German Chancellor Friedrich Merz has urged Brussels to resist calls to soften the European Union's carbon market, warning that reopening the hard-won political compromise on carbon pricing would undermine investment certainty. In a letter seen by Euronews, Merz told European Commission President Ursula von der Leyen that the EU must ensure predictable CO2 prices for businesses.
"It is extraordinarily important that the EU ensures investment certainty in emissions trading," the letter reads. The intervention comes as the European Parliament and EU governments negotiate the Commission's July 17 proposal to align the Emissions Trading System (ETS) with the bloc's 2040 climate target.
The reform has become increasingly contentious, with several EU countries seeking to weaken or even scrap parts of the system, blaming carbon pricing for high electricity costs. Merz warned that uncertainty over the future of the ETS risks deterring investment in Europe's energy and industrial sectors.
His stance contrasts sharply with that of his own Economy and Energy Minister, Katherina Reiche, who has pushed to relax carbon rules and extend free emissions allowances for industry. The ETS requires power generators and energy-intensive industries to pay for their greenhouse gas emissions, though some heavy industries receive free allowances to help them cope with decarbonisation costs and international competition.
Merz rejects further changes to ETS2
Merz took an even firmer line on ETS2, the EU's second carbon market, which is due to take effect in 2028 and will extend carbon pricing to fuels used in road transport and heating buildings. He argued that the compromise reached in early 2026 to delay its introduction until 2028, alongside measures to stabilise prices, should be sufficient to keep costs under control.
The German Chancellor rejected any further adjustments and insisted that negotiations on ETS1 and ETS2 must remain separate. His position could put Berlin at odds with governments seeking further concessions on ETS2, particularly those concerned about the political and social impact of higher fuel and heating costs on households.
Several member states have called for additional delays or changes to ETS2's price-stabilisation mechanism, which allows more emissions allowances to enter the market if carbon prices rise too sharply. Merz's letter amounts to a warning against allowing political pressure over energy costs to trigger a broader retreat from the EU's carbon market.
He argued that the impact of carbon pricing on electricity bills should be addressed through existing compensation mechanisms rather than changes to the ETS itself. These mechanisms allow governments to offset indirect carbon costs faced by electricity-intensive industries, helping to protect European manufacturing.
Merz called on von der Leyen to conclude the ongoing reform swiftly, citing competitiveness concerns without weakening the carbon market. "European companies in the energy and industrial sectors have built their business models on the expectation of reliable CO2 price signals," the letter says.
Reacting to the letter, Linda Kalcher, executive director of the think tank Strategic Partnerships, said Merz's direct intervention "carries real weight". "His letter sends an unmistakable signal: a robust ETS is vital for industrial competitiveness and future investment. So I expect Germany — and him — to step up and lead to help broker an agreement in December," Kalcher said.
The German intervention comes amid mounting pressure on the EU to soften its climate policies in response to concerns over industrial competitiveness and household energy bills. While acknowledging that industry needs protection from high electricity costs, Merz wants that support delivered through compensation mechanisms rather than by weakening the carbon price signal that underpins the ETS.
As the debate intensifies, the outcome of the negotiations will be closely watched by investors and policymakers across the continent. The EU's carbon market is a cornerstone of its climate strategy, and any significant changes could have ripple effects on energy prices and industrial investment. For now, Berlin has drawn a clear red line: the carbon market must remain intact.
