Italy's Carbon Reform and the ETS Decree

The Italian government’s February decree seeks to blunt the impact of the EU Emissions Trading System by reimbursing gas‑fired power plants for their carbon allowances, effectively stripping ETS costs from wholesale electricity prices. By lowering the marginal price set by gas plants, the plan promises a 20‑30% reduction in power bills for industry and households, a tempting prospect as Italy grapples with record‑high gas prices and a 40% gas‑fire generation mix that makes its electricity among Europe’s most expensive.

Economists and energy lawyers warn that the scheme could create serious market distortions. Shifting ETS costs to consumers breaches the polluter‑pays principle, raises state‑aid questions, and challenges the EU’s cost‑reflective bidding rules. Analysts note that cheaper wholesale prices might boost electricity exports, benefiting neighboring markets more than Italian users, while renewable power purchase agreements could become costlier, undermining investment confidence. The European Commission is expected to scrutinise the decree closely, and many predict it will face legal hurdles before any suspension of the ETS can be approved.

Beyond Italy, the proposal highlights a broader tension between short‑term competitiveness and long‑term decarbonisation. Geopolitical volatility, especially volatile LNG supplies, fuels calls for a more resilient, diversified fuel mix, yet ad‑hoc national interventions risk fragmenting the EU internal energy market and slowing the renewable transition. If the decree stalls, it could prompt a coordinated EU‑wide review of ETS design, balancing industry cost pressures with climate objectives and preserving the credibility of Europe’s climate leadership.