What You Need to Know About ETS

The EU’s Emissions Trading System (ETS) turns twenty this year and is entering its fifth legislative review. Policymakers face mounting pressure to lower carbon prices, yet Bruegel’s analysts argue the market remains the most cost‑efficient tool for cutting greenhouse gases. Since its launch in 2005 the ETS has delivered roughly a 47 % emissions decline while allowing the economy to grow, especially in the power sector where coal has been displaced by gas and renewables. This track record underpins the EU’s broader climate agenda and its drive to stay competitive against fast‑moving economies such as China.

Revenue from auctioned allowances now exceeds €260 billion, but most of it stays with national governments. The 2023 conditionality rules require 100 % of these funds to support decarbonisation, yet member states often channel money toward housing or electric‑vehicle subsidies rather than hard‑to‑abate industry. Bruegel’s research highlights this mismatch and calls for tighter earmarking, either through EU‑level ownership of the proceeds or stricter free‑allocation conditionality tied to industrial investment. Aligning the cash flow with the 2040 target of a 90 % emissions cut could unlock the next wave of green‑technology deployment and protect European manufacturers’ global competitiveness.

The upcoming reform also revises the Market Stability Reserve, shifting from permit withdrawals to a mechanism that can re‑inject allowances when the market tightens. At the same time, the Commission is unlikely to admit international credits into the EU cap, limiting flexibility but preserving environmental integrity. These technical tweaks matter for investors: a predictable carbon price and a clear revenue stream signal where capital should flow, from renewable grids to steel and cement plants. As the EU aligns its climate policy with security goals—reducing fossil‑fuel imports—the ETS remains a cornerstone for a resilient, low‑carbon economy.