Europe just told its industrial base that decarbonisation is negotiable
Loosening the carbon market is like treating the patient’s fever by breaking the thermometer.
Loosening the carbon market is like treating the patient’s fever by breaking the thermometer.
At its core, a carbon market is a promise: this tonne of CO₂ will cost you more next year than it does this year, and more again the year after, and we are not going to change our minds. Every green steel plant, every electrolyser, every carbon capture retrofit that has reached Final Investment Decision (FID) in Europe got there because somebody believed that promise enough to underwrite 15+ years of it. Over the last nine months, the EU has demonstrated that the promise is conditional.
Look at what’s been given away. Emissions Trading System 2 (ETS2[CC1] ), carbon pricing for buildings and road transport, has slipped from 2027 to 2028, traded away last November for Poland, Slovakia, and Hungary’s votes on the EU’s 2040 target[CC2] of a 90% net emissions cut. The same deal lifted the international credit allowance[CC3] (the percentage of credits that could be ‘bought’ from outside the EU) from 3% to 5%: the 90% target is an 85% target just with better PR. Then in July this year (2026), the Commission’s ETS review did the real damage. The linear reduction factor, the mechanism by which the cap actually tightens, falls[CC4] from 4.4% to 3.7% for 2031–2035, and to 1.7% from 2036. At RIG, we often look for compelling events to drive deals to conclusion – the real reason to do something. For large industrial emitters, there being nowhere for a tonne of CO2 to go, legally, by around 2040 was a good one. Sadly no longer.
In the decade when the cap needs to be closing hardest, when the hard-to-abate sectors have run out of cheap options and need the price to justify the expensive ones, the EU proposes it barely tighten at all. The ambition hasn’t been abandoned. It’s been moved to a decade in which none of the people who agreed it will be in office.
The justification is competitiveness, and I’ll be fair to it, European industry has spent three years watching American and Chinese rivals operate with cheaper energy and no equivalent carbon cost. But the diagnosis is wrong. At around €82 a tonne, ETS costs are a rounding error next to what European manufacturers pay for gas and electricity. If you want to fix competitiveness in Europe, fix the cost of power. Loosening the carbon market instead is like treating the patient’s fever by breaking the thermometer.[CC5]
And it carries a cost the energy price doesn’t. What got repriced this year wasn’t carbon – the cost of emitting one tonne of CO2 is up around 13% year-on-year – it was policy risk[CC6] . Every CFO in Europe now knows that when the compliance cost gets uncomfortable, the compliance date moves. The rational response is to delay your own capex and lobby harder, which is exactly the behaviour the ETS was built to eliminate.
The people who pay for this aren’t the incumbents – they’re the ones lobbying for slower change. It’s the founders. If you raised money in 2023 on a model with a 2035 carbon price in the terminal value, your investment case was just partially rewritten by people who have never heard of you and will never be asked to explain it.
So, here’s my uncomfortable advice. Stop treating regulation as the demand side of your business. Stress-test the model at a carbon price of zero, and if it doesn’t survive, you haven’t built a technology company, you’ve built a compliance product. You can hedge the carbon price, but you cannot hedge the politics. Find the second reason to buy: energy, yield, resilience, security, and lead with it. Sell to customers, not to statutes.
The ratchet was only ever useful because it turned one way. We’ve just learned it turns both.