Financial Observation: Behind the Differences in Carbon Trading Reform, What Challenges Does the European Union Have
Editor's note: Under the pressure of declining industrial competitiveness, the European Union is taking action on its core policies to achieve its 2040 climate goals. On July 17th, the European Commission proposed a plan to revise the European Emissions Trading System (ETS), which sparked controversy in some countries. The "environmentalists" led by Sweden and decarbonization leading companies oppose the relaxation of policies, believing that it undermines the credibility of climate targets and "backstabbes" companies that have previously invested in energy transformation; Poland and other countries strongly support the "burden reduction" policy to alleviate the pressure on industrial survival under high energy costs. Analysts believe that these debates highlight the deep dilemma of the EU in achieving climate goals and balancing industrial competitiveness.
Only EU companies are bearing the high carbon costs
The EU's revision of the ETS includes core measures such as slowing down the implementation of carbon emission targets, extending the deadline for free carbon emission quotas, and establishing an "Industrial Decarbonization Bank" to support large-scale industrial decarbonization projects in Europe.
According to Reuters, this revised plan shows that the EU will update its "linear reduction factor" for carbon emissions, which refers to the magnitude of the annual reduction in the EU's total carbon emission quota. Currently, the coefficient is 4.3%. The coefficient will be lowered to 3.7% between 2031 and 2035, and adjusted to 1.7% between 2036 and 2040, which will make emissions reduction more gradual.
Reuters reported that these adjustments represent more carbon emission quotas available for companies to purchase in the coming years, providing them with greater emission flexibility.
The plan also plans to extend the period for companies to obtain free carbon emission quotas, which is expected to continue until after 2030. For industries covered by the EU Carbon Border Adjustment Mechanism (CBAM), the EU will slow down the reduction of free quotas for relevant companies and extend the free quota measures until 2038. CBAM, also known as "carbon tariffs," requires tariffs on cement, steel, and other products imported from countries and regions with relatively relaxed carbon emission restrictions.
In addition, the new EU plan also plans to expand the scope of ETS to include emissions from flights departing from Europe and flying to destinations within 5000 kilometers; At the same time, emissions from ships with a total tonnage as low as 400 tons will be included, which is much lower than the current threshold of 5000 tons. The EU also plans to establish an "Industrial Decarbonization Bank" to coordinate 100 billion euros in funding to support large-scale industrial decarbonization projects in Europe.
ETS was officially launched in 2005 and is the core policy tool of the European Union to address climate change. It requires companies to pay for their greenhouse gas emissions and use related revenue to support green transformation, in order to promote the EU's achievement of the 2040 climate goal.
Reuters reported that although these changes will slow down the pace of ETS implementation, the European Commission stated that these adjustments aim to ensure that the system can still achieve the EU's 2040 climate goal of reducing net greenhouse gas emissions by 90%. Currently, ETS covers approximately 40% of the EU's emissions.
Fu Qiang, Vice Partner of Roland Berger and Chief Expert in the Energy Industry, told Global Times reporters that behind the adjustment of the EU's climate policy, there are both obvious political motivations and the deep background of uneven energy transitions among countries. The political landscape in Europe has shifted to the right, and the voter base for the climate agenda is shrinking, laying the political foundation for the EU to adjust its ETS. In addition, the energy structure and industrial foundation of the 27 EU countries vary greatly, and adjustment is also a stage balance for the EU under the pressure of the practical demands of member states. The original idea of the European Union was to "force innovation with high carbon prices", but the reality has become that "only EU companies are left to bear the high carbon costs", and the balance of competition with China and the United States continues to be imbalanced.
Triggering internal confrontation
The relaxation of carbon emission rules by the European Union has sparked divergent reactions within its ranks.
Sweden, Finland and other seven countries' environmentalists firmly oppose the EU's approach. And 10 countries including Poland and Italy support the EU in relaxing its carbon emission policies.
At a time when Europe is suffering from extreme heat waves, the European Commission has chosen to back down, weakening the EU's strongest tool for emissions reduction, "said Romina Pulmokhtari, Sweden's Minister of Climate and Environment. The Swedish government will do its utmost to firmly oppose such behavior that weakens the policy framework
According to the European edition of the "Political News Network", on the eve of the EU announcing the ETS adjustment plan, Swedish EU Affairs Minister Rosencrantz stated, "Given that some member states are trying to weaken Europe's most effective climate policy tool, our position is clear: we oppose any attempt to weaken the mechanism." She said, "The weakened ETS is not only detrimental to the climate, but also damages Europe's competitiveness. Enterprises that have already invested billions of dollars in green transformation should not be harmed by others' desire to lower standards. ”
Enterprises that have invested huge amounts of money in researching and developing emission reduction technologies, such as Swedish steel company SSAB, support maintaining high ETS carbon prices. These enterprises believe that only when the main carbon emitting entities bear higher emission reduction costs, can low-carbon technological transformation investment achieve reasonable returns.
A policy head of the European Environment Agency, a European environmental organization, said that in the increasingly fierce competition in the global clean energy industry, weakening the carbon market is equivalent to weakening Europe's competitive advantage. The European Commission not only did not support companies leading the transformation, but also tried to accommodate those who are lagging behind. This may lead Europe into the industrial production mode of the 19th century, exacerbating its dependence on fossil fuel imports.
The German Green Party criticized the proposal by the European Commission as a setback for climate action. The spokesperson for the Green Party's climate policy group in the German Bundestag, Badum, told Reuters that relaxing carbon trading constraints at present is equivalent to punishing leading companies that actively reduce emissions and condoning high emission entities that lag behind in transformation.
According to the European edition of "Political News Network", Spain, Finland, the Netherlands, Portugal, Luxembourg, and Sweden have all joined a joint action initiated by Finland to maintain the current version of ETS.
Bloomberg reported that some countries that have witnessed factory closures and businesses struggling under high energy costs have been urging the EU to lower the cost of its energy transition. We don't need a mechanism to squeeze out manufacturing and make our continent the region with the highest energy prices, "said Bolesta, State Secretary of the Polish Ministry of Climate and Environment
According to reports, Poland, Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Hungary, Italy, Romania, and Slovakia have submitted a joint statement to the European Commission, clearly stating multiple demands, including slowing down the reduction of carbon emission quotas and extending the deadline for the issuance of free quotas.
S&P Global analysts believe that this intervention led by Poland highlights the divisions within the EU on how to balance climate ambition and industrial competitiveness.
Relaxing internal policies and imposing external taxes may lead to a rebound
Relaxing carbon emission targets reflects the EU's deep anxiety about industrial backwardness.
Bloomberg reported that after the Middle East conflict pushed up energy prices, the European Commission is facing increasing pressure from member state governments and industry organizations on carbon costs, which has also intensified concerns about the EU's declining competitiveness.
Marcus Kamit, President of the European Chemical Council (Cefic), recently wrote in the Financial Times that "Europe must not achieve emissions reduction through industrial decline." He warned, "Europe must not mistake 'deindustrialization' for 'decarbonization.' Climate ambitions must be adapted to industrial reality. Otherwise, we may weaken our industrial foundation before achieving emissions reduction
According to a German television station, the European Commission aims to alleviate the burden on the industrial sector by reforming the emissions trading system. Local enterprises are facing increasing pressure from global competitors. However, Sigrid Stagl, a climate economist at the Vienna University of Economics, said, "The competitiveness of the European Union must not be maintained at the expense of emissions trading
According to an analysis by the German newspaper Frankfurter Allgemeine Zeitung, the European Commission is caught in a dilemma: it needs to maintain carbon prices and ensure that companies have the motivation to invest in decarbonization; We also need to leave a buffer space for the transformation of local industries. The report also mentioned that the new regulations may significantly increase the administrative approval process and breed bureaucratic problems.
The report believes that "leading companies that deeply cultivate green technologies should not bear additional costs for actively reducing emissions. At the same time, companies cannot rely on lobbying to force policies to relax carbon trading rules. If there is no bottom line to relax constraints, not only will the carbon pricing mechanism fail, but the credibility of the entire EU climate policy will also be damaged
According to Reuters, the proposal from the European Commission still needs to be passed by the European Parliament before it can become law. Member states and the European Parliament will present their opinions and negotiate the final rules, and the entire process may take over a year.
Fu Qiang stated that the crisis of EU industrial competitiveness has turned from prediction to reality. After the outbreak of the Russia-Ukraine conflict, the energy cost in Europe has been higher than that in China and the United States for a long time. Energy intensive industries (steel, chemicals, cement) have continued to reduce production, shut down or relocate in the past three years. Based on this, the cost of carbon emissions has already affected the survival of these enterprises. The statement by Polish climate officials that 'Europe cannot become the continent with the highest energy prices' clearly reflects the collective anxiety of some manufacturing countries in Central and Southern Europe.
Can EU adjust ETS to enhance industrial competitiveness? Fu Qiang believes that in the short term, it may bring good news, but in the long run, it still depends on the deep adjustment of the economic structure.
Fu Qiang believes that the new EU plan means that industries such as steel and cement will enjoy several years of free quotas outside of carbon tariff protection, further enhancing their defense capabilities against imported products. In addition, capital support and a 15 year predictable policy environment are also conducive to enhancing the competitiveness of enterprises. But the EU's move also carries risks, first of all, the investment in energy transition is negative. Secondly, the EU carbon market was once a template for global carbon pricing, and proactively slowing down may weaken its moral authority in international climate negotiations and carbon tariff enforcement, especially the asymmetry of "domestic relaxation and external taxation", which will lead to stronger political backlash and legal challenges.
Dong Yifan, Associate Researcher at the Institute of Country and Regional Studies at Beijing Language and Culture University, told Global Times reporters that in the past few decades, the European Union has long been trapped in the "deindustrialization" dilemma of industrial shutdown or capacity outflow. Despite formulating strategies and implementing policies multiple times, it has never been able to reverse this situation. Dong Yifan believes that under the interweaving of geopolitical changes and global industrial transformation, the EU hopes to achieve the so-called "de risk" by strengthening its local industries, and adjusting the ETS is also to serve this purpose. However, the development of European industry is plagued by deep-seated structural problems, and the implementation of protectionism and local revitalization strategies cannot fundamentally change this situation in the short term.