For two decades, the EU Emissions Trading System (ETS) has done what many policies only promise: it has reduced emissions while the economy has expanded, driven innovation, and generated tens of billions in public revenue.
By putting a cap and price on emissions, the ETS makes pollution more expensive and clean alternatives more competitive. For a continent with limited domestic fossil fuel resources and high exposure to geopolitical energy shocks, instruments like the ETS are vital for competitiveness.
The ETS is a foundation of European competitiveness
The ETS is not just a climate instrument. It is one of Europe’s most effective industrial policies. Yet today, it is under pressure. Calls to weaken key elements of the system, from softening the Market Stability Reserve to extending free allocation of emission allowances, are being framed as necessary to protect the European industry. Faced with global competition and high energy costs, the argument goes, Europe must offer more flexibility to its ambitions. This logic is misguided.
Europe will not win a race to the bottom on deregulation from the U.S., whose competitiveness is underpinned by abundant fossil energy, lower industrial energy prices, and large-scale public subsidies. Nor will it outcompete China on cost, where industrial policy and scaling of renewables have driven energy prices down. Europe is constrained as a net-importer of fossil energy, this is now a clear vulnerability.
Europe’s competitive advantage lies elsewhere: in creating clear, predictable rules that channel capital into innovation and long-term investment in the industries of the future. The ETS is central to that strategy.
Weakening the ETS will backfire
Weakening it now would be a strategic mistake. Take the proposed changes to the Market Stability Reserve. Under the current system, if the total number of excess carbon allowances rises above 400 million, the amount above that limit is cancelled. This ensures that the carbon market remains tight and effective. Removing this automatic cancellation risks reintroducing structural oversupply, a problem that plagued the ETS in its early years and undermined its effectiveness. Even the perception that surplus allowances could return to the market is enough to weaken long-term price expectations.
And expectations drive investments. Industrial transformation depends on confidence that carbon carries an increasing cost over time. If that confidence erodes, so does the business case for investing in Europe’s future industries. This is what makes the ETS so powerful: it does not pick winners, but it rewards those who invest in the transition.
The same applies to the continued use of free allocation. While originally designed to prevent carbon leakage, shifting pollution to countries with weaker rules, extending free allowances without strict conditions delays necessary investment. It risks locking in the industrial structures Europe needs to transform. With the Carbon Border Adjustment Mechanism Europe now has a tool to address unfair competition. Policymakers should focus on making this instrument work effectively and predictably, not weaken the ETS.
Revenue at risk: a strong ETS is also a fiscal asset
The ETS generates tens of billions of euros in public revenue, funding innovation, supporting households and enabling the transition. Diluting it would weaken both climate ambition and public income at a time when both are urgently needed.
Not all businesses are asking for a weaker carbon price. Across Europe, companies and financial institutions are investing in green technologies and future-proof business models. Watering down the ETS punishes these front-runners. They depend on a strong and credible ETS that underpins long-term investment decisions. This is the quiet majority, the many businesses already building Europe’s future, and their voice deserves to be heard more clearly in the current debate.
Strengthen the ETS or fall behind
The upcoming review of the ETS offers an opportunity to reinforce what has made the system successful: a clear cap, a predictable trajectory and a strong price signal.
Europe has built a policy framework that many other regions are looking to replicate. Weakening it in response to short-term pressures would undermine those already investing in Europe’s future. The choice is not between climate ambition and competitiveness, it is between leading the transition or falling behind.
Policymakers should protect and strengthen the ETS: to maintain a robust Market Stability Reserve, phase out free allocation in line with a strong Carbon Border Adjustment Mechanism, and to preserve a clear and credible long-term carbon price signal.
Businesses, investors and industry leaders across Europe all have a role to play. Those investing in clean technologies and future-proof industries are asking for clarity and ambition. Let’s answer their call, because they are the ones who will be building Europe’s independence and competitiveness.