European carbon prices slide as Germany's Merz says EU ETS may need revamping

European carbon prices were trading near six-month lows on Feb. 12 after German Chancellor Friedrich Merz said the EU's Emissions Trading System should be revised or postponed if it undermines industrial competitiveness, comments that could reshape debate at an EU leaders' summit.

EU Allowances stood at Eur73.01/mtCO2e ($86.75mtCO2e) at 1207 GMT on Feb. 12, the lowest since Aug. 14, according to Intercontinental Exchange data.

EUAs have slumped by almost Eur20/mtCO2e since Jan. 15 amid news that the European Commission is looking to reform the EU ETS, with changes expected around free allocations and allowance supply caps.

"This system [EU ETS] is not the system to generate new revenues. This system is implemented to reduce CO2 emissions and, at the same time, to enable the companies to come to CO2-free production lines," Merz said at the European Industry Summit in Antwerp late Feb. 11. "If this is not achievable and if this is not the right instrument, we should be very open to revise it or at least to postpone it as we did with EU ETS2."

Other European leaders have adopted a similar stance on reforming the bloc's carbon market.

On Feb. 12, ahead of the EU summit, Czech Prime Minister Andrej Babis said EU Allowances were "destroying our industry" and called for a revision of the ETS, arguing that carbon prices should be capped at Eur30/mtCO2e to save European industry.

High carbon and energy costs

Merz acknowledged that the EU was discussing this matter seriously and assured the industry that steps would be taken to address their concerns.

"The elephant in the room is the EU ETS question, but note that we are talking about it in the EU Council," Merz said. "We had some very strong comments from colleagues in the east but also from the western parts of the EU."

Merz's intervention comes as European manufacturers face mounting pressure from high energy costs and carbon prices that exceeded Eur90/mtCO2e in mid-January.

The comments suggest growing political willingness to reconsider the pace of EU climate policy implementation if it threatens industrial output and jobs.

The summit will see EU leaders discuss "European competitiveness in a changing geoeconomic context," according to the meeting's agenda.

Merz's comments follow European Commission President Ursula von der Leyen's defense of the EU ETS at the same event, in which she said she would push member states to reinvest more of the revenues from carbon permit auctions into industrial decarbonization.

The European Commission has already scheduled an ETS review for the third quarter of 2026, with many governments pushing for greater price predictability through extended free allocations or changes to allowance caps.

The sharp fall in EUAs reflects growing pushback against the expected increase in carbon prices, with an expanding political coalition keen to revisit carbon market rules to ensure prices remain manageable for industry, according to Coralie Laurencin, director of European gas, power, and carbon policy at S&P Global Energy CERA.

"The discussion will take many months to find a landing zone, but many are in favor of a less tight carbon market and lower prices," said Laurencin. "This is no longer just some countries ranting; this is Europe's industrial heartland that wants significant change."