Italy Calls for Suspension of the EU Emissions Trading System Amid Market Collapse
The Italian Ministry of Industry has officially requested the suspension of the European Union Emissions Trading System until it undergoes a comprehensive review and reform. This call increases pressure on the blocs primary tool for reducing carbon emissions highlighting growing concerns from member states about the systems current effectiveness and impact on industry.
Adolfo Urso, Italys Minister of Industry, stated that the current system acts more as a fiscal burden for Europe than a climate policy support. He has advocated for an in-depth review and the removal of the phased distribution of free emission allowances to industries, arguing that these measures limit economic competitiveness. His remarks came shortly after the market reacted sharply to the news, with carbon emission allowance prices plunging by 4.6%, reaching 69.25 euros per tonne. This figure represents the cost that businesses must pay for emitting CO2 under current trading schemes.
Italys stance resonates with broader industry concerns amid a period of economic recession and energy market volatility, especially following the escalation of the Ukraine conflict. The government already announced a radical reform in the electricity sector, which involves eliminating carbon costs from energy bills. This decision, approved last week, effectively subsidises gas transmission tariffs for power generators, reducing the financial burden of carbon compliance on energy producers.
Energy sector experts, such as Alessandro Gemmo from Linklaters, suggest that Italys reform could position the nation as a leader in advocating for a comprehensive overhaul of the EU Emissions Trading System. Such reforms might include reassessment of allocation rules and a more gradual phase-out of free allowances, aligning with proposals from neighbouring countries like Germany and Austria, which have voiced similar criticisms.
The EU ETS was originally designed to incentivise emission reductions through a system of tradable allowances, known as Emission Trading System trades. These allowances permit companies to emit a certain amount of CO2, with some distributed for free, planned to decrease significantly from 2026 to force industries towards cleaner practices. Additionally, the introduction of the Carbon Border Adjustment Mechanism (CBAM) aims to level the playing field by imposing a carbon cost on imported goods, preventing foreign competitors from gaining an advantage through lower standards.
However, the current economic climate has strained the system. High energy prices, declining demand, and the ongoing war in Ukraine have led to a downturn in many sectors, especially chemicals and steel industries heavily reliant on ETS allowances. Several member states are now calling for increased flexibility, including extending free allowances and slowing the reduction of available allowances, to prevent economic harm while maintaining climate goals.
EU officials and high-ranking members have acknowledged these concerns and are negotiating potential adjustments. Despite the persistent debate, some EU leaders, such as Peter Liese, emphasise that efforts should focus on reform rather than suspension, indicating that dismantling the scheme entirely would undermine climate commitments. The recent volatility has already halved allowance prices from levels above 90 euros to around 70 euros per tonne, reflecting market uncertainty. Nonetheless, Italys strong push for suspension signals a significant shift and could influence future policy directions within the EU climate framework.