ETS Price Rise a Risk if Iran War Prompts Gas-to-Coal Switch, Says ING

Why It Matters

A spike in ETS prices would directly increase operating costs for manufacturers and utilities, reshaping profit margins and the EU’s decarbonisation pathway.

Key Takeaways

• Coal resurgence could lift EU ETS allowance price by 20‑30%
• Energy‑intensive sectors face up to 5% higher operating costs
• Tightening emissions cap amplifies price sensitivity to fuel mix changes
• ING advises accelerated renewable investment to mitigate cost risk

Pulse Analysis

The ongoing conflict between Iran and its regional adversaries has unsettled natural‑gas supplies to Europe, prompting some member states to consider coal as a stop‑gap. While coal can fill short‑term generation gaps, it also reintroduces high‑carbon emissions that fall under the EU Emissions Trading System. ING’s analysis highlights that the ETS, which caps total emissions and forces firms to purchase allowances, is already operating near its limit. A renewed coal burn would therefore tighten allowance demand and set the stage for price pressure.

Carbon‑allowance markets react sharply when supply‑side shocks tighten the cap. Historical data shows that a 10‑percent shift from gas to coal can lift ETS prices by roughly 20‑30 percent, translating into an additional €10‑15 per tonne for compliance. For energy‑intensive industries—steel, cement, chemicals—this translates into up to a 5‑percent rise in operating expenses, eroding margins and potentially prompting relocation to jurisdictions with looser carbon regimes. Moreover, higher allowance costs can accelerate the cost‑pass‑through to end‑consumers, feeding inflationary pressures.

Given the price risk, ING recommends that European firms fast‑track renewable‑energy projects and secure long‑term power‑purchase agreements that lock in low‑carbon electricity. Policymakers can also blunt price spikes by expanding the ETS reserve or linking the system to other global carbon markets, providing greater liquidity. Ultimately, the war‑driven gas‑to‑coal scenario underscores the strategic importance of decarbonisation: firms that embed clean‑energy pathways now will be better insulated from volatile carbon costs and regulatory uncertainty.