As the Iran war impact threatens the industry, the European Union plans to relax the Emissions Trading System.

The European Union will loosen its signature carbon pricing plan, at a time when EU leaders are trying to ease the impact of the Middle East war on the continent’s struggling industrial sectors.

The EU’s executive body, the European Commission, said on Wednesday that it is proposing to scrap a mechanism that invalidates excess carbon emission allowances. The Commission said the change “will allow it to better respond to future market developments, including potential supply tightness scenarios that could emerge over the coming decades.”

The Commission said: “Stopping the cancellation of the relevant allowances will strengthen the system’s function as a buffer, ensuring future stability.”

Under the EU Emissions Trading System (ETS), companies that emit carbon dioxide that causes climate change during operations must buy allowances for each ton of carbon dioxide they emit. The system was launched in 2005 and includes a Market Stability Reserve mechanism, intended to ensure that the prices of these allowances remain roughly steady.

To maintain the competitiveness of European industry, companies receive a certain amount of free allowances. Allowances are sold through auctions and can also be traded between emitting companies.

Previously, last month, European Commission President Ursula von der Leyen said that, after tensions escalated in the conflict between the United States and Israel against Iran, the ETS needs to be modernized and become more flexible. That war has sent oil and gas prices soaring.

Von der Leyen said at the time: “We will take into account the concerns of industry.”

She said that in addition to adjusting the stability reserve mechanism, manufacturers will also receive more relaxed benchmarks for free allowances.

The proposal will be submitted for approval by the EU’s legislative bodies and the European Council, made up of heads of member states. A broader assessment of the ETS is scheduled to be passed in July, which will involve adjustments to the reserve mechanism.

The proposed adjustment is emerging against the backdrop that European industry, which has already struggled to boost production levels, is preparing to face yet another round of shocks brought on by rising energy prices. The energy predicament triggered by the Iran war is the most serious threat facing European industry since the beginning of 2022, when Europe cut off Russian natural gas supplies.

This week, Dan Jørgensen, the EU’s energy affairs chief, warned that Europe should prepare for long-term disruptions to international energy trade.

“We should have no illusions that the impact of this crisis on energy markets will be temporary,” he said. “Because that’s not the case.”

A European Union spokesperson said on Wednesday that the energy predicament weighing on Europe is a crisis “not caused by us.”

He said: “In this crisis, the EU needs to take action from the standpoint of the interests of European consumers and industry.”

The spokesperson said that, with greater emphasis on renewable energy and energy supply diversification, the EU, consisting of 27 member states, is better prepared than some other economies.

According to EU estimates, by 2023, its carbon pricing system had helped cut emissions from power generation and manufacturing—two major sources of greenhouse gases—by nearly half.

However, given the squeeze that the energy predicament is putting on Europe, some European leaders have called for a rethinking of the ETS. Italy’s Prime Minister Meloni last month urged that the system’s application in the power generation sector be abolished immediately.

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Responsible editor: Li Tong