- Renewed volatility in global energy markets following the escalation around Iran coincides with intensifying political pressure on the EU Emissions Trading System (ETS) and elements of electricity market design.
- Together, these developments are likely to dominate a series of political discussions between European governments and institutions from March 16-20 which will shape both the EU’s domestic and international response to the mounting crisis.
- The crisis exposes a fundamental truth: the global energy system’s core vulnerability is rooted in the geographic, geopolitical and logistical risks inherent to fossil fuels. Every unit of fossil fuel comes with its own trade-offs linked to exposure to global price hikes, geopolitical chokepoints, and coercion from foreign actors. The current crisis has once again underscored the role of the energy transition as critical to delivering economic resilience and national security.
- European leaders face a difficult balancing act: stabilise markets and provide relief measures now, while avoiding a short-term approach that locks Europe further into the structural vulnerability that comes with fossil fuel dependence. At the heart of this challenge will be finding ways to further accelerate measures that lower exposure to global fuel market volatility and geopolitical disruptions.
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While Europe’s direct exposure to the Strait of Hormuz is relatively limited, the increasingly globalised LNG market means Europe will still face higher prices as it competes with Asian buyers. In fact, the impact is already visible in power, gas and oil markets, and European governments are under intense pressure to react. Analysis by the FT shows that in the EU, Italy, Germany, and France are likely to be most affected by surging energy prices.
European gas storage levels are low: 29% on average as of March 12th. France and Germany are close to 22%, Netherlands at 9%. Those low levels are well below seasonal averages and among the lowest levels since the 2022 crisis. With LNG prices likely to increase, the cost of refilling gas storage may be severe for Europe and the EU may struggle to reach the mandated 90% of storage refills ahead of the next winter.
History offers a stark warning. Between September 2021 and June 2023, EU governments spent €651 billion to shield citizens, businesses, and energy-intensive industries from fossil fuel shocks—a relief effort that strained public finances and worsened debt pressures well beyond Europe. Yet the crisis also illustrated how quickly the EU could pull together to tackle short term impacts while also building long term structural resilience: additional wind, solar, heat pumps and efficiency measures helped the EU contain inflation and save on fossil gas imports.
In the last 5 years, additional wind and solar capacity in the EU has saved €59bn that would have been spent on fossil fuel imports for power generation.
From 16–18 March, EU ministers will convene in energy, environment, and general affairs configurations, culminating in the European Council, where heads of state will weigh national, European, and international responses. The decisions made here will reverberate across policy areas and borders.
Leaders may be tempted by quick fixes – emergency market interventions, relief packages for households and industries – but history shows that short-term measures alone are insufficient.
This year’s conflict in the Middle East is just the latest geopolitical event to disrupt fossil fuel and commodity markets. Any meaningful response must reduce structural vulnerabilities and consider the asymmetric impacts on Europe’s partners; accelerate decarbonisation and electrification, rather than weaken its support and investment framework; unlock investment commensurate to the scale of the challenges facing Europe.
The EU Emissions Trading System (ETS) under pressure
In recent weeks, calls to suspend or revise the ETS have intensified, often paired with criticism of electricity market design. A small but exaggerated group of actors are blaming the ETS for high energy prices and industrial competitiveness pressures.
In fact:
- There is significant support for the instrument, from businesses and industries, EU institutions, and European governments.
- By 2024, the ETS had generated €250 billion in predictable public revenues, with annual revenues of approximately €39 billion, and is expected to raise an additional €200 billion by 2030. This expands Europe’s investment capacity without increasing debt or taxes.
- Fossil fuel volatility and geopolitical tensions—not the ETS—remain the main drivers of high energy costs.
- The ETS’s direct costs on industry are minimal (under 0.2% of GVA[i]). When factoring in revenue recycling and the Innovation Fund, industry is currently a net beneficiary, receiving at least four times more support than it has paid in carbon costs since 2021[ii].
The upcoming ETS review (Q3 2026) offers a strategic opportunity to support industrial decarbonisation, ensure investment certainty, and strengthen Europe’s resilience in an increasingly volatile energy landscape.
[i] E3G estimate based on EEA and Eurostat
[ii] E3G estimates based on EEA and Annual Carbon Market Reports
Quotes
Manon Dufour, Executive Director, E3G Brussels, said:
“As Europe braces for what could be another energy crisis, it should remember that it has been here before and knows what to do. The most effective and durable response is to tackle the structural vulnerabilities in its energy system while supporting global partners on the same path. The most damaging step now would be to weaken the stable and investable framework that has helped deliver these solutions so far.”
Domien Vangenechten, Programme Lead, EU Industry, said;
“Investor certainty comes from predictability and real enablers, not diluted carbon pricing. With companies and investors urging leaders to back a strong ETS, the focus must be on delivering what industry truly needs: stronger lead markets for demand pull, access to affordable clean energy and infrastructure, and predictable ETS revenue recycling into output-based incentives for decarbonisation.”
Richard Smith, Senior Policy Advisor, Global Energy Transition, said:
“Fossil fuel markets are tightly interconnected, so a disruption anywhere quickly pushes prices up everywhere. Emerging economies are often hit hardest, and the pressure can spill into wider instability. The most durable response is reducing exposure to fossil fuel volatility by scaling up renewables – something the EU should treat as a strategic priority both at home and in its neighbourhood, with initiatives like T-MED at its core.”
Rheanna Johnston, Senior Policy Advisor EU Energy Transition, said:
“Europe’s high energy prices must be tackled, but attacking existing legislation is counterproductive. Member states already have a toolbox of effective solutions: fix electricity taxation, enable flexibility, prioritise efficiency, and provide targeted support. And in the meantime, they can quickly agree on delivering modern grids for a clean electric future. That’s the emergency response Europeans need and deserve.”
Tefta Kelmendi, Programme Lead, Foreign Policy and Climate Cooperation, said:
“This is not the first energy crisis Europe has faced in recent years, and in today’s geopolitical environment it is unlikely to be the last. Such recurring crises underscore the strategic importance of boosting investments in clean energy to build long-term resilience. They also highlight the need for the EU to see interest in its values-based foreign policy and defend its regulatory market power, which make for two of its strongest levers in a contested rules-based order and an increasingly competitive and coercive global trading environment.”
Available for comment
Manon Dufour, Executive Director, E3G Brussels, (EN/FR), Manon.dufour@e3g.org | +32 4 77 76 78 01
Domien Vangenechten – Programme Lead, EU Industry (EN, NL) – Industry; Clean Industrial Deal, Domien.vangenechten@e3g.org | + 32 (0) 474 871 827
Rheanna Johnston – Senior Policy Advisor, EU Energy Transition (EN, DE) – Energy; Grids, Rheanna.johnston@e3g.org | +32 492 97 8250
Richard Smith, Senior Policy Advisor, Global Energy Transition, (EN/FR), Richard.smith@e3g.org | +32 490 00 05 15
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