Managing the EU ETS for Decarbonization

Author(s): Andrei Marcu, Philippe Chauveau, Alexandra Maratou, Tommaso Paperini, Marika Moreski

This paper sets out ERCST’s assessment of the key elements that should be part of the EU ETS review with the Commission proposal, that will be put forward on July 17, 2026.

The report is structured around three main chapters:

• Chapter 1: Set a baseline of what ERCST thinks is necessary, and possible, depending on the timeframe (short-term and medium to long-term)
• Chapter 2: Analyze the Commission Proposal and decompose it into the elements that were identified in Chapter 1.
• Chapter 3: undertake a comparative study between the findings in Chapters 1 and 2.

At this stage, the present (partial) release includes Chapter 1 only.

Key messages from this chapter include:

• The EU ETS is currently focused on managing EUA prices, with the MSR being the instrument that plays that role.
• Changes in the EU ETS environment make it necessary to manage more than prices and include
  • Price and market functioning, largely through mathematical changes to the MSR rules,
  • Costs of compliance and impact on competitiveness
  • Articulation of EU ETS price signal with the necessary external conditions for decarbonization
  • The flexibility needed for introducing international credits, for the cost of compliance, and CDRs for reaching net-zero.
• Given the complexity of managing all these elements, a new governance is necessary that is flexible and does not rely on mathematical formulas only.
• A modified and enhanced MSR is a good candidate for such a function.
• The implementation of measures related to market functioning can be done in the short term without disrupting the market and is a necessary (but not sufficient) change.
• Implementation of changes in architecture and governance is more disruptive and requires more time and, therefore, cannot simply be postponed to the next review.

The introduction of short-term measures only, related to market functioning (MSR parameters), is possible but is likely to lead to the increased use of one-off regulatory interventions that will lower predictability and trust in the EU ETS.