Merz Leverages Energy Crisis to Challenge EU Carbon Market
Germany's industrial cost pressures and Middle East supply shocks are fracturing EU climate consensus ahead of critical Green Deal implementation.
Germany is exploiting a Middle East-driven energy crisis to mount the most serious challenge to EU climate regulation in a decade, threatening to fracture carbon market rules just as the bloc prepares to operationalize its carbon border adjustment mechanism and review emissions targets for 2040.
Chancellor Friedrich Merz’s government has openly questioned the EU Emissions Trading System’s compatibility with industrial competitiveness, citing electricity costs 2-3 times higher than China and the US, according to The Conference Board. German manufacturing output remains 10% below 2019 levels, with energy-intensive sectors down 20%. The chemical industry alone has contracted 21% since 2018, while turnover fell 14% in 2023 to €225.5 billion, per Cefic.
Merz stated at a February 11, 2026 gathering with industrial leaders that the EU ETS “may need to be revised” if it undermines competitiveness, sending carbon prices sharply lower the next day, Bloomberg reported. The comment marked the first time a sitting German chancellor publicly challenged the core climate mechanism since its 2005 launch.
Middle East Supply Shock Intensifies Pressure
The Iran conflict has transformed Germany’s energy calculus. Brent crude trades at €101 per barrel with the Strait of Hormuz effectively closed, CNBC reported. Gas prices nearly doubled following strikes in late February. Producer prices surged 2.5% month-on-month in March, with heating oil up 53.4% and motor fuel up 22.3% versus February, according to data from Germany’s statistical office.
Germany slashed its 2026 growth projection to 0.6% from 1.3% on March 31, while raising its inflation forecast to 2.8%, citing Iran war energy costs, per Prism News. The country now sources 92% of its LNG imports from the US—up from 82% in 2023—having invested €9.8 billion in LNG infrastructure through 2038, Sustainability Magazine reported, citing Institute for Energy Economics and Financial Analysis research.
“The Middle East crisis is Germany’s biggest wake-up call to electrify since Russia’s 2022 invasion of Ukraine.”
— Ana Maria Jaller-Makarewicz, Lead Energy Analyst, IEEFA Europe
Industrial Lobby Gains Leverage
Export-dependent sectors are exploiting the crisis to demand regulatory relief. The automotive and chemical industries have intensified lobbying ahead of the EU’s mid-2026 review of the Fit for 55 package and full operationalization of the Carbon Border Adjustment Mechanism. Germany allocated €100 billion of a €500 billion infrastructure fund to climate action while launching a €6 billion industrial decarbonization program featuring 15-year carbon capture contracts, Jones Day reported in October 2025.
Yet Berlin’s official position now demands that ETS reforms “ensure that decarbonization frontrunners are not disadvantaged” while providing “planning certainty for market participants,” according to a government document cited by Energy Connects. The language signals Germany will use its economic weight to reshape carbon pricing rules during the review process.
Brussels-Berlin Collision Course
The Commission’s push for a clean industrial deal and 90% emissions cuts by 2040 is colliding with German industrial pragmatism. Merz has stated “it can’t be that it’s always the last one that sets the pace” on EU decision-making, signaling Germany may prioritize national interests over climate consensus, Internationale Politik Quarterly reported.
Commission President Ursula von der Leyen and Merz clashed directly over ETS reforms in February 2026, according to E&E News. The confrontation exposed fractures in the climate coalition that delivered the Green Deal—fractures now widening as five German state elections in 2026 see the far-right AfD threatening significant gains, forcing Merz’s fragile coalition to demonstrate responsiveness to industrial concerns.
Germany under Merz (since May 2025) has pivoted toward “climate pragmatism,” prioritizing manufacturing competitiveness over emissions targets. His government faces mounting pressure from export sectors that account for nearly half of GDP while navigating a domestic political landscape where climate regulation is increasingly viewed as an economic liability rather than an investment opportunity.
An EU think tank deputy director noted that “constraints posed by the Green Deal increasingly are seen as a nuisance,” according to analysis by Clean Energy Wire. The shift in rhetoric reflects broader anxiety about industrial competitiveness amid persistent energy price differentials and geopolitical supply vulnerability.
What to Watch
The mid-2026 ETS review will reveal whether Germany can rally industrial member states—potentially including Italy, Poland, and Spain—into a blocking coalition demanding carbon market revisions. Berlin’s ability to extract concessions depends on whether Middle East tensions persist through summer, keeping energy costs elevated and industrial lobbying pressure acute. Monitor German state election results for AfD gains that could force further climate policy retreats.
The Commission’s Fit for 90 package negotiations will test whether Brussels can maintain climate ambition while addressing legitimate competitiveness concerns, or whether the combination of energy shocks and industrial lobbying fractures the climate consensus that has defined EU policy for two decades. CBAM’s full operationalization by year-end creates a hard deadline for resolving these tensions before trade partners begin responding to EU carbon border measures.