Berlin under pressure as NGOs and industry clash over EU carbon market flexibility before the 2040 target
Eight German environmental organisations have urged their government to oppose the European Commission's proposal to make the EU carbon market more flexible for the power and industrial sectors. They warn that the changes could endanger the bloc's 2040 climate goal.
In an open letter to Chancellor Friedrich Merz, Economy Minister Katherina Reiche and Environment Minister Carsten Schneider, the groups argue that the new measures would create a surplus of emission allowances. Power generation and industry would then not deliver the emissions cuts expected of them. Signatories include DNR, Klima-Allianz, WWF, Germanwatch, NABU and BUND. They describe the EU ETS 1 as a success story that has helped cut emissions, especially in electricity generation.
What the Commission proposed
The EU is revising its climate and energy rules to fit a target of cutting net greenhouse gas emissions by 90% by 2040, against 1990 levels. The Commission presented its reform proposals in July, after pressure from several member states, Germany among them, and from industrial sectors.
The package includes a slower reduction of the emissions cap from 2030. It also allows carbon removals and international carbon credits to be counted, grants more free allowances to industry and modifies the market stability reserve. The German government has welcomed the proposals. Schneider said not all industries can move toward climate neutrality at the same pace.
NABU president Jörg-Andreas Krüger said relief measures and flexibility are necessary but must not unbalance the system. Each measure may make sense alone, he said, but together they could considerably weaken the system's reduction path.
The NGOs want Berlin to defend a cap consistent with the 2040 goal, keep the current reduction path at least until 2035 and exclude both international credits and negative emissions from the count. Talks between member states and the European Parliament are entering a decisive phase. EU environment ministers will debate the review before the leaders' summit scheduled for the 15th and 16th of the month.
A German business alliance took the opposite view earlier this month, saying the Commission's proposals fell short. Its open letter singled out the plan to tie additional free allowances to sustainable investment obligations.
A market caught between credibility and competitiveness
The dispute shows how much of the 2040 target now rests on the design of the carbon market. If the flexibilities do create a surplus, as the NGOs calculate, the price signal that guides investment could weaken. That would matter most to operators weighing electrification, hydrogen or carbon capture, where the business case depends on a predictable cap.
For investors, the risk runs in two directions. Looser rules may ease near-term cost pressure on industrial assets. They may also erode the scarcity that supports long-term decarbonisation returns. Free allowances linked to investment obligations, which industry opposes, could shape which projects reach a final decision.
Policy advisers should note that Germany is both an advocate of flexibility and the target of this lobbying. Its position in the coming ministerial and leaders' discussions may carry weight with other governments, particularly given the national elections that could strengthen climate-sceptic parties.
The groups also argue that a shortfall in power and industry would shift the burden to other sectors, such as buildings and transport, and to households and public budgets. That is a plausible concern, though the outcome depends on the final compromise.
It will be worth watching whether negotiators keep the 2030 cap trajectory intact and whether credits and removals are capped or excluded. Any compromise that mixes limited flexibility with stricter conditions on free allowances could shape compliance planning across Spanish and Portuguese heavy industry as well.