The Strait of Hormuz energy crisis shows the EU’s carbon pricing is the right approach

The Strait of Hormuz energy crisis shows the EU’s carbon pricing is the right approach

The Strait of Hormuz energy crisis shows the EU’s carbon pricing is the right approach Expert comment thilton.drupal 24 April 2026 The current crisis shows that Europe must transition to renewables to reduce its dependency on volatile fossil fuels. This week’s AccelerateEU plan rightly reaffirms that goal. The global energy crisis caused by the closure of the Strait of Hormuz has demonstrated the vulnerability of relying on fossil fuels. Even if the Strait reopens in the near future, traffic flows are likely to be lower, with insurance premiums remaining high and Iran monitoring shipping through the Strait. QatarEnergy’s production facilities also remain damaged, impacting the supply of liquified natural gas (LNG) from the world’s largest exporter. As a result, energy prices are projected to remain high for the coming months at least. Even though Europe only imports roughly 10 per cent of its LNG from the Gulf, the global supply constraint has already caused European energy prices to rise, as Europe competes with Asian buyers to bid for non-Qatari LNG. Since the war started, the European Union (EU) has paid an additional €24 billion for fossil fuel imports. The scale of the crisis has led to higher inflation and lower growth forecasts globally, with the IMF warning that eurozone countries are among the hardest hit due to their lack of energy independence. In response, the European Commission (EC) released the AccelerateEU package on Wednesday. The package contains a wide range of non-binding measures aimed at addressing rising energy costs and reducing ‘dependency on volatile fossil fuel markets.’ These include short-term measures such as deeper coordination between members on storing gas and targeted temporary subsidies alongside ways to lower energy consumption. It also strengthens existing long-term solutions such as electrification incentives and transnational grid interconnectivity. The package’s influence is likely to remain limited, given most fiscal policy remains national, and the measures are non-binding. However, it is a welcome step. Crucially, it maintains the push towards decarbonization using existing market-based instruments such as carbon pricing, through which Brussels can exert most influence. Carbon pricing To reduce Europe’s exposure to recurrent geopolitical shocks, domestic reliable clean energy is key. This has already been demonstrated in countries such as Spain or Greece, whose increased share of renewables has helped to cushion the impact on electricity prices. While renewables only provide intermittent energy, this issue can be solved by complementing renewables with batteries, which can now store energy for longer periods and are over 90 per cent cheaper than in 2010. The primary tool to incentivise the transition to renewables is carbon pricing. In Europe, this has been implemented primarily through the EU Emissions Trading Scheme (ETS), which caps the level of emissions the EU can emit. Under the scheme, each producer needs to buy an allowance for the number of tonnes of carbon emitted, with the allowance becoming more stringent every year. Carbon pricing remains the most efficient tool to drive decarbonization and raise revenues for the transition. The ETS has been successful in reducing emissions by half in the sectors it covers since it was launched in 2005. Though modestly increasing the price of electricity in the short-term, the ETS encourages decarbonization investments, reduces imports of fossil fuels, and ultimately leads to lower electricity prices in the long run. Without it, the EC estimates that Europe would ‘now consume’ an additional 100 billion cubic metres (bcm) of natural gas; it consumes roughly 300bcm annually today. Importantly, the ETS generates substantial revenues that can offset any increase in electricity price to vulnerable consumers if redistributed correctly. These revenues can also be used to fund decarbonization and clean energy investments. Carbon pricing has also been instrumental in phasing out coal, which beyond catastrophic climate impacts also imposes substantial health costs. Weakening the ETS could lead to increased coal use, especially as natural gas prices rise, as seen in 2022. Countries divided Despite its success, the ETS has been at the forefront of the European energy debate ahead of its comprehensive review in July. On one side, countries such as Italy and Czechia are pushing for a pause or loosening of the policy, based on concerns over industrial competitiveness. On the other, countries including Spain and Sweden oppose it being suspended or weakened. France and Germany remain supportive of the ETS but have called for ‘flexibility’ and suggested adjustments respectively. In December 2025, the EC postponed a proposed extension of carbon pricing to the construction and transport sectors that would have incentivized the shift away from gas boilers and petrol cars. Since then, the EC’s recent proposal to adjust the Market Stability Reserve allowances is set to modestly lower the carbon price paid by producers. This could be interpreted as an attempt to manage political tensions ahead of the ETS review in July, even though industry has thus far been a net beneficiary of the scheme through compensation and free allowances. Related work Integration or deregulation? Europe’s split over how to achieve sovereignty European countries have also responded to the current energy crisis with their own national initiatives. Notably, Italy issued an ‘energy decree’ that seeks to subsidize its natural gas producers for their carbon costs with the aim of reducing electricity prices for consumers. However, the ETS is estimated to account for just three per cent of Italian household electricity bills. This approach also further locks in natural gas use and fundamentally undermines the ‘polluter pays principle,’ which has been the cornerstone of European climate policy. Ad-hoc national policies like this risk distorting the investment environment and fragmenting the European market. Short-term needs, long-term goals In the short term, Europe needs LNG – despite its high cost – to meet its energy demand as it strives to cut out Russian fossil fuels. The buildout of LNG infrastructure across Europe in response to Russia’s 2022 invasion of Ukraine has helped provide a temporary buffer. The EU should also extend its proposed coordination of natural gas storage refilling to strengthen joint procurement with a single EU buyer, as the Draghi report outlined. Coordination with allies such as Japan and South Korea can avoid bidding wars for scarce LNG supplies. But in the long-term, Europe will need to transition away from LNG. Europe’s current reliance on importing LNG from the US has not removed the risks from market volatility and further interlinks European markets to US domestic energy policy. Even European domestic production is priced at the market rate and therefore doesn’t inherently lower prices.