A perfect storm for the EU’s energy and climate policy debate

Any short-term solution that the European Council concludes next week should in our view avoid disincentivizing tackling the structural problem of Europe’s energy supply, writes expert Stefan Kvarfordt.

Not even 100 days of 2026 have passed, yet this year’s global developments regarding energy markets and regional debate on carbon pricing has sent markets and policy demands in a turmoil that we haven’t seen in years. Starting already in beginning of February in Antwerp, statements from e.g. German Chancellor Merz and French President Macron around the EU ETS, which is up for review in July, contributed to a 13 % drop in EU ETS prices during one week.

With the conflict between the US, Israel and Iran, oil and natural gas prices has seen sharp increases on the Brent and Dutch TFF trading hubs respectively. With around 2/3 of the EU’s energy coming from fossil fuels - the vast majority of which the Union must import – it is painfully obvious that the EU has significant vulnerabilities to external shocks of this kind. This long-term structural challenge – and potential short-term measures to address it through EU energy and climate policy – is turning out to be the main discussion at next week’s European Council meeting. Italy reacted already a few weeks ago with calls to suspend the EU ETS and has announced plans for a scheme to compensate gas-fired power plants of their costs of ETS permits.

According to press sources, the orientation debate of the European Commission last week centered around three main principles to guide any EU action aimed at bringing down energy prices in the Union: Focus on short-term impacts to bring price relief, while preserving long-term price signals; regulatory stability to de-risk needed investments; and avoiding further fragmentation of the internal market.

This looks like a welcomed and balanced approach by the European Commission. Anyone can acknowledge that there are significant challenges, and that they impact sectors differently in a fast-changing geopolitical landscape. But a fast-changing world should not be met by volatile European policy. From the Confederation’s perspective we have strong and clear support for the EU ETS as a market-based and technology neutral instrument driving investments & decarbonization. This was also something that we raised last week when we sent a letter to Commission President von der Leyen and Commissioner Hoekstra together with our Nordic colleagues. The main message in the letter is that a predictable business environment is key for European competitiveness and for realizing the significant investments needed to strengthen the Union’s resilience and deliver on agreed decarbonization ambitions.

Furthermore, the Confederation already last year in its submission to the Clean Industrial Deal called for maintaining the marginal pricing system on the EU electricity market. At the same time, it is obvious that the EU needs to address the fact that, while Europe has been increasing its share of renewable electricity production, natural gas and other fossil fuels continue to set the prices for the electricity to a very high degree. But rather than blaming marginal pricing, we believe that additional dispatchable, cost competitive and fossil free power is needed to drive down prices in the European electricity system, through replacing and phasing out the more expensive price setting fossil power.

Since 2022, it has been painfully evident that the dependence of natural gas imports from Russia and structurally higher gas prices have made EU electricity prices less competitive. Now, the Union’s energy policy’s reliance on the smooth sailing of LNG carrying vessels through the Hormuz Strait is presenting new and additional grave challenges to EU resilience and energy markets. It is clear that in the new geopolitical realities of the world, dependence on fossil fuels will continue to be risky.

It isn’t a quick fix to the structural problem on the EU energy market. But any short-term solution that the European Council concludes next week should in our view avoid disincentivizing tackling the structural problem of Europe’s energy supply, i.e. the need to phase out the dependency of risky and expensive fossil fuels from the power mix.