EU ETS Review: Managing the EU ETS for Decarbonization

Author(s): Andrei Marcu, Philippe Chauveau, Alexandra Maratou, Elizabeth Lesaulnier, Helen Bevernage, Marco Sangiovanni

Following the Commission’s EU ETS reform proposal that was put forward on July 17, 2026, this paper:

• Begins by briefly identifying what must be managed so the EU ETS can continue driving decarbonization amidst evolving circumstances (Chapter 1);
• It then provides ERCST’s initial reactions to the Commission proposal (Chapter 2);
• The main part of this paper sets out ERCST’s EU ETS Strawman (Chapter 3).

Conditions within the EU ETS, outside the EU ETS, and the stage in the decarbonization of the EU society and economy have changed. While so far, the EU ETS had to manage volumes to ensure an adequate price signal, it is now called to manage several additional dimensions:

• Price and market functioning
• Cost of compliance, including competitiveness
• Managing flexibility for the introduction of CDR and international credits
• Governance to enable the transition

For each of the above four areas, Chapter 3 of the paper (EU ETS Strawman), provides concrete proposals and also differentiates between recommendations that can be implemented in the short-term and in the mid-to-long term as they require significant changes to the EU ETS.

In particular, the report identifies elements in the Commission proposal that need addressing, especially the conditionality in free allocation and the lack of a targeted provision for exports in CBAM-covered sectors. Provisions in the Proposal for the inclusion of CDRs, international credits, and recycling of revenue are welcome, but there are significant adjustments that this paper suggests.

The report highlights that while the EU ETS remains central to achieving the EU’s climate targets, industrial decarbonization now depends on more than the carbon price alone. It increasingly hinges on external conditions beyond installations’ control—such as the development of markets for low-carbon products, access to affordable low-carbon electricity and hydrogen, and the infrastructure needed for electrification, hydrogen, and carbon capture, utilisation and storage (CCUS).

In this context, the report argues that the EU ETS needs to evolve from a system primarily driven by price to one supported by a broader governance framework. This includes addressing market functioning and compliance costs, enabling flexibility for carbon dioxide removals (CDRs) and international credits, and managing the wider transition. Over the medium to long term, this implies a more flexible governance approach capable of responding to these external conditions, which are no longer captured by simple mathematical rules.

Since introducing such a governance will take time, a workplan to develop and deploy it needs to be part of the outcome of the EU ETS review. Similarly, a targeted CBAM exports solution is the mid- to long-term destination, which requires an immediate start.