Industrial companies caution that the EU's carbon reform might favor polluters.

Steelmaker SSAB is investing €6 billion to modernize its operations by transitioning from coal to low-carbon hydrogen, betting that European Union policies will favor lower-emission production and enable it to outperform more polluting competitors.

However, the Swedish firm is among several industrial companies worried that an EU plan to revamp the emissions trading system, the primary method for decreasing CO2 emissions in Europe, might weaken the scheme and diminish the benefits for early adopters of low-carbon technologies.

"Businesses that have not made investments could end up with an advantage," remarked Helena Norrman, SSAB’s executive vice president of communications. This issue highlights a fundamental challenge in Europe’s climate strategy: whether policymakers will maintain strict carbon pricing or bow to political pressures to assist heavy polluters facing high energy costs and global competition.

The emissions trading system (ETS) serves as the EU's central climate policy. Since its initiation in 2005, it mandates that heavy industries and power plants purchase CO2 permits for their emissions, creating a financial incentive to invest in cleaner technologies. The anticipated modifications to the ETS, intended to align with the EU's 2040 climate goals established last year, are coming amid a political backlash against Europe's green initiatives, with some leaders, including Italy’s Giorgia Meloni and Poland’s Donald Tusk, claiming these efforts harm industrial competitiveness.

"How can this system remain compatible with current pressures regarding competitiveness and security?" questioned Simone Tagliapietra, a senior fellow at the think tank Bruegel, addressing the difficulties EU policymakers face. Commission officials have indicated a willingness to ease the scheme, potentially by granting companies more free CO2 permits to lessen their carbon expenses.

Carbon prices within the ETS have surged in the past decade, with permits currently trading around €80 per metric ton, up from below €10 in the 2010s, a shift that has justified significant investments in cleaner technologies. According to Goldman Sachs, low-carbon industrial technologies, such as electric heat production, start becoming competitive with traditional methods at around $100 (€90) per ton.

"It sends a carbon price signal that is essential for us to make large-scale transformative investments feasible," stated Winston Beck, vice president of group public affairs at cement manufacturer Heidelberg Materials, which has been investing in lower-carbon raw materials and carbon capture technologies.

The insulation manufacturer Rockwool is making similar moves, developing electric melting technology to replace fossil fuels in its production facilities. "We anticipated changes in the ETS," noted Brook Riley, head of EU affairs at Rockwool. A weakened ETS could jeopardize such plans. "If we invest a hundred million euros per factory in electrification and that case is suddenly undermined, it could completely disrupt our operations," he warned.

BASF, ArcelorMittal, and thyssenkrupp have called for "immediate action to halt the escalation of ETS-related costs," cautioning in a June 16 letter to EU leaders, which was reviewed by Reuters, that Europe risks acting largely alone in increasing carbon prices. BASF, the continent's largest chemicals producer, has halved its emissions since 1990 through efficiency improvements and fuel switching but claims that options for further CO2 reductions, such as low-carbon hydrogen and electrification, often lack economic viability.

"We are entering a much more challenging landscape now, with the easier options mostly exhausted," a BASF spokesperson informed Reuters. In its current state, the ETS "is not pushing us to the next stage of new technologies, as they are prohibitively expensive, and the CO2 price is too burdensome for an industry facing global competition," the spokesperson added.

Central to this discussion is an uneasy political reality: the ETS inherently creates winners and losers. For investors, the carbon price indicates which companies might gain a competitive advantage, but shifts in policy complicate this clarity. "Frequent policy changes and reversals create significant difficulties," said Andy Howard, global head of sustainable investment at Schroders. "There’s a genuine risk that investors cannot confidently allocate capital for our clients."

The ETS encompasses about 40% of EU emissions, meaning any reductions would have significant economic consequences. While certain low-carbon technologies like wind and solar can thrive without high carbon prices, others may struggle to secure funding without a clear motive to move away from fossil fuels. "Removing that incentive would send a very strong message to the market that this is not a priority," noted David Frykman, general partner at venture capital firm Norrsken.

"If we can't predict carbon price trends and can't rely on them, then businesses reliant on that become significantly more volatile," he explained. As pressure builds on the Commission ahead of its July 15 proposal, SSAB and others caution that dismantling the ETS will not fix competitiveness issues stemming from high energy costs, infrastructure deficiencies, and geopolitical instability. "It’s crucial not to try to resolve these issues through the ETS, as it won’t be effective," stated Norrman from SSAB.