Concerns over EU ETS Rollback and NGO Warnings
This article is an automatically translated version of the original Japanese article. Please refer to the Japanese version for the most accurate information.
Subject: Joint NGO Statement to the EU ETS and the European Council (link)
Overview
In March 2026, amid concerns over declining European industrial competitiveness and soaring energy prices, political pressure is mounting to relax or postpone the EU Emissions Trading System (EU ETS), the world's largest Compliance Market. In response, 35 NGOs, including Sandbag, submitted a joint letter to the European Council (EUCO), strongly urging them to protect the integrity of the system and the predictability of carbon prices.
Key Points
1. Political Pressure to Soften EU ETS and Market Volatility
German Chancellor Merz and others have alluded to the possibility of "reviewing or postponing" the EU ETS due to concerns about industrial competitiveness, while countries like Italy have also called for a temporary suspension of the system. Concerns about such short-term political intervention led to significant market volatility, with EUA (European Union Allowance) prices temporarily dropping by 8% in mid-February 2026, reaching a six-month low of approximately 73 euros/tCO2e.
2. Demands in a Joint Letter by 35 NGOs
Thirty-five civil society organizations, including Sandbag, Carbon Market Watch, and WWF, published a letter ahead of the European Council meeting on March 19-20. They strongly urged for the maintenance of an emissions cap trajectory aligned with climate goals (for 2030 and 2040), adherence to the polluter pays principle through the phase-out of free allocation, and avoidance of political interference in the system.
3. Geopolitical Risks and Spillover Effects on Energy Prices
Escalating conflicts in the Middle East (e.g., Iran) have led to surging natural gas prices, resulting in increased reliance on coal-fired power as an alternative. While this boosts demand for allowances, lobbying activities for system relaxation due to rising energy costs are also intensifying, leading to heightened regulatory uncertainty.
Background and Context
The EU ETS is a core policy tool driving GHG / Greenhouse Gas Emission Reduction in Europe and the transition to a decarbonized economy. Currently, discussions are focused on a system review scheduled for the third quarter of 2026, and the phase-out of free allocation (2026-2034) in conjunction with the full implementation of Europe's Carbon Border Adjustment Mechanism (CBAM). However, amid rising inflation and industry pushback, concerns about "backsliding" regarding the balance between climate action and economic competitiveness are at an unprecedented high.
Detailed Analysis
| Analysis Item | Details |
|---|---|
| Impact on Prices | Following political statements, EUA prices sharply dropped to around 73 euros/tCO2e in February 2026. This revealed the risk of significant market price fluctuations when policy predictability is undermined. |
| Cap and Free Allocation | Maintaining the pace of cap reduction towards the legal 2030 target and the gradual phase-out of free allocation accompanying CBAM implementation are planned. Any regression on these would severely impair market function. |
| Utilization of Revenues | NGOs demand that ETS auction revenues and the Innovation Fund be strategically and reliably directed towards low-carbon investments in electrification and the circular economy, avoiding lock-in to fossil fuels. |
Related Developments
Regarding "ETS2," a new market targeting buildings and road transport, some member states (such as Cyprus and Central and Eastern European countries) are requesting to postpone its introduction from the initially planned 2027 to 2030, citing concerns about social impacts (increased costs). Experts warn that without clear and predictable carbon price signals (prices for allowances and Carbon Credit / Credit), companies will delay massive investments in clean technologies, ultimately eroding the competitiveness of Europe's low-carbon industries.
Summary
- Political pressure in Europe is leading to discussions about relaxing or postponing the EU ETS, the world's largest Compliance Market.
- 35 NGOs, including Sandbag, are calling for the exclusion of short-term political interference and the maintenance of stable, rule-based carbon prices.
- The situation in the Middle East, leading to higher gas prices, further complicates discussions around the system review.
- EUA prices are highly sensitive to political statements, posing a risk that regulatory uncertainty will dampen corporate decarbonization investment intentions.
- The upcoming European Council meeting and the European Commission's ETS review, scheduled for late 2026, will be key focal points.
References
- Don't Ruin the EU ETS! Joint NGO Letter to the European Council - Sandbag, 2026/03/11
- Joint NGO letter to safeguard the integrity and predictability of the EU ETS - Carbon Market Watch, 2026/03/11
- European carbon prices slide as Germany's Merz says EU ETS may need revamping - EUROMETAL, 2026/02/16
- The war in Iran exacerbates turbulence in Europe’s carbon market - Net Zero Investor, 2026/03/16
- EU carbon market rocked by politics; volatile “safe havens” - Capital Economics, 2026/02/13