Armands Gūtmanis, CEO and founder of Amber Advisory Latvia
Heated debates over whether European businesses and society can meet the emissions reduction targets already adopted are taking place not only in Latvia, but across the European Union. Unlike many other policy issues, the divide in this case does not run solely between groups of member states. It also cuts across industrial sectors and even between companies operating within the same industry.
Some businesses have already made substantial investments in reducing emissions and therefore want the EU to maintain a predictable and sufficiently high CO₂ price, as well as a stable long-term climate policy. For these companies, easing the rules would create a risk that competitors which postponed their transition could gain an advantage.
Other companies argue that technologically and economically viable alternatives are not yet available to them. In their view, a rapid increase in the cost of emissions allowances could weaken their competitiveness or encourage production to move outside Europe. Both sides justify their positions by referring to the need to protect European competitiveness, although they understand this concept in very different ways.
The European Union Emissions Trading System, or ETS, has been operating since 2005 and is one of the EU’s main climate policy instruments. It sets an overall cap on emissions in selected sectors and gradually reduces the number of allowances available on the market. Companies must hold an allowance for every tonne of CO₂ they emit. These allowances may be allocated free of charge or purchased on the market.
On 17 July, the European Commission presented proposals for revising the ETS. The aim is to reconcile the EU’s 2040 climate targets with the need to protect industrial competitiveness and strengthen energy independence. The proposal includes several adjustments to the previous trajectory, including a slower reduction of the overall emissions cap and a longer phase-out period for free allowances in certain energy-intensive industries. The measures must still be discussed by the European Parliament and the member states.
Industry Calls for a More Pragmatic Approach
Ahead of the European Commission’s proposal, the Federation of German Industries, BDI, the French business organisation MEDEF and Italy’s Confindustria urged Brussels to slow the reduction of free emissions allowances.
The organisations warned that the current trajectory could create an excessive shortage of allowances before economically viable decarbonisation options become available to 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. In their view, a sharp increase in CO₂ costs could encourage carbon leakage — the relocation of production, and therefore emissions, outside Europe — rather than accelerate industrial modernisation.
The European Commission’s new proposal responds in part to these concerns. It would slow the annual reduction in the total number of allowances and extend the allocation of free allowances to heavy industry until 2038, instead of ending it in 2034. At the same time, most of these allowances would be linked to company decarbonisation plans and actual investment.
Ten Countries Call for a Review of the ETS
A similar position has been taken by ten EU member states: Bulgaria, Cyprus, Czechia, Estonia, Greece, Hungary, Italy, Poland, Romania and Slovakia. In a joint declaration, they called on the European Commission to carry out a “pragmatic and fair” review of the ETS that would take into account not only environmental protection, but also energy prices, industrial competitiveness, security and the differing economic circumstances of member states.
The countries argue that under the current trajectory, the supply of industrial allowances could approach zero around 2039, potentially forcing part of European manufacturing to relocate. They propose bringing the transition closer to 2050, revising the criteria for allocating free allowances and improving the predictability of the CO₂ price.
Particular attention is also being paid to the new ETS2 system, which will cover fuel use in buildings and road transport. Its introduction is currently planned for 2028, after the original deadline was already postponed by one year. The ten countries are calling for another review, arguing that the system could increase heating and transport costs for households, with a disproportionate effect on lower-income citizens.
Because housing and transport directly affect almost everyone, ETS2 is not only a climate policy issue but also a question of social and political stability. The forthcoming negotiations will determine whether the current timetable is maintained and how effectively the Social Climate Fund and other support mechanisms can mitigate its impact.
Businesses and Climate Policy Experts Warn of the Opposite Risk
However, industry is far from united. Many companies that have already invested in cleaner technologies are concerned that easing the rules would reduce the value of those investments and give an advantage to competitors that delayed their transition.
Ursula Woodburn, Director of the Corporate Leaders Group Europe, argues that a stable and sufficiently high carbon price is one of the main preconditions for investment in low-carbon industry. In her view, Europe should make the ETS more credible and stable rather than use it as a scapegoat for the structural problems facing European industry.
Since the system was launched in 2005, it has generated €266 billion in revenue, including €43 billion in 2025 alone. These funds can be used to modernise industry, expand electricity grids, introduce clean technologies and support regions where the transition is more difficult.
The main argument from this side of the debate is policy predictability. Companies make investment decisions that extend over decades. If requirements are substantially relaxed after investments have already been made, confidence in European climate policy may be weakened, discouraging businesses from modernising early in the future.
The dispute is therefore not simply between “industry” and “climate advocates”. It also reflects a conflict between companies that have chosen different investment schedules and technological development paths.
Electrification Becomes One of the Main Solutions
The ETS review is closely linked to the European Commission’s Electrification Action Plan, presented on 17 July. Its purpose is to replace fossil fuels in industry, transport and buildings with low-emission electricity produced in Europe.
The Commission’s intention is not merely to increase electricity consumption. It represents a fundamental change in energy strategy: the goal is to make electric solutions financially more attractive than continued dependence on natural gas and oil.
This approach has been shaped to a large extent by the geopolitical situation. According to the accompanying documents, during the 111 days of the Middle East crisis, the EU spent an additional €50 billion on fossil fuel imports. Dependence on imported energy resources exposes European businesses and households to external price shocks and supply disruptions. Electrification is therefore being presented not only as a climate measure, but also as a policy for energy security and economic independence.
Europe’s Electrification Paradox
Around 70% of electricity generated in the EU already comes from clean or low-emission sources, yet electricity accounts for only 23% of final energy consumption. This share has barely changed over the past decade.
The European Commission now wants to increase this figure to 46% by 2040. According to its estimates, such progress could reduce annual fossil fuel import costs by approximately €260 billion.
One of the main obstacles is the price relationship between electricity and fossil fuels. When electricity prices include higher taxes, levies and network charges than natural gas prices, companies and households have little financial incentive to install heat pumps, purchase electric vehicles or electrify industrial processes.
The plan therefore focuses on reducing electricity costs and narrowing the price gap between electricity and fossil energy. The Commission wants member states to review taxes and charges so that electricity is not placed at a competitive disadvantage compared with natural gas.
Grids, Technologies and Financing Are Needed
Electricity prices are not the only obstacle to faster electrification. Europe also needs stronger and more flexible power grids, energy storage systems, wider charging infrastructure and digital solutions that allow electric vehicles and other devices to respond to electricity market conditions.
Smart and bidirectional charging will be particularly important. It would allow vehicles to be charged when electricity is cheaper and renewable generation is higher, while also making it possible, when necessary, to feed electricity from vehicle batteries back into the grid.
Other barriers include the high upfront cost of technologies, shortages of skilled workers and European manufacturing capacity, as well as the need to accelerate the deployment of new technological solutions.
Support for Industry, Buildings and Transport
In industry, the plan is expected to promote long-term power purchase agreements, the development of industrial parks and investment in electrified production processes. Funding would be drawn from the Innovation Fund, ETS revenues and other EU instruments.
In the buildings sector, wider use of heat pumps will be one of the main solutions. In transport, the plan aims to support the uptake of electric cars and electric trucks, expand charging infrastructure and introduce measures such as social leasing to make electric vehicles more affordable to a wider section of society.
ETS Revenues as a Source of Investment
The Electrification Action Plan and the ETS reform are intended to operate as complementary instruments. The carbon price creates an economic incentive to reduce fossil fuel consumption, while ETS revenues provide financing for the technological transition.
The Commission’s proposal would require member states to invest at least half of their ETS revenues in the decarbonisation of domestic industry. At the same time, 80% of free allowances allocated to companies would be linked to credible decarbonisation plans, while the remaining share would depend on actual investments being made.
Free allowances would therefore no longer be viewed only as protection against additional costs. They would increasingly become a conditional support instrument for companies that are genuinely investing in the transformation of their production processes.
The Commission’s Proposed Compromise Is Not Yet Final
The European Commission’s new proposal effectively attempts to combine the demands of both sides. Industry would be given more time and access to a larger volume of allowances, but support would be linked more closely to investment in emissions reduction. At the same time, the EU would maintain its target of reducing net greenhouse gas emissions by 90% by 2040.
However, the compromise satisfies neither side completely. Some member states and industry organisations want even greater flexibility, while environmental organisations and companies that have already invested in clean technologies warn that a slower reduction in allowances would weaken the carbon price signal and undermine investment predictability.
The forthcoming negotiations will therefore concern more than the speed of emissions reduction. Policymakers will also need to decide who should bear the cost of the transition, which companies should receive free allowances, how ETS revenues should be used and how far households should be protected from higher transport and heating costs.
The central challenge is to design a system that does not reward inaction, does not penalise companies that modernised early and does not force technologically complex industries to leave Europe. Whether EU climate policy becomes an instrument for industrial modernisation or another source of pressure on European competitiveness will depend on how successfully this balance is achieved.
Sources
- European Commission — Electrification Action Plan
https://energy.ec.europa.eu/publications/communication-electrification-action-plan-com2026595_en - European Commission — Information on electrification in the European Union
https://energy.ec.europa.eu/topics/eus-energy-system/electrification_en - 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/