Based on analysis and reporting by Thomas Mramor and Simone Tagliapietra for Bruegel
The European Union’s Emissions Trading System (EU ETS) is set to undergo a major review in 2026 at a moment of rising political pressure to weaken key elements of the framework in the name of competitiveness. Recent analysis by Bruegel cautions that this debate risks overlooking a substantial body of empirical evidence showing that the EU ETS has delivered meaningful emissions reductions with limited economic disruption. Since its launch in 2005, the system has covered carbon-intensive industry, power generation, and intra-European aviation and maritime transport, accounting for roughly 40% of EU greenhouse gas emissions, and is estimated to have reduced emissions by 14–16% between 2005 and 2020 relative to a no-policy counterfactual.
The analysis further highlights that the effectiveness of the EU ETS has depended not only on current carbon prices, but on credible long-term scarcity signals that shape expectations and investment decisions. While the power sector has decarbonised rapidly under a more stringent allocation regime, industrial sectors have progressed more slowly, in part due to extensive free allocation, which has often resulted in overallocation, windfall profits, and weaker incentives to invest in transformation. As CBAM enters its definitive phase from 2026 and free allocation is set to decline, the interaction between carbon pricing, industrial competitiveness, and the use of ETS auction revenues will become central to the system’s future credibility and economic impact.
FACS Perspective
The upcoming EU ETS review marks a critical inflection point for carbon pricing in Europe. The evidence increasingly suggests that the core challenge is not the existence of carbon pricing, but how its costs, incentives, and revenues are structured and deployed. As free allocation declines and CBAM reshapes trade exposure, carbon costs will become a more explicit and durable input into industrial decision-making.
At FACS, we view this shift as reinforcing the need for disciplined carbon cost forecasting, granular exposure analysis, and strategic use of market instruments. Preserving credible long-term price signals while aligning carbon revenues with real decarbonisation investment will be essential to maintaining both competitiveness and climate ambition. Companies and policymakers alike will need to treat the EU ETS not as a constraint to be weakened, but as a financial and strategic tool to be actively managed in an increasingly integrated carbon and industrial policy landscape.
You can read the full Bruegel analysis here.
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