2026 State of the EU ETS Report

Key takeaway

1. Environmental Delivery Remains Strong

The EU ETS continues to reduce emissions effectively, with verified emissions remaining below the cap and more than half of the system’s 2030 target already achieved. EU ETS emissions declined by approximately 1.3% in 2025 following stronger reductions in prior years. While the pace of reduction has slowed, this appears linked primarily to energy system dynamics — particularly higher reliance on gas generation to balance increasing renewable penetration — rather than a failure of the ETS framework itself.

The power sector remains the main driver of emissions reductions, accounting for roughly 75% of total stationary installation reductions since 2008, supported by rapid renewable deployment and coal-to-gas switching. Industrial sectors are now beginning to show more measurable decarbonisation progress, although reductions are still gradual and uneven across sectors. While difficult to quantify, anecdotal evidence suggests that a percentage of the absolute emission reductions are due to closure of facilities.

2. Competitiveness Has Become Central

Competitiveness concerns now sit at the core of EU climate policy discussions. The EU has a very difficult balancing act, of continuing on its decarbonization path while ensuring that it maintains a viable industry. “Industrial crisis” is not a hyperbole, if we look at key EU industrial sector performance. Rising EUA prices, tightening free allocation rules, and the gradual phase-out of free allowances under CBAM are increasing compliance costs for energy-intensive industries.

The report finds:

• The power sector now faces very high exposure to auctioning, with less than 10% of emissions effectively covered by free allocation.
• Energy-intensive industries have shifted from historical allowance surpluses to structural deficits.
• Average annual compliance costs in Phase IV exceeded €35 billion for the power sector and €7.6 billion for energy-intensive industries.

Although ETS-related costs remain materially smaller than energy costs in most sectors, industrial production trends show increasing pressure from high energy prices, global competition, and carbon costs combined.

Importantly, the report stresses that carbon leakage and competitiveness cannot be separated. While CBAM is intended to replace free allocation and protect EU industry from unfair competition, the report warns that free allocation phase-out alone does not yet create a sufficient business case for large-scale industrial decarbonisation without substantial public support, technological cost reductions, or additional policy measures.

3. Carbon Prices Remain Globally High

The EU ETS continues to operate at substantially higher carbon prices than other global carbon markets. In 2025, EU ETS prices averaged approximately USD 85/tCO₂e, significantly above systems in China, California, Korea, and New Zealand.

The report argues that comparisons should focus not only on visible carbon prices but also on the effective carbon costs borne by industry after free allocation and compensation mechanisms. Even after adjustment, the EU remains among the highest-cost jurisdictions for covered entities.

4. Market Functioning Remains Robust

Despite major reforms and market shocks, the EU ETS market continues to function effectively. Liquidity, price discovery, auction participation, and supply-demand balancing mechanisms remain broadly stable.

The Market Stability Reserve (MSR) continues to play a central role in tightening supply and supporting market stability. The report also notes that international developments — including efforts to link the EU ETS and UK ETS, Swiss linkage arrangements, and broader Article 6 carbon market discussions — will increasingly shape future market evolution.

5. Complex and Intertwined Policy Architecture

2026 is a year that see a number of important pieces of legislation under review, which are clearly impacting the operation and impact of the EU ETS. These include a revision to CBAM Directive as well as the post 2030 climate change framework and the Energy Union Governance. The timing of this legislative agenda is not necessarily synchronized.

Strategic Conclusion

The report concludes that the EU ETS remains one of the world’s most effective carbon markets and continues to deliver on its environmental mandate. However, the system is transitioning from being primarily a power-sector decarbonisation tool into a central pillar of Europe’s industrial transformation strategy.

Future reforms will need to balance three objectives simultaneously:

1. Maintaining environmental integrity and emissions reductions;
2. Preserving industrial competitiveness and limiting carbon leakage;
3. Providing long-term regulatory predictability to support investment in low-carbon technologies.