EU climate retreat risks penalising early movers

The European Union’s efforts to soften key climate policies in the name of competitiveness are triggering growing concern that the bloc is undermining its own green transition — rewarding late movers while penalising companies and countries that invested early in cutting emissions.

Already, elements of the EU’s flagship climate framework have been diluted, including rules on deforestation and supply chains. The political debate has also rattled confidence in the EU’s Emissions Trading System (ETS), the cornerstone of its climate strategy since 2005.

Pressure on the carbon market

Several member states, seeking relief for struggling industries facing high energy costs, are pushing to weaken the ETS, which requires companies to pay per tonne of carbon emitted. Critics argue that carbon prices are compounding Europe’s competitiveness challenges.

Even political signals have unsettled markets. Remarks by German Chancellor Friedrich Merz in February suggesting reforms to the ETS helped trigger a sharp fall in carbon prices from a two-year high of €92 per tonne to below €70. Italy escalated tensions further when its industry minister called for the system to be suspended pending a “thorough review”.

Poland and the Czech Republic have already secured delays to a separate emissions system set to charge households and road transport from 2027.

Belgian Prime Minister Bart De Wever argued that Europe cannot remain an economic powerhouse if its companies are “structurally disadvantaged”.

In December, the European Commission also relaxed its landmark 2035 ban on new combustion engine cars, responding to pressure from Germany, Italy and eastern European countries concerned about job losses in the automotive sector.

First movers fear losing out

For governments and businesses that have invested heavily in cleaner technologies, the shift threatens to upend the policy certainty underpinning those decisions.

Thomas Pellerin-Carlin, a French MEP, warned that the debate risks becoming a broader ideological clash over Europe’s energy future — “fossil-fuel nostalgia versus cleantech leadership”.

Denmark, Finland, Luxembourg, the Netherlands and Sweden have jointly called for “political stability and predictability” in climate policy, urging restraint ahead of the ETS review due later this year.

In the Netherlands, Tata Steel and environmental group Natuur & Milieu issued a rare joint appeal defending the cap-and-trade system, stressing that companies investing in green steel, green chemicals and electrification require stable long-term policies.

Swedish officials have also sought to defend the combustion engine phaseout, citing progress by manufacturers such as Volvo and Scania in electric vehicle development.

One senior EU official argued that complaints about climate policy reflect deeper structural weaknesses in some member states. Backtracking on the ETS, the official warned, could disadvantage those that have already complied and invested.

Risks to the single market and investment climate

Diplomats caution that continued dilution of EU-wide climate rules could fragment the single market, as countries committed to strong climate action may pursue national measures instead.

With an ETS review scheduled for the summer, markets remain jittery. Analysts say recent political signals have already led to capital losses and squeezed positions in carbon markets.

European Commission President Ursula von der Leyen and European Council President António Costa have publicly defended the ETS. Rather than wholesale reform, officials are considering targeted adjustments to ease pressure on the most affected sectors.

However, business leaders warn that uncertainty is damaging confidence. Donal O’Riain, chief executive of green cement company Ecocem, said weakening the policy trajectory would increase risk for firms that have already committed hundreds of millions of euros to low-carbon investment.

Fertiliser producers have also raised concerns over potential suspension of the EU’s carbon border adjustment mechanism (CBAM) if prices rise too sharply, fearing broader instability in climate rules.

Heidi Peltonen of green steelmaker Outokumpu said hesitation on CBAM or the ETS would signal that early movers may not be rewarded. Pierre-Etienne Franc, founder of hydrogen investor Hy24, added that retreating from climate leadership could undermine Europe’s ability to attract investment and create jobs.

As the debate intensifies, the EU faces a difficult balancing act: shielding industry from short-term economic strain without weakening the long-term credibility of its climate ambitions.