercial rationale for more low-carbon projects, stopping them from getting financed.
“Investors want predictability,” he says. “Not short-term political reactions.”
