Italy calls for suspension of EU carbon market in escalation of climate policy fight

Italy has called for the European Union to suspend its flagship Emissions Trading System (ETS), intensifying pressure on Brussels to overhaul the bloc’s cornerstone climate policy amid mounting industrial unrest.

“The ETS mechanism, as currently designed, is nothing more than a tax, a levy on energy-intensive companies,” Italian Industry Minister Adolfo Urso told reporters on arriving at a meeting of EU economy and industry ministers in Brussels. “It is necessary to revise it substantially … To do this properly, the ETS mechanism must be suspended pending a reform,” he added, Politico reports.

As bne IntelliNews reported, the European Commission is preparing to scale back its most ambitious Green Deal climate pledges as it seeks to relieve pressure on its lacklustre economy. The commission announced in December that it will drop plans for a complete ban on the sale of new internal combustion engine vehicles from 2035 and admitted its policies are a disaster. Green activist now warn that the policy drive is increasingly being captured by industrial lobby groups who are bent on stymieing the restrictions.

Italy’s demands mark the most forceful challenge yet from one of the EU’s largest economies to the carbon market, which has required power plants and heavy industry to purchase permits for every tonne of CO2 emitted since 2005. The system covers around half of the bloc’s greenhouse gas emissions and has long been viewed as the EU’s most powerful tool for driving decarbonisation.

Italy had already announced plans to compensate operators of gas-fired power plants for the cost of ETS permits, effectively offsetting the price signal designed to penalise fossil fuel use. Urso defended the move, arguing that Rome could not wait for a lengthy EU review process. “We are facing the collapse of the European chemical industry; we are facing a crisis in European steelmaking. We cannot wait for the timing of EU negotiations to find solutions,” he said.

Carbon markets reacted swiftly. Earlier this month, criticism from industry and comments from German Chancellor Friedrich Merz suggesting a weakening of the ETS pushed the carbon price down from €81 to €72 within a week. Following Urso’s remarks, it slipped further to just above €70.

Italy argues that reimbursing gas plants will lower wholesale electricity prices in a market where gas often sets the marginal price. Italians face the fourth-highest power bills in Europe, reflecting a heavy reliance on gas, which accounts for roughly 44% of the country’s energy mix.

Supporters within Prime Minister Giorgia Meloni’s coalition say the measures are intended to “open a dialogue” with the European Commission and act as a “catalyst” for reform. Raffaele Nevi, a senior centre-right lawmaker, said the reimbursement plan would push Brussels towards a swift revision of the carbon market.

Critics warn that the approach risks undermining the green transition. “Italy’s excessive electricity prices are the direct consequence of its overreliance on gas for power generation — the highest in the EU,” said Chiara di Mambro, Europe director at Italian climate think tank ECCO. “Suspending the ETS as proposed today or subsidizing gas, as envisaged in the government’s recent energy decree, would move Italy in the opposite direction: Weakening the price signal, increasing market uncertainty, and ultimately delaying the transition away from expensive fossil fuels,” she added.

A former senior Italian energy executive said the policy effectively redistributes the carbon cost burden. “You are removing a tax on energy generated through fossil fuel, and you are distributing that cost also on the energy generated with renewables,” the person said.

The European Commission has yet to respond formally, but pressure is building ahead of a scheduled review of the ETS in the third quarter. Austria has backed differentiating between gas and coal within the system, while Germany has called for broader revisions, with Economy Minister Katharina Reiche arguing that current standards for allocating free permits are “not feasible for our chemical industry.”