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Twenty years since its launch, the EU Emissions Trading System (EU ETS) has become the world’s strongest and best-functioning carbon compliance market. The results are striking: by 2024, EU greenhouse gas emissions had fallen 37% below 1990 levels, with ETS-covered sectors (power, heavy industry, and aviation) driving most of those cuts. Emissions from electricity, heating and industrial production are down 50% since 2005. Since its inception, auction has raised over €258 billion in revenues, and all without causing significant macroeconomic disruption.
The system survived serious turbulence – among them a price collapse after the 2008 banking crisis and a flood of cheap Kyoto-era CDM credits – through the creation of the Market Stability Reserve (MSR) in 2019, which rebalances allowance supply automatically. By 2023, the carbon price peaked at €100 per tonne; it now hovers around €75, an incredibly solid example compared to other carbon prices floating around €25 in California, €22 in New Zealand, €12 in China or with average prices in the global voluntary carbon market often under €10. The ETS has also become a global template: connected to Switzerland and soon to the UK, it has inspired compliance markets in China (with the Chinese ETS now becoming the largest system in the world), South Korea, and California, while the Carbon Border Adjustment Mechanism (CBAM) has pushed Türkiye, Brazil, and others to start their own systems.
And yet, in early 2026, this hard-won edifice finds itself under threat. A wave of pressure from energy-intensive industries and several European governments – Italy most prominently – has called for suspending or substantially weakening the system. The response from civil society and academia was bold: in late February, more than 200 Italian scientists and economists signed an open letter to their government in support of the ETS and against any request of suspension. Rome’s argument runs as follows: carbon costs raise energy prices, undermine industrial competitiveness, and accelerate the relocation of production to countries with lower standards. In a geopolitical context where the US has turned inward and China’s industrial rise is reshaping global supply chains, Europe cannot afford, they argue, to hobble its own industries with self-imposed carbon constraints.
This narrative might be politically potent in the short term, but remains analytically fragile. As Bruegel researchers Simone Tagliapietra and Georg Zachmann have argued, “attacking the ETS amounts to economic self-sabotage” for five reasons.
First, the ETS is not the cause of high electricity prices: natural gas sets the marginal price, not carbon permits. Only accelerating renewables deployment can sustainably reduce electricity costs, and that requires the carbon price signal to remain intact. Second, reversing the course rewards laggards at the expense of innovators: companies that invested early in decarbonisation did so on the basis of the long-term carbon price; undermining it now, instead, would penalise foresight and subsidise delay.
Third, there is a hidden fiscal cost. Weakening the carbon price reduces auction revenues and, paradoxically, increases renewable energy subsidy bills: Germany alone would face €3–4 billion more per year in renewables support for every 10% drop in wholesale electricity prices. Fourth, the ETS compresses Europe’s fossil fuel import bill by reducing gas demand and thus global LNG prices; abandoning it would transfer those savings to exporters.
Fifth, dismantling a mature, unified market framework would fragment climate policy into a patchwork of national subsidies, creating far greater market distortions than the carbon price itself.
None of this means the ETS should be left unchanged. The next phase of decarbonisation, i.e., moving beyond oil and gas towards renewables, is structurally harder than what came before. The question is not whether to adapt the ETS, but how to do so without dismantling its core economic and political rationale.
The point is indeed both economic and political. “The Italian government, pushed by the most backward segment of the national industrial system, has proposed no alternative option or possible amendment – but that’s not surprising,” comments Stefano Caserini, Professor in Climate Change Mitigation at the University of Parma, Italy, and among the first proponents of the open letter. “Their call for its suspension, ignoring the fact the ETS is essential for meeting international commitments, is consistent with the disinterest shown by some part of the populist far right in climate policy over the past 10-20 years and with their support for climate denialist positions, still largely reflected in newspapers and in opinion pieces by key journalists and opinion-makers, despite twenty years of achievements.”
For Italian and European firms, price volatility is the most urgent issue. Some analysts project carbon prices reaching €150–200 per tonne before 2030, and €250–400 by 2040. Such trajectories are seen as politically unsustainable. The risk is not just that the ETS might be too ambitious in theory; rather, it is triggering a backlash that can destroy it entirely. The MSR, which tackled the allowance glut of the 2010s, must be retooled to moderate price spikes as well. Ending the permanent cancellation of allowances held in the reserve, ideally by 2027, would improve liquidity; a well-designed emergency release procedure should complement the existing rules-based governance.
Among the precursors of the European ETS during his years at the European Commission and today as Chair on Climate Policy and International Carbon Markets at the European University Institute, Prof. Jos Delbeke has recently published a brief providing some actionable proposals. Given the current circumstances, he argues, free allocation needs to be repurposed rather than phased out. Rather than distributing permits unconditionally, they should be made contingent on verifiable decarbonisation investments. The existing 3% buffer (around 370 million allowances under Art. 10a5a) could seed the Industrial Decarbonisation Bank immediately, providing capital for companies committed to the green transition.
Scope, he argues, must also expand. The EU ETS2, covering road transport and buildings, should proceed as planned, argues Delbeke, with revenues flowing to the Social Climate Fund; moreover, a merger of ETS and ETS2 should be considered in the medium term.
Internationally, the EU’s 2040 climate target now allows up to 5% compliance through high-quality Article 6 carbon credits. It is no secret that credit-based flexibilities arrived in the summer of 2025 as part of a last-minute compromise (based on the German coalition pact) to save the overall 90% emissions reduction goal at a moment when the climate dossier was at risk of being blocked by far-right political groups in the European Parliament. By transforming this compromise into an opportunity, rather than simply offsetting domestic shortfalls (the main risk foreseen by most civil society organisations, such as Climate Action Network Europe), the EU could use its purchasing power strategically, acquiring buffer Article 6 credits preferentially from countries committing to establish compliance markets and bundling access with capacity-building and clean technology. The MSR could serve as a centralised buffer for these high-quality credits, reinforcing the EU’s old ambition: not just reducing its own emissions, but spreading carbon pricing policies globally towards reaching, collectively, the goals of the Paris Agreement in a more orchestrated manner.
The year 2026 is a year for reviews. The Commission is expected to launch a formal review of both the ETS and the MSR in the second half of the year, in parallel with the Clean Industrial Deal. The two processes must develop in tandem: the carbon market cannot function as an isolated instrument, detached from the industrial policy context in which investment decisions are made.
Four things will be decisive: whether the MSR is redesigned to cap price spikes without becoming a back door to environmental dilution; whether repurposed free allocation and the Industrial Decarbonisation Bank generate real investment flows at speed; whether the EU’s new approach to international carbon credits genuinely promotes compliance markets globally rather than simply buying cheap offsets; and, finally, whether policymakers can hold the line on the carbon price signal under sustained political pressure.
The EU ETS is not perfect. But it remains the most cost-effective, durable, and internationally influential climate tool that the EU possesses. Navigating 2026 will require keeping faith with its underlying logic while adapting its mechanics for harder terrain. The alternative – fragmented national subsidies, frozen investment incentives, and diminished credibility on the world stage – can be far more costly than any carbon price.
Cover: Envato