As the European Union aligns its policies with its newly agreed 2040 climate target, the EU Emissions Trading System (EU ETS) faces a critical moment. Although the system helped cut greenhouse gas (GHG) emissions in 2024 by half compared to 2005, its future direction has been increasingly contested ahead of a major legislative review expected for July 2026.  

In particular, the EU ETS has become the target of growing political criticism. Amid high energy prices, geopolitical uncertainty, and increasing international competition, several governments and industry groups have argued that the EU ETS risks imposing excessive costs on European industry, particularly when competing with jurisdictions that pursue less ambitious climate policies. Some Member States have called for measures ranging from temporary price interventions to suspending parts of the system, arguing that carbon costs risk undermining European competitiveness. In contrast, other governments, industry groups and EU institutions have warned that weakening the EU ETS could delay investment decisions and create uncertainty at a time when Europe seeks to accelerate industrial decarbonisation. At the same time, the upcoming launch of the EU ETS 2 for buildings and road transport has intensified concerns about affordability and the distributional impacts of carbon markets. 

For researchers, policymakers, industry stakeholders, and civil society actors alike, understanding the evidence behind these debates will be crucial. This is precisely why the LIFE NETS project is developing a training course putting the scientific assessment of the EU ETS to the fore. We invite interested stakeholders to participate in our training needs survey and help shape the content. 

Has the EU ETS achieved its primary objective? 

Before assessing concerns about competitiveness, it is worth recalling the EU ETS’s primary objective: reducing GHG emissions by creating an economic incentive for firms to invest in cleaner technologies and production processes. By this measure, the EU ETS has largely delivered. According to data from the European Environment Agency, emissions from installations covered by the system have fallen substantially since its introduction. Although attributing emissions reductions to a single policy instrument is challenging, a broad body of scientific literature finds that the EU ETS has contributed to emissions reductions, concentrated in the power sector, and increased low-carbon patenting and R&D among regulated firms, with moderate evidence of wider innovation diffusion or technology adoption (i.e., Bayer & Aklin, 2020; Calel & Dechezleprêtre, 2016; Colmer et al., 2025; Dechezleprêtre et al., 2018). The key policy question may therefore no longer be whether the system reduces emissions, but rather how it can continue to do so while maintaining industrial competitiveness. 

Is the EU ETS compromising European competitiveness? 

Concerns about carbon leakage and industrial competitiveness have been part of the political and scientific debate since the inception of the EU ETS, but have gained renewed attention in the current political context. When examining the system’s impact on competitiveness, a nuanced picture emerges. So far, most ex post empirical assessments find no statistically significant effects of carbon or energy prices on various dimensions of competitiveness, including net imports, foreign direct investment, turnover, and value added (Venmans et al., 2020).  

As summarised in the 2026 State of the EU ETS Report by the European Roundtable on Climate Change and Sustainable Transition (ERCST), it generally remains difficult to isolate the specific effects of the EU ETS from other factors affecting European industry, including energy costs, labour costs, industrial policy, and broader economic conditions. The report, however, finds that the EU ETS is becoming progressively more stringent. While free allocation continues to protect many energy-intensive sectors, a growing share of emissions is no longer covered by free allowances, increasing firms’ exposure to carbon costs. Evidence from several sectors suggests that emissions intensity is declining, indicating progress in technological decarbonisation. Nonetheless, the report also cautions that part of the observed emissions reductions may be linked to lower industrial output rather than solely to innovation and cleaner production processes. 

Discussions about competitiveness should also consider the investment side of the equation. The EU ETS not only creates carbon costs but also generates substantial revenues that are reinvested in innovation, industrial decarbonisation, energy system transformation, and social support measures. Through instruments such as the Innovation Fund and the Modernisation Fund, carbon pricing revenues help finance the technologies and infrastructure needed for a competitive, low-carbon economy. Assessing the competitiveness impacts of the EU ETS, therefore, requires considering both its costs and the opportunities created through these investments. 

What does this mean in the context of the 2026 EU ETS review? 

The 2026 review represents a pivotal moment in the evolution of the EU ETS. Following the major reforms adopted under the Fit-for-55 package in 2023, the European Commission is required to assess whether the system remains fit for purpose, taking into account the EU’s increasingly ambitious climate objectives, changing economic conditions, and an evolving international landscape.  

The review is expected to address a range of strategic questions, including the functioning of the Market Stability Reserve, the phase-out of free allocation and the implementation of the Carbon Border Adjustment Mechanism (CBAM), the interaction between ETS1 and ETS2, the possible role of international carbon credits, and the contribution of carbon pricing to the EU’s 2040 climate target. Many of these discussions are closely linked to the concerns about European competitiveness mentioned above. The review, therefore, also reflects a broader debate about how Europe can reconcile climate ambition with industrial resilience. 

Importantly, the review is unlikely to focus on whether the EU ETS should continue to exist. Instead, the debate is set to centre on how the system can evolve to support industrial transformation, strengthen public acceptance, and contribute to the EU’s 2040 and 2050 climate objectives. These are complex questions that cannot be answered through political slogans alone. They require rigorous scientific assessment and continuous exchange with industry stakeholders, policymakers, and civil society.  

The LIFE NETS project aims to provide capacity-building courses to help actors keep up with the legislative developments and equip them with the scientific knowledge needed to assess the EU ETS’s environmental and economic performance, as well as different carbon market design options going forward. If you are interested in participating in one of our future courses, stay tuned and help us shape the content via this survey. 

References 

• Bayer, P., & Aklin, M. (2020). The European Union Emissions Trading System reduced CO₂ emissions despite low prices. Proceedings of the National Academy of Sciences, 117(16), 8804–8812.  

• Calel, R., & Dechezleprêtre, A. (2016). Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market. Review of Economics and Statistics, 98(1), 173–191.  

• Colmer, J., Martin, R., Muûls, M., & Wagner, U. J. (2025). Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading Scheme. Review of Economic Studies, 92(3), 1625–1667. 

• Dechezleprêtre, A., Nachtigall, D., & Venmans, F. (2018). The joint impact of the European Union Emissions Trading System on carbon emissions and economic performance. OECD Economics Department Working Papers, No. 1515. Paris: OECD Publishing. https://doi.org/10.1787/4819b016-en 

• Venmans, F., Ellis, J., & Nachtigall, D. (2020). Carbon pricing and competitiveness: are they at odds? Climate Policy, 20(9), 1070–1091. https://doi.org/10.1080/14693062.2020.1805291