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Antony Froggatt, Senior Director at the European Federation for Transport and Environment, defends the EU ETS and explains why 2026 is pivotal for the world’s most comprehensive carbon market
Launched in 2005, the EU Emissions Trading System (EU ETS) is the world’s first and, so far, most influential cross‑border carbon market. The EU ETS is now in its fourth phase, and over time it has incrementally reduced the cap and the volume of free allowances, expanded the gases included, and expanded to include industrial processes, such as chemical production, aviation and marine emissions, as well as heavy industry and power production. Around 40% of the European Union’s (EU) greenhouse gases (GHG) are now covered.
However, 2028 will see a step change in Europe’s carbon pricing evolution, with the entry into force of ETS 2, a new scheme that will, for the first time, price emissions from road transport and buildings, roughly doubling the emissions covered.
The case for maintaining ETS
Setting a price on GHG emissions leads to reductions in emissions through increased fuel switching, more efficient energy use, and energy savings. Bruegel estimates that the ETS has reduced emissions in affected sectors by around 15% relative to a no-ETS counterfactual. The power sector and heavy industry have experienced reductions in emissions since the introduction of the ETS in 2005.
In December 2025, the EU agreed on its latest decadal GHG reduction target, a 90% reduction compared to 1990 levels. This is now legally binding in the EU and is part of its international commitment under the Paris Agreement. There is no doubt that, without the ETS, the EU would fail to meet its domestic and international commitments across all major emitting sectors.
The ETS not only provides an economic incentive for polluters to reduce their emissions, but also serves as a significant source of finance for technology innovators and hard-to-abate sectors. Between 2013 and late 2025, the ETS 1 auctions raised €245 billion in revenue, which is used at either the Member State or EU level for the climate change transition. The introduction of ETS 2 is likely to double the amount available, including for a new Social Climate Fund, which will support consumers and citizens most affected by the changes.
The EU has been a trailblazer in introducing carbon pricing. According to the World Bank, the number of operational carbon pricing instruments globally has grown from five in 2005 to about 80 today, with new systems being prepared in Brazil, India and Türkiye. Direct carbon pricing now covers roughly 28% of global GHG emissions, up from about 24% the year before and ~5% in 2005. Importantly, this now includes middle-income countries such as Brazil, China, and India.
What is the case against it?
However, several EU and non-EU countries are seeking to reduce the scope of, or even abandon, the EU’s ETS. Leading politicians from several Central European countries, including the Czech Republic, Hungary, Poland, and Slovakia, have called for further price caps and/or the abandonment of the ETS 2, arguing that the schemes raise energy prices, affect the cost of living, and undermine industry competitiveness.
Heavy industry across the EU is calling for delays in the phase-out of free allocations, despite the introduction of Carbon Border Tax Adjustment Mechanisms (CBAM) (designed to put a carbon price on imports in the sectors most affected). This call is gaining traction among a wider group of EU Member States. The U.S. administration’s attempt to roll back domestic climate change policies is also putting pressure on the EU to dilute or remove its CBAM and aviation carbon pricing measures.
Why is transport so important?
Transport is responsible for around 29% of the EU’s emissions, of which road transport accounts for around 21%, aviation for 5%, shipping for 3%, and rail for less than 0.2%. Consequently, its emissions are a fundamental part of the ETS schemes.
Direct carbon pricing for cars and trucks is introduced with ETS 2, which caps fuel suppliers for road transport, thereby passing a CO2 price through to petrol and diesel. Aviation has been in ETS 1 since 2012, currently covering flights within the European Economic Area and selected extra‑EEA routes, with a tightening cap and shrinking free allocation.
Maritime shipping entered into the ETS 1 in 2024, initially for large ships on EEA routes and 50% of voyages to non-EEA ports, with a phase-in period that ends in 2026. It is envisaged that the 2026 review of the ETS could lead to the expansion of the scheme to cover more GHG gases and additional journeys for both ships and aircraft.
What is the timetable for decisions?
The EU ETS will undergo a major review in 2026, required by the ETS Directive and the Market Stability Reserve (MSR) rules, and now shaped by the new 2040 climate target. The Commission has conducted a 2025 consultation and plans to table a legislative proposal around mid-2026, as part of a wider climate package that updates ETS 1 and the MSR, and links to ETS 2, the CBAM, and future Carbon Dioxide Removal (CDR).
Once proposed, the file will follow the ordinary legislative procedure. The European Parliament (ENVI lead) will adopt its first‑reading position, while the Council agrees on a general approach among Member States. Parliament, the Council, and the Commission will then negotiate in trilogues, aiming for political agreement and formal adoption, likely in 2027. Most substantial changes to the cap, free allocation, scope and possible CDR integration would then take effect from the early 2030s.
At a time of high energy prices, there is growing pressure to water down the ETS. The irony is that weakening the ETS would only prolong Europe’s reliance on fossil fuels.