Rising energy prices, declining industrial competitiveness, and the risk of further deindustrialization in Europe—these are the main threats identified in the latest report by the Warsaw Enterprise Institute, titled “In Search of an Optimal Climate Policy.” The report’s authors argue that the current ETS system is placing an increasing burden on the European economy and could weaken the EU’s position vis-à-vis the United States and China.

The European Union's climate policy is increasingly detached from the fundamental economic problems Europe faces today. The EU is entering a period of structurally weaker economic growth, a growing development gap with the United States, and increasing competitive pressure from China. One of the most visible symptoms of this process is the widening gap in GDP per capita between Europe and the US and the declining share in the world’s GDP. At the same time, citizens are increasingly feeling the effects of rising energy prices. High electricity and heating costs are causing public frustration and hindering the development of industry, services and households. EU climate policies are increasingly being cited as a key factor behind these rising costs. Indeed, many of the solutions adopted, particularly the EU Emissions Trading System (ETS), impose significant costs on businesses, particularly those in energy-intensive sectors such as heating and manufacturing. In extreme cases, this leads to situations in which entire industries operate on the verge of profitability, unable to cease production (critical industries) and fined for not buying and surrendering CO2 allowances, even during years of a price bubble. Other sectors either reduce their operations or move them out of Europe (carbon leakage). This raises a critical question: Does the current climate policy model really promote both decarbonization and economic growth in an acceptable way?

According to the report, the cost of operating the ETS system for European companies currently amounts to approximately €46 billion per year. Once ETS 2 is fully implemented and free allowances are phased out, this cost could reach approximately €140 billion per year.

Key findings of the report:

• The ETS system cost the European economy approximately €46 billion as early as 2023.
• Once the ETS 2 is fully implemented, costs could rise to around 140 billion euros per year.
• According to the ETS report, this undermines the competitiveness of European industry vis-à-vis the United States and China.
• The authors point out that the ETS market does not function like a traditional free market and is susceptible to speculation.
• Economic analyses have shown the presence of price bubbles in the EU Allowance market between 2017 and 2023.
• The report warns against further “carbon leakage,” or the relocation of production outside the EU.

The authors of the report emphasize that Europe is entering a period of structurally weaker economic growth and that high energy prices are becoming a major factor undermining industry and investment.

“Europe is increasingly losing out in economic competition with the U.S. and China. High energy costs and growing regulatory burdens are limiting European companies’ ability to invest and grow,” notes Marek Lachowicz, the report’s main author.

The report notes that the ETS system generates not only direct costs associated with the purchase of emission allowances but also additional administrative, regulatory, and investment costs. According to the authors, another issue is the high volatility of EUA prices, which hinders long-term investment planning.

The planned implementation of the ETS 2, which covers road transport and building heating, is a particular cause for concern. According to forecasts cited in the report, the price of allowances could exceed 200 euros per ton of CO2 by 2030.

The authors of the report propose moving away from the current climate policy model in favor of more free-market solutions that support technological innovation and decarbonization investments.

“Decarbonization does not have to mean ever-rising costs and regulations. Europe needs a system that supports investment and innovation rather than undermining the economy’s competitiveness,” the report’s authors emphasize.

Decarbonization Tax Cuts (“DTCs”) and Rapid Innovation Funds (“RIFs”) as viable free market-based alternatives

⇒ Decarbonization Tax Cuts are a Corporate Income Tax (CIT) rate reduction (approx. 5 percentage points) on income from the lowest emission products in the highest emission sectors. DTCs require no complex tax reform and are equally accessible to businesses of any size, unlike traditional subsidies that favor larger firms. With tax costs of just €3.55-17.76 billion, they could generate an additional €6.75-44.4 billion in GDP per year. This corresponds to approximately €15–99 per EU citizen.

⇒ Rapid Innovation Funds (RIF) provide an internationally reciprocal tax exemption on interest income from debt used to finance investment in Property, Plant & quipment (PP&E). RIFs are technology-neutral and accessible to every investor. Volume of RIF-eligible investment amounts to over €700 bn across the EU. With tax costs of just €1.94-4.19 billion, they could generate an additional €3.68-10.48 billion in GDP per year. This corresponds to approximately €8–23 per EU citizen. Under the report’s optimistic scenario, the combined avoided ETS burden and estimated DTC/RIF effects imply a potential benefit of up to €245 per capita

The Warsaw Enterprise Institute prepared the report in collaboration with the Responsible Energy Transition Association and the Climate & Freedom International Coalition.