Is Carbon Pricing Really Driving Up Europe’s Energy Bills?

Hello! Today is 30 March, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on LinkedIn.

This week’s expert is Anna Crawford. Anna is a Policy Analyst at the European Policy Centre (EPC) in Brussels. She works for the Sustainable Prosperity for Europe Programme. She previously worked as an EU affairs consultant. Anna is from Stockholm, Sweden.

One month has passed since the US-Israeli attack on Iran, which triggered the largest supply disruption of oil in history, pushing crude oil prices above $100 per barrel, from around $70 before the war. Gas prices in Europe have climbed to €50 per MWh, up from €30.

This disruption is largely due to the closure of the Strait of Hormuz and the threat of continued military strikes on energy infrastructure in the Middle East. Rising prices have revealed, once again, how deeply Europe’s prosperity depends on imported energy it does not control.

In response, EU leaders are weighing several short-term levers: targeted price interventions (including a possible gas price cap), tax cuts and subsidies for households and industry, and cuts to network charges. A fourth lever has become the most politically charged: adjusting the Emissions Trading System (ETS, which is due to be revised in July 2026).

While the future design of the ETS is important in itself, it has a rather limited impact on energy costs. The EU should confront its energy dependency heads on rather than tweak the ETS for short term relief.

How ETS Works

The ETS is the EU’s flagship climate policy tool, in place since 2005. It works by setting a cap on the total greenhouse gas emissions allowed from industry and power generation, and requires companies to buy carbon allowances for every tonne of CO₂ they emit. The cap is reduced over time, making carbon-intensive activity progressively more expensive and incentivising investment in cleaner alternatives.

The ETS has helped reduce emissions from power and industry plants by half since 2005. It has also been a source of inspiration, with over 80 carbon pricing instruments in place worldwide.

The ETS does feed into electricity prices: companies that generate electricity (such as power stations, gas plants, wind farms) pass on the cost of their carbon allowances when setting their prices. But the scale of this passed-on cost is frequently overstated.

ETS-related costs account for roughly 11% of the average EU electricity bill. This is real, but modest compared to the cost of energy commodities themselves, which make up 56% of the bill. Network charges (18%) and taxes and levies (15%) outweigh the costs of ETS too.

What Drives Electricity Prices

Under the current electricity market design, the last power plant needed to meet demand sets the price for everyone. Hence countries that rely on gas for electricity generation are hit strongest by the current situation.

In Italy, gas-fired plants have set the market price in 89% of hours in 2026. This has pushed the average price for electricity to €142 per MWh. In Spain, where gas sets the price in just 15% of hours, the average price is 59€.

This explains why Germany, the Netherlands, Italy and Belgium have seen electricity prices surge, while less gas-dependent countries like France, Spain, Portugal and the Nordics have been comparatively shielded.

Carbon Prices Fall as Leaders Signal Appetite for a Watered-down ETS

Still, leaders from Member States and industry have been vocal in their critique of the ETS. Carbon prices on the market have already fallen considerably in recent weeks, as traders anticipate that political pressure could lead to a watering-down of the system.

The most market-moving statement came from German Chancellor Friedrich Merz during an industry summit in Antwerp in early February, signalling he was open to revising it or suspending it.

Italian Prime Minister Georgia Meloni argued that the ETS inflates the price of all electricity, making it a structural drag on industrial competitiveness. Italy went so far as to urge the Commission to suspend the system until its scheduled review in July 2026.

At the most recent European Council Summit on 19-20 March, leaders from Italy, Austria, and Poland cited competitiveness challenges to push for substantial changes to the ETS.

Short Term Tweaks to ETS Ahead of July Review

The ETS was already scheduled for a broader review in July 2026. Political pressure prompted Ursula von der Leyen to announce two targeted measures to be presented in the coming days.

The first would update the benchmarks used to calculate free allowances — the credits that energy intensive industries receive to cushion the impact of carbon pricing during their transition. Adjusting these benchmarks could reduce costs for some carbon-intensive industries.

The second involves strengthening the Market Stability Reserve, the mechanism that regulates the supply of carbon allowances in the market. The Commission’s proposal would add an emergency brake to this mechanism: during acute price spikes, credits that would normally be permanently cancelled would instead be kept in circulation, preventing sudden surges.

These more targeted adjustments still leave the July review as the vehicle for any bigger decisions.

Protect the Price Signal

The July 2026 ETS review represents a genuine opportunity, but also a risk. The ETS has cut emissions and generated over 245 billion euro to help finance the clean energy transition. Any backtracking or decreased ambition will not lower energy bills significantly. Instead, it will delay the investments that actually would.

Fossil fuel dependency is the principal driver of Europe’s energy costs. Caving to political pressure on the ETS would undermine the long-term investment signal that industry needs. The July review should deliver reform where warranted to meet climate targets or reward industrial decarbonisation frontrunners, not reward laggards or jeopardise a strong carbon price.

TRADE • On 26 March, the European Parliament voted in favor of two regulations implementing the EU‑US Turnberry trade agreement concluded in July 2025. The European Parliament’s vote had been delayed because of Donald Trump’s threats over Greenland.

Ahead of the vote, US ambassador to the EU Andrew Puzder had warned that Washington could walk away from its commitments, including the planned sale of 750 billion euros of energy, notably liquefied natural gas, if the EU failed to deliver on its side of the bargain.

The adoption of the Parliament’s position on these two regulations opens the way for interinstitutional negotiations with the Council of the EU on the final legislative texts.

The Parliament’s position adds a series of safeguards to the Commission’s proposal.

EU tariff cuts are made conditional on the United States actually reducing its duties on most EU goods to 15%, and a “sunrise” mechanism ensures EU concessions only take effect once Washington has implemented its commitments.

A “sunset” clause provides that EU tariff concessions will automatically expire on 31 March 2028 unless renewed, and the EU will be able to suspend its concessions if the US breaches the deal by re‑introducing additional tariffs or if there is a damaging surge of US imports, including in products containing steel and aluminium.

MIGRATION • On 26 March, the European Parliament endorsed opening negotiations with the Council on a new regulation setting up an EU‑wide system for returning third‑country nationals who have no right to stay in the EU.

Key measures include: a general obligation for returnees to cooperate with national authorities, the possibility of detention for up to 24 months in cases of non‑cooperation, stricter rules for people deemed security threats, and the use of return “hubs” in third countries that agree to accept returnees.

In plenary, the text was backed by the right wing of the Parliament, including the European People’s Party (EPP), the European Conservatives and Reformists (ECR) and the Europe of Sovereign Nations (ESN) groups.

CUSTOM DUTIES • On March 26, the Council and the Parliament agreed on a reform of the customs system to address the explosion of low‑value parcels entering the EU, largely from Chinese e‑commerce platforms such as Temu, Shein and AliExpress.

Under the new rules, online marketplaces that sell products into the EU will be legally treated as the importers of those goods. They will have to pay the customs duties due and ensure that products comply with EU safety rules.

If a platform repeatedly brings unsafe or non‑compliant goods into the EU, authorities will be able to impose fines worth between 1 and 6 per cent of its annual sales in the EU, and, as a last resort, block access to its website.

The reform will also abolish the customs duty exemption on goods worth less than €150 and introduce a €3 levy, plus a handling charge for low-value imports — the precise amount is still to be determined.

• In the FT, Valentina Romei explains how Europe’s weak private R&D spending is undermining the EU’s competitiveness.