Europe’s ETS windfall should fund clean industry market making

The European Commission is deliberating the revision of the European Trading System – the flagship instrument of climate policy. Lobby groups are pushing hard to extend the free credit allowances and push back the 2040 horizon. This Friday is a crucial juncture.  I hope the Commission will maintain the core of the ETS. The Commission should model any revision to make sure there will be an effective carbon price going forward. It is not just Europe’s climate leadership that is at stake, it is Europe’s resilience and security. But protecting the ETS’s ambition is only half the job, what Europe does with the revenues from it, matters just as much. It should use ETS revenue to create market certainty for clean industries and unlock further investment into Europe’s clean economy while there is still time. 

Europe needs a broad industrial base and that base will have to become clean if it is to survive rising energy costs and stiff global competition. The tools available are carbon pricing (ETS), public support and regulation, crucially the revenues from the first can fund the second and help support the third.

Mission Possible Partnership’s Global Project Tracker shows the pipeline for clean industrial projects in Europe is strong – 26% of the global pipeline, 200+ planned commercial scale plants valued at €170 billion. The issue is reaching Final Investment Decision. One of the biggest obstacles is long-term demand: project developers cannot raise financing without buyers willing to commit to green steel or cement.

This is where regulation comes in and there is proof that is already works.  Since the EU’s Sustainable Aviation Fuels (SAF) mandate took effect in 2023 SAF is being used (blended at 2%) in flights across Europe, investment into SAF-plants has accelerated sharply with financed capacity more than doubling and all three of the clean industrial investment decisions in Europe this year so far are for SAF-projects. The Commission’s Industrial Accelerator Act tries to extend this logic to steel and cement, but too timidly. The Parliament and member states should strengthen the IAA widening it to more sectors; extend it beyond public procurement to include the whole market and increase the percentages of green products required by 2030 onwards. Time is short; these measures need to happen now.

But: mandates alone will not close the financing gap.  Producers need long term contracts running 10 to 15 years; the buyers of clean cement, clean steel or green ammonia can rarely commit for that long. Bridging that gap needs a new set of market-making mechanisms – double-sided auctions and contracts-for-difference that guarantee producers a minimum price, are the kind of mechanism that already underpin Europe’s renewables build-out. Funding these market-makers is the most effective use of public money, more so than one-off subsidies to individual projects. The flywheel effect of market-makers means every euro invested crowds in more private capital and can be recycled over time.

Where to get the money? The fiscal situation for many countries is tight. The ETS can provide the capital. Revenue currently flows mainly to member states (€24 bn of the €38 bn raised in 2024). The pot will keep growing as prices rise and free allowances shrink. The Commission should freeze member states’ share and use all additional ETS revenue, potentially €30bn a year by 2030, to fund these market-making mechanisms sector by sector. Companies and consumers will foot the bill, but through a system they are already paying into (ETS), with no new costs.

Can Europe afford this? The evidence says, yes. The ‘green premium’ at the factory gate, which can be 40% to 100% more for green steel or ammonia largely disappears by the time it reaches consumers. The price increase, of a car made with 10% green steel in 2030 is less than 1%.   That seems a manageable price next to the cost of fossil-fuel volatility which has had enormous consequences on inflation and the cost of living. Seen this way, the green premium is really a strategic premium, a downpayment on the kind of resilience NATO countries are already committing to through 5% GDP on defence and security.

Setting aside €30-40 bn per year of ETS revenues to transform Europe’s industrial base to a clean one seems a modest price for a resilient future. We need to shift the debate from isolated policy topics to a coherent picture of a manageable transition. For the greater good of Europe and its people.