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10/02/2026

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The EU ETS at a Crossroads: Competitiveness Concerns and Policy Scenarios

Author

Joseph Dellatte

Head of Energy and Climate Studies and Resident Fellow

Why the EU ETS Is Being Questioned Today

The European Union Emissions Trading System (EU ETS) has been the cornerstone of Europe’s climate strategy since its launch in 2005. Under the ETS cap-and-trade scheme, a cap on total emissions is set and divided into tradable allowances; companies must hold an allowance for each ton of CO₂ they emit. This mechanism forces polluters to pay for emissions, internalizing the carbon cost into business decisions, while allowing flexibility through trading so that reductions occur where cheapest.

The ETS’s appeal lies in its technological neutrality (it doesn’t prescribe how to cut emissions, only creates a price signal) and its cost-effectiveness, theoretically achieving emissions cuts at the lowest overall cost to the economy, with little impact on public finances.

In practice, the EU ETS has driven significant emissions cuts in covered sectors - by 2023, emissions from European power plants and heavy industry had fallen ~47% compared to 2005.

With various ways to decarbonize, Europe’s bet was that a robust carbon price signal would incentivize such transformations and stimulate green innovation, without picking winners. Indeed, studies have found the ETS has contributed to an increase in low-carbon patenting and incremental innovation in covered industries.

For years the ETS suffered from low prices (due to overallocation and economic crises), delaying its impact. Reforms (like the Market Stability Reserve) eventually tightened supply, and carbon prices surged from under €10 a few years ago to ~€80 per ton recently (peaking above €100 in 2023). This strengthened the decarbonization signal - but also intensified costs for European industries.

As climate ambition ratchets up, the political backlash has grown: companies and some Member States voice concern that the ETS imposes burdens that competitors abroad do not face. Based on industrial competitiveness worries, some question whether Europe’s climate leadership is tenable amid global economic rivalry and an uneven playing field on energy and climate costs.

This paper examines three possible reform scenarios for the EU Emissions Trading System and assesses their implications for Europe’s climate ambition and industrial competitiveness.

Key Highlights & Policy Takeaways

Carbon pricing has gone global, but the EU ETS remains uniquely stringent in price level, sectoral coverage, and ambition.
Most non-EU carbon markets deliberately shield domestic industry through low prices, free allocation, or limited scope.
This asymmetry creates a real competitiveness risk for EU industry, compounded by structurally higher European energy costs.
The ETS–CBAM package was designed as a coherent bargain: tighter ETS, end of free allocation, and border protection.
Weakening CBAM or extending free allowances would unravel this balance and undermine policy credibility.
Scrapping the ETS would provide short-term relief but destroy investment certainty, climate credibility, and innovation incentives.
A degraded ETS would repeat past failures: low effective prices, slow decarbonisation, and industrial stagnation.
The only viable path is to maintain ETS tightening and CBAM while scaling up industrial support.
ETS revenues should be front-loaded and recycled into large-scale industrial decarbonisation tools (e.g. CCfDs, lead-market support).
Competitiveness should shift from low-cost carbon-intensive production to early leadership in low-carbon industrial technologies.

The EU ETS at a Crossroads: Competitiveness Concerns and Policy Scenarios (12 pages)Download

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