Handily imposed emission cuts sink EU industry

The moment seems historic because, for the first time since the industrial revolution, Europe is trying to lead its industry on a path defined by environmental policies and less by innovation and market dynamics. On 1 January 2026, the market for CO2 emission permits, the main instrument of European climate policies, will enter its crucial phase. The system (Emission Trading System, ETS), all based on desk-based rules, will create a permit deficit by forcing industries to buy permits in large quantities. It has been known since 2003, since the first Ets Directive, that the free allocation that has lasted for 20 years and that applies, in the first phase, to 12,000 industrial plants throughout Europe and about a thousand in Italy, would come to an end. Theoretically it is all simple, based on a market approach, the one dominant in the 1990s, celebrated in 1997 with the Kyoto Protocol. Every plant that emits CO2 must have permits, given these until now free of charge based on its past emissions, the historical ones. If it wants to emit more, it has to buy permits; if it can emit less, it sells the permits on the market. As of next January, some sectors under ETS will be forced to buy permits, because the free allocation will have to be phased out: from 2026 only 97.5 per cent of historical, or free, permits will be given, falling to zero in 2034. Prices, dormant between 2000 and 2017 at €5, spiked to €100 per permit, or per tonne of CO2 emitted, in May 2023, before falling in recent months to €70-75.

Decisive for the jump in prices was the inauguration of the first von der Leyen Commission and the subsequent definition in 2019 of the Green Deal, in which the strong commitment to accelerate towards decarbonisation was enshrined. The target to reduce CO2 emissions, better climate-altering gases, by 2030 was stiffened from -40% to minus 55% compared to 1990. Already the first target seemed difficult, the second is revolutionary, because the problem is planetary and we only count for 6% of the total and no one has reduced as much as we have in the rest of the world. In 2025 we will be at minus 39%, already a very good result, but to bring it within five years to minus 55% is impossible, unless we give up even feeble economic growth.

The commission, on the other hand, is optimistic and emphasises that we have achieved growth since 1990 by cutting emissions, but forgets that the United States, in the same period, has gone up more than twice as much and China 15 times. The sectors under ETS, those 12,000 large industries, are the ones that have reduced the most, since 2005 minus 50 per cent of their emissions, and they are the ones for which the target is even stricter by 2030: -62 per cent. Here, too, two thoughts: the first is that they cannot make it in just five years; the second is that these sectors are the ones that lack, and will lack, economic growth. They cannot make it because the space available to further reduce emissions is limited, they have all exploited it and all that is left, which they have already begun to do, is to close factories. It is the energy-intensive industries, steel mills, ceramics, cement factories, paper mills, oil refineries, petrochemical plants, all of which have shrunk and explain the deindustrialisation and low growth. For example, steel production between 2005 and 2024 fell by 35 per cent, refined oil production by 25 per cent, cement production by 38 per cent, and ceramics by 50 per cent.

Exalting emission cuts while forgetting these chilling figures is incorrect. These are the sectors that also need a lot of electricity and, by closing plants, require less, which is why electricity demand in the EU is flat, when in the rest of the world it is rising at a fast pace. The electricity sector thus becomes the most environmentally satisfying sector, because, thanks to the penetration of renewables, emissions fall. But the electricity sector is only a part of all Europe's energy, about a quarter, while the rest, sees a lower penetration of renewables. Then one would like all energy-intensive sectors to use electricity in their processes, perhaps made from the sun, instead of gas or coal, but this is impossible for physical reasons. The higher costs of Ets come at a time that could not be worse. Energy prices, gas and electricity, are still high in Europe as a consequence of the war in Ukraine, in an economic downturn aggravated by the Trumpian confusion over tariffs.

The Cbam (Carbon Border Adjustment Mechanism), a kind of tariffs designed to protect European producers from imports of products from countries where the Ets mechanism does not exist, should serve some purpose. In other words, again relying on theoretical simplicity, the costs of purchasing permits from 2026 will be passed on to European consumers in final prices. Products that are imported, and which might have lower prices, will have to pay for the emissions caused but not paid for in their countries. The technical complications, however, are enormous and the delays inevitable. Similarly, those who export from the EU to other countries, such as Italian ceramics, should be granted free permits on those goods so as not to penalise the cost in countries that do not have a CO2 price.