EU Emissions Trading System (EU ETS)

The European Emission Trading System (ETS) has emerged as the backbone of the EU Climate Action and, especially in the last two years, as a crucial driver of decarbonization. The cap-and-trade system puts a price on carbon while ensuring GHG emissions decline through its cap. Market participants can trade emission allowances to compensate for the CO2 they emit. The EU ETS aims to facilitate cost-efficient decarbonization.

The EU ETS is the first and most developed carbon market across the world and covers more than 40% of all EU emissions. Over its first three phases, between 2005 and 2020, many reforms have been implemented to increase its effectiveness and market functioning. Since 2018, reforms for phase IV have been implemented and the ETS revision is also a large component of the Fit For 55 package, proposed by the Commission in July 2021. A revised EU ETS Directive was adopted in 2023, for the period running until 2030.

Since ERCST’s inception, the EU ETS policy file has been central to ERCST’s efforts to facilitate cooperation between policymakers and other stakeholders in articulating cost-effective climate policy. Throughout the years, ERCST has organised numerous roundtables, circulated a wide range of publications and in the process, took a place among global thought leaders on the subject.

ERCST’s work on the EU ETS can be subdivided into three different strands:

  1. State of the EU ETS
  2. Future of the EU ETS
  3. Carbon Leakage under CBAM and Free Allocation

State of the EU ETS

The EU ETS has always been presented as an important component of the EU climate change policy. How well it delivers is critical for the overall delivery by the EU on its climate change commitments.

Each year, ERCST together with its partners, publishes the State of the EU ETS report. This report is intended as a “snapshot”, providing policymakers and stakeholders with an overview of how the EU ETS is doing by April of each year, based on previous year data. Within the constraints posed by the lack of publicly accessible data, the Report tries to assess the question whether the EU ETS is “fit for purpose”.

In 2026, the 11th annual report will be produced together with the Wegener Centre on Climate and Global Change, BloombergNEF and Compass Lexecon. In addition to the report, the project aims to bring together small groups of stakeholders deeply involved in EU ETS discussions, through meetings held in Brussels.

Future of the Emissions Trading System in the EU

The EU ETS is seen as one the important drivers since it came into operation in 2005. However, as we reach end of 2020’s and forward middle of 2030, there are many issues that need to be discussed – fundamentally if the EU ETS is the right instrument as we reach towards zero allowances and what architecture and governance it should take.

The Future of the Emissions Trading System in the EU is a process that ERCST is putting into place as an independent review to have the EU institutions and EU stakeholders in this important debate. In the framework of this sub-workstream, ERCST will organise thematic events along the year focused on key issues for the EU ETS: carbon removals, ETS extension to new sectors, governance, etc.

Carbon Leakage under CBAM and Free Allocation

ERCST and the Climate Economics Chair (CEC) are analysing the impact of a combination of Free Allocation and CBAM on industrial profitability, production and other KPIs.

The work will encompass a number of iterative consultations with stakeholders, and will result in a paper in early 2026 that will provide evidence-based policy recommendations to inform future reforms of EU ETS and CBAM.

CONTACT

Tommaso Paperini (tpaperiniercst.org)

PROJECTS

The Future of the Emissions Trading System in the EU

Overview

We are pleased to announce our new project on “The Future of the Emissions Trading System in the EU”. This is an important topic that will accompany the European Commission discussions on the future of the Emissions Trading System in the EU. Leveraging ERCST’s expertise and recognition in EU ETS discourse, the “Future of the Emissions Trading System in the EU” project aims to provide original analytical insights, pinpoint challenges, and propose solutions for the evolution of the EU ETS during the second Phase of phase IV (2025-2030) and post-Phase IV. The project will investigate the system’s impact on key sectors such as power and industry and explore implications for governance relevant to EU policymakers.

For the project, ERCST will put into place an independent review process of a range of key issues, working closely with an Advisory Group and in collaboration with EU Institutions and EU Member States. While taping in the knowledge and insights that the Advisory Group has to offer, ERCST will maintain its role as an independent think tank which will provide evidence-based outputs and will take into account advice and information from all credible sources.

The Advisory Group comprises representatives from:

Cefic – European Chemical Industry Council European Aluminium
CEMBUREAU ExxonMobil
Cepi – Confederation of European Paper    Industries Fertilizers Europe
EDF- Électricité de France FuelsEurope – European Fuel Manufacturers Association
ENEL PGE
EuLA – The European Lime Association Danish Ministry of Climate, Energy and Utilities 
Eurelectric – Union of the Electricity Industry French Ministry of Ecological Transition
Eurofer – European Steel Association German Federal Ministry for Economic Affairs and Climate Action
Eurometaux – Association Européenne des Métaux Ministry of Climate and Environment of the Republic of Poland

 

This project kicked off in June 2024 and will address the following issues:

1.  Coverage Analysis

2.  Role in EU Climate Policy

3  Price signal and competitiveness

4.  Carbon removals

5.  Agriculture

6. ETS – CBAM Strawman

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RECENT PUBLICATIONS

RECENT AND UPCOMING EVENTS

2026 State of the EU ETS Report