Europe’s regulatory retreat raises doubts over long-term competitiveness and climate ambition

In February, Emmanuel Macron warned that Europe faced a “geopolitical and geoeconomic emergency”, a language that captured the mood in Brussels ahead of a summit dominated by competitiveness. The French president argued that the continent needed to remove barriers to growth and invest more aggressively if it was not to be overtaken by American technology and Chinese imports.

That urgency has helped push climate policy down the agenda. In early 2025, EU lawmakers sharply reduced the reach of corporate sustainability reporting rules, cutting the number of companies covered by as much as 90%. In December, parliamentarians delayed the EU law aimed at curbing global deforestation, while another measure designed to end new combustion-engine car sales by 2035 was also weakened. In each case, competitiveness was cited as a reason for easing the rules.

For business leaders and policymakers, the central question is whether simplification is becoming a euphemism for retreat. Andreas Rasche, a professor at Copenhagen Business School, argues that streamlined regulation can be sensible, but warns that the concept becomes problematic when it is used to justify broad deregulation. If Europe keeps moving in that direction, he says, the rules shaping climate-related business decisions may be written elsewhere.

That concern is especially acute in sectors where investment decisions are long-lived and capital intensive. Hanna Ahlström, senior adviser and sustainability business developer at the Oslo consultancy Æra, says the case for lower compliance costs is straightforward. What is less certain, she says, is whether the savings will be channelled into the kind of investment that genuinely improves competitiveness. Lower overheads do not automatically make firms stronger if the money is not reinvested into new capabilities, technology or market positioning.

That uncertainty matters because Europe’s policy volatility can deter the very firms the bloc wants to encourage. Marcin Menkes, an associate professor at the Warsaw School of Economics and Vrije Universiteit Brussel, says companies make major bets on the assumption that rules will endure. When governments change course, firms that moved early into cleaner technologies may end up absorbing higher costs without enjoying the advantage of being first. In his view, policy stability is essential if Europe wants innovators to take the risk of deploying new environmental solutions.

The carbon border adjustment mechanism has become a test case for that argument. The policy, which began applying on 1 January 2026, is intended to level the playing field by charging imports of products such as steel, cement, aluminium, fertilisers, hydrogen and electricity according to their embedded emissions. According to Yara International, the Norwegian fertiliser group, any suspension of CBAM would force it to reconsider a major low-carbon ammonia project in the United States. Speaking to Reuters earlier this year, chief executive Svein Tore Holsether said the mechanism strengthened the business case for low-carbon ammonia, but that uncertainty around the rules made it harder to justify more expensive investments.

For some exporters, however, the same policy represents an opening rather than a threat. Canada, with large hydro-powered aluminium and steel sectors, is well placed to benefit from the EU’s demand for lower-carbon materials. Michael Lenaghan, associate director at Anthesis in the UK, says Canadian producers are often less carbon-intensive than competitors in China, India and Turkey, and that this can translate into real cost advantages for European importers seeking to cut emissions in their supply chains. In his view, the trade disruption caused by higher U.S. tariffs makes the European market especially attractive.

That illustrates the broader point: climate regulation does not necessarily conflict with industrial strength. If the rules are clear and durable, they can reward firms that invest early and penalise those that lag behind. Rasche argues that the debate should not be framed as a choice between climate ambition and competitiveness. In the short term, softer rules may lower costs. Over the longer term, he says, industrial strength depends on decarbonisation.