Author: Armands Gūtmanis, founder and CEO of Amber Advisory Latvia
Fierce discussions about the ability of European companies and society to achieve the already agreed emission reduction targets are taking place not only in Latvia, but throughout the European Union. Unlike many other issues, in this case the gap of opinions and interests does not only arise between groups of Member States. It also crosses different industrial sectors and even companies within the same sector.
Some companies have already made significant investments in reducing emissions and therefore want to maintain a predictable, sufficiently high CO₂ price and a consistent climate policy direction. For these companies, easing the rules would risk giving an advantage to competitors who have delayed the transition.
Other companies, on the other hand, point out that technologically and economically viable alternatives are not yet available to them, so too rapid an increase in the price of emission allowances may reduce the competitiveness of production or encourage its relocation outside Europe. Both sides base their position on the protection of European competitiveness, but this concept means different political solutions.
The European Union Emissions Trading System, or ETS, has been in operation since 2005 and is one of the main instruments of EU climate policy. It sets the total allowable emissions in certain sectors and gradually reduces the number of allowances available on the market. Companies need an allowance for each tonne of CO₂ they produce, which they can receive for free or buy on the market.
The European Commission presented a proposal for a revision of the ETS on 17 July, which aims to align the EU’s 2040 climate targets with the needs of industrial competitiveness and energy independence. The proposal includes several departures from the current trajectory, including a slower reduction in the overall emissions cap and a longer period of free allowances for certain energy-intensive sectors. This still needs to be discussed by the European Parliament and the Member States.
Industry calls for a more pragmatic approach
Before the European Commission’s proposal was made public, the German business confederation BDI, the French business organization MEDEF, and Italy’s Confindustria called on Brussels to slow down the reduction in free emission allowances.
The organizations warned that the current trajectory could lead to an excessive shortage of allowances before economically viable decarbonization solutions become available for many energy-intensive industries.
Industry representatives point to high energy prices, geopolitical uncertainty, supply chain disruptions and competition from producers in countries with less stringent climate requirements. They argue that too rapid a rise in CO₂ costs may not accelerate modernization but instead encourage so-called carbon leakage – the relocation of production and therefore emissions outside Europe.
The European Commission’s new proposal partly addresses these concerns. It would slow down the reduction in the total annual emissions allowances and extend the free allocation of allowances to heavy industry until 2038, rather than ending it in 2034. At the same time, most of these allowances would be linked to decarbonisation plans and actual investments developed by companies.
Ten countries call for revision of the ETS
Ten EU member states – Bulgaria, Cyprus, the Czech Republic, Estonia, Greece, Hungary, Italy, Poland, Romania and Slovakia – have also expressed a similar position. In a joint declaration, they called on the European Commission to carry out a “pragmatic and fair” review of the ETS, which would take into account not only environmental protection, but also energy prices, industrial competitiveness, security and the different economic situations of the Member States.
The countries believe that the current trajectory of the system, in which the supply of industrial allowances approaches zero around 2039, could displace some production from Europe. They are calling for the transition to be brought closer to 2050, for the criteria for free allocation to be revised and for the CO₂ price to be made more predictable.
The new ETS2 system, which will cover fuel use in buildings and road transport, is also under scrutiny. It is currently set to come into effect in 2028 after the original deadline was already pushed back by a year. Ten countries are calling for the system to be re-evaluated, arguing that it could increase household heating and transport costs, particularly for those on lower incomes.
As heating and transport directly affect almost all of society, ETS2 is not only a climate issue, but also a social and political one. Future negotiations will have to decide whether the implementation schedule of the system will be maintained and how effectively the Social Climate Fund and other support mechanisms will be able to mitigate its impact.
Businesses and climate policy experts warn of the opposite risk
However, the industry’s position is not unanimous. Many companies that have already invested in cleaner technologies are concerned that easing the rules will reduce the value of these investments and create an advantage for companies that have delayed the transition.
Ursula Woodburn, Director of the European Corporate Leadership Group, believes that a stable and sufficiently high carbon price is one of the key prerequisites for investment in low-carbon industry. In her opinion, Europe should make the ETS more reliable and stable, rather than using it as a culprit for the structural problems of industry.
Since the system began in 2005, it has generated €266 billion in revenue, including €43 billion in 2025. These funds can be used for industrial modernization, the development of electricity grids, the introduction of clean technologies, and support for regions facing more difficult transitions.
The main argument of this camp is policy predictability. Companies make investment decisions decades in advance. If requirements are significantly relaxed after investments have already been made, this could undermine confidence in European climate policy and further discourage companies from modernizing in a timely manner.
Thus, the dispute is not simply between “industry” and “climate advocates.” It is also between companies that have chosen different investment rates and technological development paths.
Electrification is becoming one of the main solutions
The ETS review is closely linked to the Electrification Action Plan presented by the European Commission on 17 July. It aims to achieve a wider replacement of fossil fuels with low-emission electricity produced in Europe in industry, transport and buildings.
The Commission’s plan is not simply to increase electricity consumption. It envisages a fundamental shift in energy strategy – to make the use of electric solutions more financially viable than continued dependence on natural gas and oil.
This approach is largely determined by the geopolitical situation. The accompanying materials indicate that in the 111 days of the Middle East crisis, the EU has spent an additional 50 billion euros on fossil fuel imports. Fossil energy imports expose European companies and households to external price and supply shocks, therefore electrification is also positioned as a policy of energy security and economic independence.
The paradox of European electrification
Around 70% of the EU’s electricity is generated from clean or low-emission sources, but electricity still accounts for only 23% of final energy consumption. This share has hardly changed in the last decade.
The European Commission now wants to increase this figure to 46% by 2040. Its estimates show that such progress could reduce fossil fuel import costs by around €260 billion per year.
One of the main obstacles is the price ratio of electricity to fossil fuels. If the price of electricity includes higher taxes, levies and network costs than the price of natural gas, there is not enough economic incentive for companies and households to install heat pumps, buy electric cars or electrify production processes.
The plan therefore focuses on reducing electricity costs and closing the price gap between electricity and fossil fuels. The Commission wants Member States to review taxes and levies and ensure that electricity is not placed at a disadvantage compared to natural gas.
Networks, technologies and financing are needed
The pace of electrification is not only hindered by prices. More powerful and flexible power grids, energy storage systems, a wider charging infrastructure and digital solutions are needed to allow electric cars and other devices to respond to the electricity market situation.
Smart and bi-directional charging will be essential. It would allow vehicles to be charged during hours when electricity is cheaper and renewable energy production is higher, but if necessary, use the car batteries to transfer electricity back to the grid.
Other obstacles include the high initial costs of the technologies, the lack of skilled labor and European production capacity, as well as the need to introduce new technological solutions more quickly.
Support for industry, buildings and transport
In industry, it is planned to promote long-term power purchase agreements, the development of industrial parks and investments in electrified production processes. Financing will be sought from the Innovation Fund, ETS revenues and other EU instruments.
In the building sector, one of the main solutions will be the wider use of heat pumps. In transport, it is planned to support the introduction of electric cars and electric trucks, develop charging infrastructure and use mechanisms such as social leasing to make electric vehicles more accessible to the wider public.
ETS revenue as a source of investment
The electrification plan and the ETS reform are designed as complementary instruments. The carbon price creates an economic incentive to reduce the use of fossil fuels, while the ETS revenues provide funding for the technological transition.
The Commission proposal would require Member States to invest at least half of their ETS revenues in decarbonising domestic industry. At the same time, 80% of the free allowances for companies would be linked to the development of credible decarbonisation plans, and the remainder to actual investments.
This would mean that free quotas would no longer be seen as mere protection against additional costs. They would increasingly become a conditional support instrument for companies that actually invest in the transformation of production.
The compromise proposed by the Commission is not yet final
The European Commission’s new proposal effectively tries to reconcile the demands of both sides. It gives industry more time and a larger volume of allowances, but ties the support more closely to investments in reducing emissions. At the same time, the EU’s target of reducing net greenhouse gas emissions by 90% by 2040 is maintained.
However, this compromise does not satisfy everyone. Some member states and industry organizations want even more flexibility, while environmental organizations and companies that have already invested in clean technologies warn that a slower reduction in quotas will weaken the carbon price signal and threaten the predictability of investments.
Therefore, future negotiations will not only be about how fast to reduce emissions. They will also need to agree on who bears the costs of the transition, which companies receive free allowances, how ETS revenues are used, and the extent to which households are protected from rising transport and heating costs.
The main challenge is to create a system that does not reward inaction, does not penalize companies that have started modernizing early, and does not force the most technologically complex industries to leave Europe. It is on this balance that will depend whether EU climate policy becomes a tool for industrial modernization or another source of tension for European competitiveness.
Sources
1. European Commission – Electrification Action Plan https://energy.ec.europa.eu/publications/communication-electrification-action-plan-com2026595_en
2. European Commission – Information on electrification in the European Union https://energy.ec.europa.eu/topics/eus-energy-system/electrification_en
3. Reuters — EU softens carbon market to ease pressure on industry https://www.reuters.com/business/environment/eu-revamp-carbon-market-ease-pressure-industry-2026-07-17/