Four billion euros, free of charge: the EU's quiet retreat on industrial carbon pricing

Four billion euros. That is the size of the concession the European Commission has already offered European heavy industry in the form of extended free allocations under the bloc's carbon market — and according to a Franco-German-led alliance now pressing Brussels, it is not enough. The number decides this column, because it tells you exactly which of the four variables an EU climate policymaker is allowed to choose between — speed, cost, equity, political feasibility — has just been put on the table to be sacrificed.

The variable is speed. Specifically, the speed at which Europe's steelmakers, cement kilns, chemical plants and refiners are forced to internalise the cost of the carbon they emit. The mechanism for that internalisation is the gradual withdrawal of free allowances — pollution permits handed out without charge — which was supposed to be the disciplining edge of the EU's emissions trading system. Industry has always argued that the edge cuts too deep, too fast, against competitors in jurisdictions with no comparable price. Now two of the bloc's largest economies have decided that argument has won.

It is worth slowing down on what this means, because the mechanics matter less than the redistribution. A free allowance is, in plain language, a transfer. The right to emit a tonne of carbon dioxide has a market price; when a regulator gives that right away rather than auctioning it, the value of the giveaway accrues to the recipient — the steel mill, the cement works — and the foregone revenue is borne by the public budget that would otherwise have received it. Four billion euros of free permits is four billion euros that does not flow into the transition funds, the grid upgrades, the retraining schemes, the household energy rebates that the same governments insist are underfunded. Berlin and Paris want that number to be larger. They have not yet said which line of the transition budget should be smaller to accommodate it.

The physics has not moved. A tonne of CO₂ emitted from a blast furnace in the Ruhr in 2026 has the same radiative effect as a tonne emitted in 2028 or 2030, and the cumulative budget consistent with the bloc's stated temperature goals shrinks each year regardless of which firms are paying for their share of it. What has moved is the politics. Brent traded today at $92.69 a barrel, down a little over one per cent; Henry Hub gas jumped seven per cent to $3.30. Those are not yet the kind of price signals that frighten finance ministries. But the political memory of the 2022–2023 energy shock is still doing the work of frightening them, and industrial lobbies have learned to invoke it efficiently. The argument is no longer that decarbonisation is unaffordable; it is that decarbonisation at the previously agreed pace is unaffordable at this particular moment, which is the same argument made at every previous moment.

Name the tradeoff cleanly. If the free allowances are extended, European industry receives a subsidy worth billions, the carbon price signal weakens, and the bloc's near-term emissions trajectory bends upward against the trajectory it has legislated for itself. The benefit is political feasibility — keeping heavy industry, and the regions that depend on it, inside the coalition that supports the broader transition rather than defecting from it. That is not a trivial benefit. A carbon market that has lost the consent of the industries it regulates is a market that gets unwound at the next election. The cost, however, is paid in the years that follow: every tonne not priced now is a tonne that must be removed later, at a higher marginal cost, by an actor with less political capital than the current Commission has.