Making the European Carbon Market an Industrial Policy Magic Wand Attempted Again

In an article entitled ‘The Carbon Market Is Also a Central Pillar of Our Industrial Policy’ (Le marché carbone est aussi un pilier central de notre politique industrielle) published by the Institut Montaigne, expert Joseph Dellatte argues that the European Union’s Emissions Trading System (ETS) should become a major tool of its new industrial policy. He stresses that the system already performs three important functions – limiting greenhouse gas emissions, sending a general price signal for investment, and generating a considerable public revenue. Between 2013 and the end of 2025, carbon allowance sales alone have generated over EUR 258 billion. In the author’s opinion, this money should be much more actively used to support the decarbonization of European industry, especially to cover operational spending – not only capital expenditures.

This constructive and outwardly reasonable rhetoric conceals rather an unpleasant and alarming picture. Europe has really created one of the world’s biggest and best-developed carbon markets. However, it has not yet learned to use its revenues in a truly strategic and centralized manner. The author cites quite telling figures: in 2024, out of the EUR 16.4 billion that member States declared to have disbursed towards their climate goals, less than five percent was directly allocated for industry decarbonization. Much of the funds is still being used to compensate energy-intensive industries, i.e. to actually preserve the existing high-carbon economy instead of building a new and low-carbon one.

The classical European structural problem of deep fragmentation is quite manifest here. A common carbon market exists, a common emissions cap has been established, and a common price signal is working. And common, truly European tools for supporting industrial transformation are virtually absent. States with strong budgets (mainly Germany, but also Italy and Spain) get the lion’s share of public assistance under the provisional and transitional frameworks. Countries with weaker budgets fall far behind. This undermines the common market directly and creates a real risk that the industrial transformation will go on in the rich member States only, while others continue losing their competitiveness and industrial capacity.

Mr. Dellatte’s proposal looks logical and even necessary at this stage, but extremely complicated to implement – both politically and financially. He suggests creating a European Bank for Industrial Decarbonization with an ambitious target of EUR 100 billion, to be financed from available resources of the Innovation Fund, additional revenue from the ETS, and the revision of the InvestEU program. The author insists on moving from almost exclusive support for capital expenditures to credible support for operational expenditures – via carbon contracts for difference, fixed production premiums, and resilience contracts. Yet even he is cannot but admit that the current funding sources are insufficient and member States’ willingness to transfer much of their carbon revenues to the all-European level remains extremely low.

The most interesting thing is that Europe is again trying to address several deep structural problems at once – namely high energy prices, competitors’ hefty industrial subsidies, lack of sufficient demand for green products, and fragmented budgets – using just one tool. The Emission Trading System is really useful and important. But it cannot replace cheap and stable energy supply, industrial production scale, and an active industrial policy long and consistently pursued by the United State and especially China. As long as European energy prices for the industry remain twice or thrice – and gas prices, nearly fivefold – as high as American ones, no carbon contracts and premiums will make European industry truly competitive in the global market.

Besides, the author justly points to the risk of further ETS weakening under the industry’s pressure. A lower linear reduction factor, more generous free distribution of allowances and ample use of the market stability reserve may each seem manageable on their own – but may combine to bring down the carbon price and reduce sharply the future revenue, so much needed to fund industry transformation.

The article is quite illustrative of the limits and internal contradictions of the current European approach. The Emissions Trading System is a strong tool that is already working. However, attempts are being made to turn it into the main pillar of a new industrial policy – even though a genuine and large-scale industrial policy is short of money, political unity, and willingness to give up national interests in favor of a common one. As Europe continues expecting a ‘proper’ and well-calibrated carbon market to solve the issues of deindustrialization and loss of competitiveness on its own, it risks losing even more industrial capacity. And all talk about the carbon market becoming a ‘pillar’ of industrial policy will remain good-looking but unrealistic rhetoric while European industries increasingly fall behind competition.

Original publication: https://www.institutmontaigne.org/expressions/le-marche-carbone-est-aussi-un-pilier-central-de-notre-politique-industrielle