EU carbon prices tumble as major states add to ETS reform calls

EU carbon prices have come under renewed downward pressure after key member states including Italy and Germany called for an overhaul of the bloc's emissions trading system, arguing current rules undermine industrial competitiveness.

EU Allowances were trading at Eur70.23/mtCO2e ($82.71/mtCO2e) as of 1210 GMT on Feb. 26, according to Intercontinental Exchange data, down by more than 3% from the previous settlement, after having fallen to an intraday low of Eur69.33/mtCO23 at 0915 GMT. Platts, part of S&P Global Energy, assessed EUAs for the December 2026 contract at Eur72.60/mtCO2e on Feb. 25.

"The reaction to these headlines is crazy. I can't see how the legislation gets unwound to this extent," a UK-based carbon trader told Platts.

Italy's enterprise minister Adolfo Urso said Feb. 26 his government would ask the European Commission to suspend the ETS pending a thorough review, as it represents an additional tax on European companies, impacting costs and limiting their competitiveness.

The call comes as a coalition of 13 EU states, dubbed the "Friends of Industry," issued a joint statement demanding that the upcoming ETS revision prioritize competitiveness.

"We will ask the European Commission to suspend it until it is thoroughly reviewed to intervene both on the emission benchmarks and on the mechanisms for allocating allowances, including the postponement of the phase-out of free allowances, and to finally introduce a stable support mechanism for exporting companies, not yet fully defined in the CBAM reform," Urso said in a statement.

Deindustrialization vs decarbonization

Germany's minister for economic affairs Katherina Reiche hosted 13 EU member states for a "Friends of Industry" exchange in Brussels, where ministers agreed to submit a follow-up paper to the European Commission outlining demands for regulatory relief. The gathering included Austria, Croatia, Czechia, France, Germany, Italy, Luxembourg, Poland, Portugal, Romania, Slovakia, Slovenia and Spain.

The joint statement warned that "decarbonization should not be achieved by deindustrialization" and demanded that the ETS revision strive to support the competitiveness of European industry, and enhance investments in innovative technologies.

"Given the decline in the EU-wide emissions cap, industrial actors face the risk of high price levels, increased market volatility and limited liquidity," the joint statement said. "The upcoming revision should therefore ensure an effective price signal, market stability, predictability and sufficient liquidity, a pragmatic and investment-compatible approach to free allocation that fosters investments in climate-friendly technologies and is fully coherent with CBAM, while safeguarding the European industrial base."

The European Commission is scheduled to undertake a review of its compliance market in the third quarter of this year, with items such as free allocation, the Market Stability Reserve and sectoral expansions on the table.

Under current rules, free allocations are set to be phased out completely by 2034 for sectors covered by the EU's Carbon Border Adjustment Mechanism.

European carbon prices have slumped by more than Eur20/mtCO2e since Jan. 15 after several member states called for the EU ETS to be watered down to boost the bloc's industrial competitiveness.

Competitiveness concerns

EU ministers were meeting Feb. 26 in Brussels to discuss European competitiveness, including the possibility of establishing a European Competitiveness Fund as part of the 2028-2034 EU budget.

Industrial policy concerns have intensified over the past few weeks, with a growing number of politicians expressing concerns about industrial decline amid rising climate costs.

Italy has recently proposed a decree to reduce gas and power prices by subsidizing the variable costs of gas-fired power plants.

"I think now more and more countries are considering covering ETS costs in energy bills," a second carbon trader said.

Earlier in February, German Chancellor Friedrich Merz made similar calls, saying that the EU ETS should be revised or postponed, before softening his stance in later statements.

Other European officials have echoed these concerns, with Czechia, Poland and Slovakia calling for significant reforms, while others, such as France and Belgium, have expressed more tempered views though also supporting some degree of reform ahead of the market review scheduled for the third quarter of 2026.