EU Carbon Market Reforms Ignite Clash Between Industrial Competitiveness and Climate Policy Credibility

A major debate is intensifying within the European Union over the future direction of its emissions trading system (ETS), the bloc’s central tool for pricing carbon since its launch in 2005.

The dispute is unfolding as policymakers weigh how to maintain industrial competitiveness while still meeting long-term climate targets, including the EU’s agreed 2040 emissions goal.

At the center of the discussion is Swedish steel producer SSAB, which is investing around €6 billion to transform its operations by replacing coal-based steelmaking with hydrogen-powered, low-emissions production. The company has placed its strategic bet on the assumption that EU carbon pricing will continue to strengthen, rewarding early adopters of cleaner technology and penalizing higher-emission competitors.

However, executives at SSAB and other industrial firms are increasingly concerned that planned revisions to the ETS could dilute its effectiveness. In particular, there is anxiety that expanding the allocation of free emissions permits could reduce the financial pressure on heavy emitters to decarbonize.

“Companies that have not invested might actually get an advantage,” said Helena Norrman, executive vice president of communications at SSAB.

The broader political context is proving difficult for EU policymakers. Several leaders across Europe, including Italy’s Giorgia Meloni and Poland’s Donald Tusk, have voiced concerns that the EU’s green policies are undermining industrial competitiveness, contributing to a wider political backlash against environmental regulation.

Simone Tagliapietra, senior fellow at the Bruegel think tank, highlighted the difficulty facing Brussels as it tries to balance competing priorities: “How do you make this system compatible with the current competitiveness pressures and security pressures?”

The ETS operates by requiring power plants and heavy industry to purchase permits for each ton of CO₂ emitted. Over time, the cost of these permits has increased significantly, strengthening the incentive to shift toward low-carbon production methods. Carbon prices, which were below €10 per ton in the 2010s, have risen to around €80 per ton today.

At approximately $100 (€90) per ton, analysts including Goldman Sachs estimate that cleaner industrial technologies—such as electrified heat systems—begin to become economically competitive with traditional fossil-fuel-based processes.

Several companies argue that this price signal has already begun reshaping investment decisions. Winston Beck, vice president of group public affairs at Heidelberg Materials, emphasized the importance of predictable pricing: “It provides a carbon price signal, which is necessary for us to make large-scale transformative investments viable,” he said, referring to the company’s work on lower-carbon materials and carbon capture technologies.

Similarly, insulation manufacturer Rockwool has invested in electrified production methods designed to replace fossil-fuel-based melting processes. “People saw what was coming for the ETS,” said Brook Riley, head of EU affairs at the company.

But he also warned that policy uncertainty could undermine such long-term investments: “If we invest a hundred million euros per factory in electrifying and suddenly the case for that is undermined… it could ‌yank the ⁠carpet from under companies’ feet,” he said.

A group of major industrial players—including BASF, ArcelorMittal, and thyssenkrupp—recently urged EU leaders in a June 16 letter to take “immediate action to halt the escalation of ETS-related costs,” warning that European industry could lose ground internationally if carbon pricing continues to rise without similar global measures.

BASF, Europe’s largest chemical producer, reports it has already cut emissions roughly in half since 1990 through efficiency gains and fuel switching. However, the company argues that further reductions will be far more difficult and expensive. A BASF spokesperson said:

“We are entering a much more challenging world now, with the low-hanging fruit pretty much gone,” and added that current conditions make deeper cuts economically unfeasible: the ETS “is not driving us to the next stage of new technologies, they are far too expensive, and the CO2 price ⁠is too high to bear for an industry that is facing a global competition,” the spokesperson said.

Investor confidence is also becoming part of the debate. Andy Howard, global head of sustainable investment at Schroders, warned that policy instability could undermine capital allocation decisions: “Having policy flip-flops and reversals makes that pretty tricky,” he said. “There’s a real danger that ⁠investors don’t have the ability to confidently allocate our clients’ capital”.

Venture capital investor David Frykman of Norrsken echoed concerns that weakening the ETS would send damaging signals to markets: “To take that away … would be a very strong signal to the market that this is not important,” he said. He also warned of broader financial uncertainty: “If we can’t see the price development, and we can’t trust it, then any business that is dependent on that becomes much more volatile”.

The ETS currently covers roughly 40% of EU greenhouse gas emissions, meaning any significant weakening of the system could have wide-reaching consequences across the European economy. While some technologies such as wind and solar are already competitive without carbon pricing, many industrial decarbonization pathways still depend heavily on strong carbon price signals to attract investment.

Policy signals from the European Commission suggest possible adjustments ahead of its July 15 proposal, including the potential expansion of free allowances to ease pressure on energy-intensive industries. Officials are attempting to respond to concerns about high energy costs, infrastructure limitations, and global competition.

Yet critics argue that weakening the system risks undermining long-term industrial transformation. As SSAB’s Helena Norrman put it, “It’s important not to try to fix that with the ETS, because it’s not going to work.”

By fLEXI tEAM