INTERVIEW: War and energy crisis spur EU carbon market soul-searching: IETA chief

Geopolitical shocks and an energy crisis spurred by the war in the Middle East are compelling European policymakers to reconsider how carbon pricing fits alongside energy security and industrial competitiveness, Dirk Forrister, president and CEO of the International Emissions Trading Association, said April 14.

Speaking to Platts, part of S&P Global Energy, in an interview, Forrister explained how these events were forcing a fundamental reassessment of how climate policy, global trade and energy security intersect in the EU Emissions Trading System and in global carbon pricing.

"We're in unprecedented times in terms of global energy markets and wars and really how business is responding to this new world order that's emerging," Forrister said on the sidelines of the European Climate Summit in Barcelona. "I think it's natural that there's some nervousness about what it means for the ETS."

The comments reflect growing pressure on Brussels to introduce greater flexibility into the world's most established carbon market as European industry grapples with volatile energy costs and mounting competition from regions with lower climate compliance burdens.

Platts assessed EU Allowances for December 2026 at Eur74.30/mtCO2e on April 15, down from the 30-month highs of Eur92.09/mtCO2e reached in mid-January.

Carbon market security

Forrister said the current upheaval presents an opportunity to ensure that different policy instruments work together more effectively. He emphasized the need for what he called "carbon market security" alongside traditional energy security measures.

"I think it's giving us an opportunity to rethink how all of the various policy elements fit together and make sure that there's coherence," Forrister said. "We develop a strategy that borrows from energy security, and that would be forms of carbon market security as well."

He drew parallels to strategic petroleum reserves, which have historically calmed oil markets, suggesting that similar measured interventions could stabilize carbon prices.

"The market is looking for continuity, but it's also looking for relief," Forrister said. "We're looking for a package of measures that can address the near-term competitiveness goals and set Europe up to achieve its climate ambitions more cost-effectively."

The European Commission is expected to present a comprehensive review of the ETS in July, as Brussels seeks to shield industry from volatile carbon costs while maintaining pressure to decarbonize.

The bloc's flagship carbon market has faced mounting criticism from several European leaders over its impact on heavy industry.

Middle East carbon markets

The conflict in the Middle East will also have direct consequences for carbon market development in the region, according to Forrister.

Several Middle Eastern jurisdictions have been working to establish their own emissions trading programs, but those efforts have been deprioritized amid more urgent concerns.

"The work is still underway, from what I understand, but it's lower on the priority list," he said.

Price volatility in energy markets has amplified concerns about the cumulative cost burden facing European industry from both fuel costs and carbon compliance.

Forrister suggested the current crisis could accelerate domestic manufacturing capacity for low-carbon technologies as countries reassess their supply chain dependencies. He noted that China's positioning within Belt and Road partnerships has prompted other nations to reconsider their technological capabilities.

"There may be a way that you work on energy security and climate progress together, and you might get a different result than if you just look at either one of those in isolation," Forrister said.

Flexibility tools

As European policymakers consider reforms to the ETS, Forrister emphasized that businesses are seeking cost-effective solutions rather than weakened climate targets. He cited international carbon credits and nature-based solutions as mechanisms that could provide relief without compromising environmental outcomes.

"Many of the solutions the EU is coming up with are for higher-priced solutions rather than something that can address the cost and competitiveness concerns," Forrister said. "We're not particularly keen on weakening targets -- the targets are the targets. They're driven by the NDCs."

The IETA chief acknowledged that European leaders want to send strong price signals through the ETS cap but said smart policy is needed to address inevitable price increases as free allocation shrinks. He pointed to revenue recycling as a potential mechanism to support deep decarbonization in industries ready to transition.

"As the pie of carbon allowances available for free allocation gets tighter and tighter, prices are going to go up, and there has to be smart policy in addressing that," Forrister said. "Some of that I think is renewed interest in use of revenues -- can we talk about how you use revenues for helping to support the deep decarbonization of those industries that are ready to move to the next level."