The EU's Emissions Trading System (ETS) is under fire, with energy-intensive industries and some European governments pushing for its suspension or overhaul. But this move would be a grave mistake, as it would harm the EU's economic competitiveness rather than help it. Here's why:
The ETS is not the culprit for high electricity prices. The misconception that the ETS drives up electricity costs is widespread. In reality, natural gas is the primary factor in setting marginal electricity prices. The ETS actually helps stabilize electricity prices by providing a mechanism to manage volatility. Lowering the carbon price would disrupt this stability, deter private investment in renewables, and prolong dependence on expensive and geopolitically risky imported gas.
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Watering down the carbon price has hidden fiscal costs. The ETS generates significant auction revenues, which EU countries can use to fund industrial transition and social support. Weakening the ETS would directly reduce these revenues, impacting national budgets. Additionally, lower carbon prices often increase the subsidy gap for renewable energy projects, as governments must fill the gap in short-term electricity prices.
A rent shift to fossil-fuel exporters. The carbon price plays a crucial role in reducing EU demand for fossil-fuel imports, putting downward pressure on global LNG prices. Dropping the ETS would signal to consumers that they don't need to reduce consumption, leading to upward pressure on global gas prices. The carbon market revenues would then be sent abroad as pure profit for LNG exporters, rather than staying within the EU to support its economy.
Undermining the ETS triggers market fragmentation. The ETS is a mature, unified market-based framework that ensures a level playing field across the EU's single market. Undermining it would lead to dangerous fragmentation, with EU countries reverting to a patchwork of national subsidies and contradictory regulations, causing major market distortions.
In conclusion, the ETS is an ally, not an enemy, of Europe's competitiveness. Instead of dismantling it, EU leaders should strengthen the system as the central pillar of clean industrial policy. Adjustments are possible, but the long-term credibility of the carbon price signal must be protected to ensure investment certainty for frontrunners and innovators. The multi-billion euro revenues from the ETS should be strategically used to secure Europe's future prosperity.
