Climate Mirage

How ETS is Fueling The EU Deindustrialization and Energy Dependence

"Insanity is doing the same thing over and over again and expecting different results." Albert Einstein

The European Union (EU) has long patted itself on the back for being a climate leader, but its flagship policy—the Emissions Trading System (EU ETS)—has, in practice, proven more costly and controversial than many are willing to admit. The system, which began in 2005, was meant to reduce emissions by creating a market where companies could buy and sell carbon allowances. A laudable goal, perhaps. But the real question is: at what cost?

Now, as Europe moves toward its 2050 climate neutrality target, the EU is preparing to roll out ETS2—a new phase that will expand the carbon pricing scheme to residential heating, road transport, and small industries. Set to launch in 2027, ETS2 could very well be the tipping point for consumers who are already feeling the financial pressure from energy costs. But before we dive into the expected impact of ETS2, let’s first look at what the current EU ETS has achieved—and more importantly, what it has failed to achieve.

The EU ETS began with the ambition to reduce emissions from the power and industrial sectors. It started off with good intentions: to create a flexible carbon market where industries had an economic incentive to reduce their emissions, rather than forcing them into stringent, one-size-fits-all regulations.

The problem? Over-allocation of allowances in the early years of the system rendered the carbon price largely irrelevant, and for a long time, it remained too low to push meaningful changes. The market was flooded with excess permits, resulting in carbon prices hovering below €10 per metric ton in the early years. The system, in its initial phase, was more of a carbon lottery than a tool for real emissions reduction.

Provided by emissionhandler.com

It wasn’t until 2019, with the introduction of the Market Stability Reserve (MSR), that the EU took action to rein in the surplus of carbon allowances. The result? A slow but steady rise in the carbon price, which reached around €80 per ton by 2023. But this increase in price didn’t happen in a vacuum. As the price of carbon went up, it hit Europe’s industries and consumers right in their wallets. The very sectors the EU was trying to decarbonize—energy and heavy industry—were forced to adjust to the new costs, leading to an erosion of competitiveness, particularly in energy-intensive industries.

Here’s the kicker: the EU ETS has effectively incentivized companies to relocate to countries with more lenient carbon regulations. The result? A rise in offshoring, with industries leaving Europe to avoid the carbon price penalty. And what does that mean? More emissions—not fewer—since many of the countries receiving these outsourced operations don’t have the same stringent carbon pricing policies.

Take ArcelorMittal, the world’s largest steel producer. Faced with sky-high carbon costs under the EU ETS, it started investing heavily in steel plants outside the EU. In 2019, the company announced it would cut back its operations in Europe and focus more on its plants in the United States and Asia, where carbon prices are significantly lower.