Introduction

The EU Emissions Trading System (EU ETS) has helped cut emissions from power, industry, aviation, and maritime sectors in half over the last 20 years. In 2025, the World Bank estimated that more than a quarter of global emissions are covered by carbon pricing, raising around €85 billion in revenues in 2024, with the EU ETS alone raising €38.8 billion (p.3). Despite this progress, in 2024, 82% of emissions from ETS installations were still from burning fossil fuels (p.3), and the system remains structurally oversupplied and misaligned with the 1.5°C goal of the Paris Agreement.

Why do we need the EU ETS?

Even in “normal” years, the EU and its member states spend nearly €400 billion on imported fossil fuels (p.3). Industry received more direct support through the ETS than the effective carbon price paid — direct support is nearly five times higher than net carbon costs over 2021–2024 (p.5). Aviation emissions from flights departing European airports increased by 8% between 2023 and 2024 (p.6), and in 2025 the power sector alone emitted 250 million tonnes of CO2 from coal (p.6). The three largest petrochemical companies returned over €65 billion to shareholders via share buybacks between 2022 and 2025 (p.6).

Uphold the principles of the EU’s flagship climate policy

Since 2021, over 2.6 billion free allowances have been handed out for free, valued at €170 billion — of which nearly 500 million allowances in 2024 alone, worth €32 billion at 2024 average prices (p.8). The ETS should be expanded to include waste incineration and a greater share of aviation and maritime emissions. The polluter pays principle, preventive action, and the precautionary principle must remain central to any ETS revision.

How to keep the ETS on track

1. Want a new cap? Make it budget neutral. Under several decarbonisation scenarios, the EU ETS will remain oversupplied until 2036 (p.10). Reducing the Linear Reduction Factor (LRF) to 3.4% would allow an additional one billion tonnes of GHG emissions; a further reduction to 2.4% would result in roughly three billion additional emissions (p.10). Any post-2036 adjustments must be carbon budget neutral.

2. Freebies have prevented investments: eliminate them once and for all. Since 2021, 97% of total EU energy-intensive industrial climate pollution came at no cost (p.13). Free allocation to non-CBAM ETS sectors must be phased out fully by 2034 at the latest, with residual freebies made strictly conditional on verified decarbonisation investments (p.15).

3. Use revenues wisely: kick out fossil fuel subsidies. Between 2026 and 2030, the EU ETS is expected to raise between €120 and €150 billion in auctioning revenues for member states (p.16). In 2024, over €5.5 billion — 23% of member state ETS revenues — was spent on indirect cost compensation, subsidising fossil-based electricity use (p.17). This mechanism should be eliminated.

4. Predictability is good for business, keep the MSR doing its job. The Market Stability Reserve (MSR) has successfully invalidated 3.4 billion ETS allowances (p.18). In 2024, supply was 276 million tonnes higher than demand (p.18). Diluting the MSR risks up to 900 million extra tonnes of CO2 and must be avoided (p.18).

5. An absolute no to offsets. During phase 3 (2013–2020), over 1.6 billion international credits entered the ETS, wrecking the price signal for a decade (p.20). Offsets must not be reintegrated.

6. Keep removals out of the system. Carbon removal costs remain far above the EUA price — BioCCS is estimated at €150–200 per tonne and DACCS at €500–1,000 per tonne, versus the EUA price of approximately €75 in early 2026 (p.21). Direct integration risks transforming the ETS into an offsetting mechanism.

7. Cover all international flights and private aviation, plus remove biofuel handouts. The 2012 “stop-the-clock” exemption cost €26 billion in lost revenues between 2012 and 2023 (p.23). Private jet emissions rose by 46% between 2019 and 2023 (p.26). Extending ETS to all EEA-departing and arriving flights could generate an extra €19 billion annually by 2030 (p.23).

8. Cover smaller vessels and all international voyages. Smaller vessels in the 400–5,000 gross tonnage range account for unaccounted emissions of 17.8 megatonnes of CO2 per year (p.27). Coverage of extra-EEA shipping voyages should be increased from 50% to 100% (p.27).

9. Null and void the zero-rating of biomass. In 2024, biomass combustion contributed an additional 153MtCO2e beyond the cap (p.31), and biomass represented more than a fifth of total emissions from ETS1 stationary installations (p.30). The zero-rating creates a perverse incentive to swap fossil fuels for biomass.

10. Leave the ETS2 alone – for once. Delaying ETS2 by one year to 2028 led to around €50 billion in forgone auctioning revenues in 2027 (p.32). As of April 2026, only one Social Climate Plan has been approved and 20 member states are yet to submit theirs (p.32). ETS2 must be left to commence and await its scheduled 2028 review.