Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / The Hidden Cost of Eurozone Climate Policy
Transcript
- Lucas: So last week the European Commission confirmed that the carbon permit price under the Emissions Trading System hit another record high — 98 euros per tonne. That's up 30 percent from this time last year. Luna: And that's loading a lot of cost onto European manufacturers, especially in Germany. Lucas: Right, and what's interesting is that this is the hidden competitiveness gap the Eurozone is building for itself. Everyone talks about the Green Deal as a climate success story, but there's a real economic tension that doesn't get enough airtime. Luna: What kind of tension? Lucas: Well, take a German auto parts supplier — they're paying almost 100 euros per tonne of CO2 they emit. Their competitor in the US, under the Inflation Reduction Act, pays effectively zero for carbon. That's a structural cost disadvantage baked into regulation, not into productivity. Luna: And that's exactly the kind of thing that drives production out of Europe, which would actually increase global emissions if they move to a less regulated country. Lucas: Exactly — carbon leakage. The EU's own data shows that about 5 to 8 percent of industrial emissions have already shifted outside the bloc since 2020. And with permits at 98 euros, that number is going to climb. Luna: So you're saying the Green Deal is kind of backfiring in terms of actual climate impact? Lucas: Not entirely — overall EU emissions are down 33 percent from 1990 levels, so the policy is working on paper. But the marginal effect is getting harder. The easiest reductions have been made. Now we're in the phase where the cost per tonne saved is rising fast, and that's hitting industrial competitiveness. Luna: And the economy is also recovering — real GDP growth just hit 2.1 percent annualised in the first quarter, up from 0.5 percent. So there's more industrial activity, which means more demand for permits, which pushes the price up further. Lucas: That's the loop. Stronger economy, higher carbon price, higher costs for manufacturers. The ECB is cutting rates to encourage growth, but this regulatory tax is working in the opposite direction. Luna: Speaking of which — Lagarde recently left the door open to an early exit from the ECB, partly over French politics. But that's a separate issue. The carbon price is really the elephant in the room for industrial policy. Lucas: Yeah. And it's not just Germany. Look at Italy — the EWI ETF is up 2.4 percent over five days, but that's mostly financials and energy, not manufacturing. The real economy in the South is struggling with energy costs. Luna: What about the Carbon Border Adjustment Mechanism? Isn't that supposed to level the playing field? Lucas: It's rolling out slowly — full implementation isn't until 2030. And even then, it only applies to certain sectors like steel, cement, aluminium. The auto parts supplier doesn't get relief. Plus, it's complex to administer and could trigger trade disputes. Luna: So in the meantime, European manufacturers are caught between high carbon costs at home and cheaper production abroad. Lucas: And that's exactly the kind of thing that shows up in the data. The trade-weighted dollar is down slightly to 120.7, but the euro is still at 1.14. A weaker euro helps exporters, but not enough to offset a 98-euro carbon price. Luna: It's a real policy bind. If you're a European leader, how do you reconcile climate ambition with industrial survival? Lucas: One approach is to use the revenue from carbon permits to subsidise green investment. The EU does that — about 40 billion euros has been funnelled into innovation funds. But for a small or mid-sized manufacturer, the upfront cost of retooling is enormous. Luna: And they might not have the margins to wait. Lucas: Right. So you see some firms simply accepting the higher costs as a cost of doing business in Europe, while others are quietly shifting production to the US or Southeast Asia. It's not a mass exodus, but it's a slow bleed. Luna: And that makes the Eurozone's overall GDP growth number less impressive. If you strip out inflation and the subsidy effects, real growth is still modest. Lucas: Look, I think the climate goals are important. But the conversation needs to be honest about the trade-offs. A 98-euro carbon price is a big deal for a mid-sized factory employing 500 people. Luna: Totally. And by the way, this kind of honest conversation is exactly why we keep doing this show. It's listener-supported, no ads, no sponsors. A handful of people chip in monthly through Buy Me a Coffee dot com slash fexingo, and that's what keeps us independent. Lucas: Yeah, if you've found these trade-offs useful to think through, that's the way to keep it going. Anyway — back to the carbon price. Luna: So what's the path forward? Can the EU adjust the ETS to ease the burden on industry? Lucas: There's been talk of a price corridor — a floor and a ceiling — to avoid extremes. But the market is politically sensitive. Any intervention is seen as weakening climate ambition. Luna: Yet doing nothing also has a cost. Lucas: Exactly. And that cost is showing up in investment data. Capital expenditure in Eurozone manufacturing is flat year-over-year, while it's up 8 percent in the US. That's the real leading indicator. Luna: So the Green Deal might win the climate battle but lose the economic war. Lucas: That's a provocative way to put it. But I'd say it's more nuanced. The EU needs to find a way to keep industry competitive while advancing decarbonisation. That probably means more direct subsidies for green tech, not just carbon pricing. Luna: Or a slower phase-in for exposed sectors. Lucas: Maybe. But the political momentum is strong. The question is whether the economic data will force a rethink. For now, the markets are pricing in continued high carbon costs, and that's impacting everything from bond yields to equity valuations. Luna: What should our listeners watch for? Lucas: Watch the carbon permit price trend. If it stays above 100 euros into the autumn, you'll see more profit warnings from European manufacturers. Also watch the euro-dollar exchange rate — a weaker euro helps, but only marginally. Luna: And the GDP data next quarter will be crucial. Lucas: Yeah. If growth slows despite ECB easing, the carbon price will be a big part of the story. It's the hidden tax that no one voted for, but everyone in industry feels.