Future of Emissions Trading in the EU: EU ETS – CBAM Strawman

Author(s): Andrei Marcu, Alexandra Maratou, Laure Fleury,Tommaso Paperini , Cecilia Meinardi

The paper examines how the EU’s Carbon Border Adjustment Mechanism (CBAM) interacts with the EU Emissions Trading System (EU ETS). CBAM was created to prevent carbon leakage caused by uneven global climate policies, but it also aims to encourage carbon pricing abroad and support the EU’s transition from free allocation to full auctioning in the ETS. Because CBAM is meant to mirror the ETS for WTO compatibility, any mismatch between the two systems creates policy challenges.

The study identifies several gaps in the CBAM–ETS alignment—especially those affecting EU industrial competitiveness. These include the lack of an export solution, risks of circumvention, the treatment of scrap and Scope 2 emissions, default values, downstream product coverage, compliance costs, and plans for expanding CBAM. It also highlights the major role of ETS and CBAM revenues in shaping decarbonization, competitiveness, and market dynamics.

Beyond these immediate issues, the paper notes longer-term questions: expanding the ETS to new sectors, integrating international credits or carbon removals, linking ETS systems, and technical challenges such as MRV, hedging, and the Market Stability Reserve.

Finally, the paper outlines potential ways forward: speeding up industrial decarbonization using ETS/CBAM revenues; delaying (“backloading”) the full CBAM rollout; introducing a WTO-compatible export adjustment; pausing Scope 2 expansion until indirect cost compensation is reformed; finding a pragmatic compromise on scrap; and taking a cautious, case-by-case approach to downstream and lateral CBAM expansion.