The world’s largest carbon market is likely to be significantly revised by the end of 2026.

Accounting for around 40% of the EU’s greenhouse gas emissions, the ETS places a cap on emissions from carbon-intensive sectors such as aviation, heavy industry and energy.

It has spurred decarbonisation with emissions from sectors covered by the ETS falling by more than 15% in 2023, compared to 2022, according to the European Commission.

EU ETS: The pros and cons

Carbon pricing has been volatile in recent years, which is causing some nations and sectors to argue that the ETS is hampering competitiveness.

BusinessEurope, which represents business federations across the bloc, called for reforms to the pricing and market earlier this year, as it was risking “deindustrialisation” by creating a reality where companies moved production outside of Europe. This, in turn, could create cases of carbon leakage, where emissions are shifted into markets that have less stringent climate rules.

Ministers also hosted a workshop with more than 50 industry leaders in January to assess the ETS compliance process. The discussions will inform the upcoming revisions to the ETS Directive, the legislation underpinning the scheme.

Since the so-called ‘reality check’ workshop, news headlines have emerged about specific businesses like chemicals giant BASF pushing for sweeping reforms. They, as well as some industry bodies and influential policymakers, have argued that the ETS in its current form is driving deindustrialisation.

In a recent blog post for edie, WE Soda’s chief sustainability officer, Dr Alan Knight, claims that the ETS isn’t working for the glass industry, for example.

“The EU is undermining its own principle that carbon markets should reward decarbonisation and innovation,” Knight claims. “Additionally, in a globalised economy where trade crosses borders, penalising non-EU competitors with a lower carbon footprint would mean that while direct emissions may go down, embedded carbon would increase.

“The ETS system, as it is now, is bad for producers and consumers.”

Calls for long-term certainty

More than 100 businesses have warned that weakening the EU ETS would be a “serious misdiagnosis of the problem”. These businesses have called on the European Council to axe a proposal that could weaken the EU ETS, calling for the bloc to continue moving away from “volatile fossil fuel imports”.

More than 100 companies and investors, including Tata Steel, Volvo Cars, EDF, Ørsted, Heidelberg Materials, Vattenfall, Holcim, SSAB, Salzgitter, Ingka Group|IKEA, Nordea Asset Management, Outokumpu, VELUX and Novonesis  – as well as leading Cleantech innovators including Cylib, Reverion, Sunfire, Gravithy, Stegra, CorPower Ocean and Rondo Energy- have written to the Council expressing their concerns.

The letter states: “In the current geopolitical context, Europe’s security and sovereignty hinge on building a more competitive and resilient economy, moving away from volatile fossil imports towards capitalising on our clean energy potential, highly educated workforce and strength in innovation.”

The letter states that the EU ETS is “critical” to achieving competitiveness while meeting climate targets.

Maria Mendiluce, CEO, We Mean Business Coalition, said: “Europe’s carbon market is not a burden on industry; it is one of the most powerful tools Europe has to drive investment, innovation and industrial competitiveness. Businesses need stability and clear signals. Weakening the ETS would undermine confidence at precisely the moment Europe needs to scale investment in clean industry, as geopolitical tensions once again illustrate the volatility of fossil fuel markets.”

Is the price right?

In 2018, prices were below €10 per ton. By early 2023, prices reached record highs of around €100 per ton.

However, prices fell in 2024. As noted by CarbonCredits, carbon prices across the EU have fluctuated from lows of €10 per ton in 2018 to around €60–€70 per ton as of March 2026.

Price fluctuations could also be impacted by the war in Iran. The conflict has triggered a surge in wholesale oil and natural gas prices steeper than when Russia first invaded Ukraine in 2022. This is due to strikes on dozens of large pieces of energy infrastructure as well as the disruption in the Strait of Hormuz.

In response to rising energy costs, some Member States view changes to the ETS as a potential quick fix.

Germany, one of the bloc’s largest manufacturers, is one nation pushing to weaken the scheme. The country relies on gas for around 25% of its energy consumption, in particular of industrial use cases.

Elsewhere, Italy is calling for the ETS to be suspended. It is also suggesting that a domestic law be introduced that would reimburse Italian gas-fired plants for the cost of the carbon price.

Italy is the third largest market for natural gas in Europe behind Germany and the UK, and is the second largest importer behind Germany.

The Commission has, it confirmed in early April, taken note of these concerns, without going as far as Italy had requested.

It has proposed measures to increase the availability of allowances under the ETS by amending a mechanism called the Market Stability Reserve, which puts a cap on the number of permits in circulation at any one time.

The Reserve’s original purpose was to boost the carbon price by removing excess permits from the market. A higher carbon price, the idea went, would make it easier to build the business case for investments in energy efficiency and fossil-free technology.

With the proposed revision, the aim is the converse – to keep carbon prices lower. The Market Stability Reserve is presently allowed to accumulate up to 400 million permits, with any above this level being retired.

How will CBAM be impacted?

Another key legislative instrument is the EU’s Carbon Border Adjustment Mechanism (CBAM). The Mechanism applies a carbon price on the imports of key materials and products, including cement, steel, aluminium, electricity and hydrogen.

A key aim of CBAM is to improve the competitiveness between EU and non-EU producers by ensuring that foreign importers pay a comparable carbon cost so that domestic production is not adversely affected.

Since its formal introduction at the start of the year, it has already met resistance from France, Italy and other countries, in this case over farm competitiveness due to the costs of importing fertilisers.

CBAM certificates are priced in accordance with the EU ETS.

The European Commission estimates that CBAM could generate more than €2.1bn per year by 2030, some of which would be ringfenced to support industrial decarbonisation. As such, any changes to the ETS could impact the funding pot for industrial decarbonisation down the line.

The UK is also launching its own Mechanism. The UK’s CBAM was originally meant to enter a reporting phase in 2024 ahead of a 2026 launch. A delay was confirmed in late 2023 to account for business burdens and other green policy delays arising from the pandemic. Ministers subsequently struck a deal to link the UK and EU CBAM schemes, reducing cost burdens on both sides.

It is also facing its own challenges, which you can read about here.

What happens next?

It does sound like the ETS will remain in place, according to a draft statement from the European Council, obtained by POLITICO.

European Commission President Ursula von der Leyen has indicated that the ETS will not be scrapped, instead operating until at least 2039.

This is especially crucial given the EU’s enshrining of a new 2040 emissions target into law. The target entails a 90% reduction against 1990 levels, 5% of which can be delivered with carbon credits from other countries.

As for what supporters of the ETS are proposing, it is very much tailored towards scaling clean energy via long-term financing for the energy sector.

The letter calls for effective use of EU ETS revenues that would support the deployment of clean, flexible power, with a focus on electrification and storage. ETS revenues should also support long-term clean industrial Power Purchase Agreements (PPAs) to help industrial decarbonisation investments, which could include removing impediments for industrial companies to co-locate onsite clean energy generation, batteries and thermal storage.

The letter additionally calls for CBAM to function effectively and extend, where necessary, to prevent carbon leakage across the value chain.

Leon de Graaf, Acting President of the Business for CBAM Coalition, said: “This letter provides an important counter-voice to those that want to weaken the EU ETS and the CBAM. What some don’t yet realise is that many billions have already been invested based on the assumption that both instruments are not watered down.

“We are not tone-deaf to the worries of heavy industry, which is why we propose that certain policies can be strengthened. But at the end of the day, the EU ETS and CBAM make a lot of business sense, and their current trajectories are crucial for investment certainty.”