But ETS has many haters who claim it undermines industries' competitiveness. We've written about Europe's love-hate relationship with carbon pricing before.
ETS critics are now close to winning a battle about the future of this programme – and with that, the future of many European industries.
After long-standing pressure from lobbyists and fossil-fuel-heavy countries, such as Poland, Italy, and Czechia, the European Commission proposed an adjustment to the current ETS rules in July.
Instead of reaching zero emissions by 2039 as originally planned, companies in sectors such as steel, chemical production, or aviation, would be allowed to emit carbon emissions well into the 2040s.
Free pass on polluting
The EU has also been allocating free CO2 permits to these industries to help them compete in the global market. Thanks to these, companies that would otherwise need to buy carbon permits can apply for free ones via their national authority.
“After the ETS started in 2005, the Commission decided to occasionally grant free permits to industries that were under particular pressure. It was supposed to be a temporary thing. The problem is that it became a permanent thing”, Camille Maury, industrial decarbonisation expert at WWF EU, told The European Correspondent.
Under the updated ETS rules, there would be more free permits available for longer.
The Commission is trying to find a compromise by binding these free permits to clean investment. Companies would only be allowed to access these permits once they present their decarbonisation plans and start the transition.
Similarly, member states would be pushed to spend at least half of the money collected from ETS permits, from companies that still pay for them, on decarbonisation support for local industries. And that's no small amount. Since 2013, the ETS has generated €260 billion in revenue.
Still, countries like Sweden and Spain argue that any weakening of the current ETS system benefits companies that have not yet become greener, and “punishes” green forerunners – companies that have already invested in new, cleaner technologies to save on carbon prices later.
That's exactly the signal that discourages investors from sending money in the direction of innovation. Even though clean alternatives already exist, companies are hesitant to make the switch due to changing rules.
Clean but pricey
“Decarbonisation can come from two different sources: the 'energy and heat' layer and the 'industrial process' layer. We can think of them as 'changing how we fuel the oven' versus 'changing the recipe of what we bake'”, Flora Marchioro, climate and energy policy researcher at the Brussels-based think tank Bruegel, explained to us.
When it comes to fueling the oven, direct electrification isn't possible everywhere, but the so-called “green molecules” could lower the European demand and dependency on fossil fuels. These green molecules are non-fossil chemicals and renewable fuels produced with clean energy or biomass.
Some of the clean fuels could be locally-produced and distributed via the infrastructure we already have. For example, biomethane can use existing gas pipelines. But biomethane production remains small-scale.
Then there's green hydrogen: the most discussed technology for hard-to-decarbonise industries. Europe already has the know-how, but adaptation is costly. “[To switch to hydrogen] all industry processes require changes and new interlinked investments,” Petteri Laaksonen, research director of LUT School of Energy Systems, told TEC.
When a fossil fuel crisis hits, such as the latest one caused by the US-Israel war on Iran, the interest in green hydrogen and other clean but pricey technologies rapidly grows, but then disappears as soon as fossil fuel prices stabilise. Meanwhile, the average lifecycle of a hydrogen project is 10 to 20 years, according to Martin Tengler, an analyst from BloombergNEF. If polluting is not heavily penalised, “you have less incentive for investors to invest in the technologies that we need”, said Maury.
The experts we spoke to agreed that for industries to remain competitive and for any of them to stay fully European, they have no choice but to speed up decarbonisation projects and invest in innovations.
They emphasised that if we don't secure these projects in Europe, China will enter the market with its own fossil-free products. And we will watch as energy dependencies on the Middle East and the US get replaced with energy dependency on China.