Brussels slows industry’s carbon clock

The European Commission publishes its review of the EU Emissions Trading System on July 17. The ETS is Europe's main market for putting a price on pollution, and the choice now is direct. Brussels can keep tightening the ceiling on industrial emissions, or give heavy industry more time and more free permits (European Parliament, Carbon Herald).

For Malta, this is not a distant Brussels file. Any change in Europe's carbon price feeds into electricity, shipping, aviation, construction materials and the cost base of a small island economy that imports almost everything. The louder argument is about whether the EU is moving too fast. The more uncomfortable one is that free permits have already weakened the carbon signal for much of heavy industry, while governments have often used the money for other purposes instead of helping firms clean up.

How the cap works

The ETS is a cap-and-trade system. The EU sets a ceiling on total emissions from power plants, steelmakers, cement factories, airlines and shipping companies. Every firm must hold one tradable permit for each tonne of CO₂ it emits. The ceiling then falls each year by a fixed percentage, currently set at 4.4% from 2028 (Argus). At that pace, the cap reaches zero around 2039.

The Commission is expected to stretch that timetable. Officials have signalled that permits will be issued "well into the 2040s," while Poland wants the annual reduction brought closer to 3% (Euronews). The proposal also includes an Investment Booster: 400 million new allowances to be auctioned to raise money for clean-technology investment, described as the first stage of a planned Industrial Decarbonisation Bank (S&P Global).

That mechanism matters. More permits in the market lower the value of each permit. Firms that already bought allowances at higher prices take the hit; firms that waited face cheaper compliance. In a country like Malta, where energy and transport costs quickly pass through to households and small businesses, the politics of that price are never abstract.

Free permits have already softened the blow

The headline carbon price is around €70 per tonne, but most industrial emitters do not pay anything close to that. German environment agency data shows energy-intensive companies received almost 91% of their allowances free in 2025, while the market still held a surplus of roughly one billion certificates (Frankfurter Rundschau). A high market price means less if firms receive most of their permits for nothing. For many industrial operators, the effective cost was closer to €10 per tonne (Aither).

Those free permits were designed to prevent "carbon leakage", the shift of production and jobs to countries without a carbon price. That is a real concern, especially for sectors exposed to global competition. But SteelWatch found that three major steelmakers collected €25.7 billion in free allowances while investing only €3.2 billion in cutting emissions (Euronews). A tool meant to stop relocation has, in too many cases, become a subsidy for delay.

Ten governments want more room — two say it would punish early movers

A ten-state declaration led by Italy and Poland argues that the current path risks pushing industry out of Europe altogether (Eunews). Poland's position is sharpened by its coal-heavy power mix: the same carbon price hits a Polish factory harder than a French competitor powered largely by nuclear electricity (Energetyka24). Italy's steel and cement sectors face rising costs as free allocation started phasing down in January 2026 (Bruegel).

Sweden and Finland are resisting that line. Sweden's climate minister Jessica Rosencrantz has said Stockholm will oppose any dilution because companies that spent billions on fossil-free steel should not have that advantage wiped out by cheaper dirty production (Omni). Saarstahl, a German steelmaker investing in hydrogen-based production, has warned that weaker rules keep dirty steel artificially competitive (Zeit).

The divide is not simply green north versus industrial south and east. It is about who is rewarded. Companies that moved early want the carbon price to protect their investment. Companies still dependent on older production want more time. Governments with coal-heavy or cost-sensitive industries want breathing space. The bill, in one form or another, lands on consumers, taxpayers or firms that already changed course.

Where the carbon money went

How governments spend the money raised from auctioning permits matters as much as the cap. Poland has received more than 200 billion złoty from the ETS since 2012. Yet in 2024–2025, more than 26 billion złoty out of 32.5 billion in revenues went into the general budget, while only about 32 million went directly to climate purposes (Money.pl). When governments absorb the money instead of using it to help firms and households adapt, industry faces the cost without the public investment the system was meant to finance.

Europe's carbon market has cut covered emissions by roughly half since 2005 (Florence School of Regulation). Most of the industrial transition, however, is still ahead. If the Commission extends free permits without tighter investment conditions, it will be protecting today's producers more than financing tomorrow's industry.