The EU Emissions Trading System (EU ETS) is one of the largest carbon markets in the world, and also one of the most effective. According to the European Commission, between 2005 and 2023, emissions in sectors covered by the system decreased by 47.6%. “However, drastic changes and enhancements to the system’s capabilities will be necessary after 2030,” says Robert Jeszke from the Institute of Environmental Protection – National Research Institute. Jeszke proposes incorporating carbon dioxide removal (CDR) mechanisms into the EU ETS. Experts suggest that such technologies could be crucial in achieving climate neutrality by 2050.
How the EU ETS Works
Under the “polluter pays” principle, companies participating in the EU ETS must acquire allowances (EUA) for each ton of CO2 they emit. They can purchase allowances on the market (e.g., through auctions), receive them for free through allocations, or trade them with each other. This system encourages faster decarbonization and increased use of renewable energy sources.
“Currently, the EU ETS, which has been operational since 2005, is the largest and most effective system of its kind in the world because it rapidly reduces emissions. According to a recent European Commission report, emissions reductions achieved through this system between 2022 and 2023 were around 16%,” says Robert Jeszke, Deputy Director for Emissions Management at the Institute of Environmental Protection – National Research Institute.
Scope and Effectiveness
About 10,000 European companies fall under the EU ETS, primarily in sectors such as power generation, heating, and energy-intensive industries like refining, steel, cement, glass, and paper production. The system covers approximately 40% of the EU’s total greenhouse gas emissions and has proven to be an effective mechanism for their reduction.
“The system is effective and mature, though its development has faced many challenges and political tensions. However, it now requires major reforms, as its current structure and functionality effectively end around 2040. The EU’s climate goals extend to 2050, so if the EU ETS is to remain a driving force for decarbonizing the European economy, drastic changes are needed beyond 2030,” the expert notes.
Preparing for Future Challenges
These changes should prepare the EU ETS for future challenges and ensure that the trading system continues to support the EU’s long-term climate policy.
At the COP29 climate summit in November in Azerbaijan, the National Centre for Emissions Management (KOBiZE), part of the Institute of Environmental Protection, presented recommendations for incorporating CDR mechanisms into the EU ETS. This would provide significant support for the sector if companies covered by the ETS could use CDR units to offset emissions. Experts argue this is essential in the context of the projected depletion of emissions allowances around 2040, maintaining market liquidity and stability, and addressing the difficulty of further emissions reductions in certain industrial sectors, which could lead to carbon leakage (relocating production outside the EU).
“Carbon removal mechanisms will play a significant role in future EU climate policy and the emissions trading system,” emphasizes Robert Jeszke. “These include both natural mechanisms, such as CO2 absorption by forests or biomass production for energy purposes, and industrial technologies that capture and store CO2 from the atmosphere, such as BECCS (bioenergy with carbon capture and storage). While there are pilot installations for these technologies, they are extremely expensive and require financial support. After 2030, such support will need to be available in the EU.”
Integrating Negative Emissions into the EU ETS
Introducing negative emissions—CDR units—and fully integrating them into the EU ETS (i.e., equating CDR units with EUA allowances) would enhance the flexibility and liquidity of the system in the coming decades.
KOBiZE also proposes establishing a European Central Carbon Bank (ECCB), an independent institution responsible for managing CDR units and regulating EUA supply. The ECCB could stabilize allowance prices, replacing current stabilization mechanisms in the EU ETS, simplifying the system, and increasing its efficiency. Additionally, by managing CDR integration, the ECCB could generate funds from selling CDR units, supporting the EU’s energy transition and hard-to-abate sectors.
“We should allow CO2 removal technologies to reduce long-term costs in the emissions trading system and create opportunities to link it with other similar systems worldwide,” says the expert from the Institute of Environmental Protection. “Different countries or regions design emissions trading systems according to slightly different criteria, but the underlying mechanics are the same. Linking these systems, scaling actions beyond the EU, and enabling the use of credits from projects in developing countries to offset emissions in developed nations is crucial. To achieve this efficiently, we propose the European Central Carbon Bank.”
The Future of the EU ETS
As shown in the November CAKE/KOBiZE report (“VIIEW on EU ETS 2050”), the architecture of the EU ETS will evolve with the inclusion of the construction and transport sectors and the gradual depletion of EUA allowances by 2040. This could affect market stability in the 2030s, leading to price volatility as supply and demand adjust. The European Commission has highlighted the urgent need for a reassessment of the EU ETS, including evaluating the incorporation of CO2 removal mechanisms. This review is planned for 2026.
Potential changes to the system may also include expansion (sectoral, emissions-based, geographical, or international), such as extending the EU ETS to additional sectors and countries, merging the EU ETS with ETS 2, or linking it with similar systems in other regions. According to CAKE/KOBiZE experts, such integration would offer significant benefits. Their analysis shows that linking ETS systems lowers CO2 emission prices in high-cost regions and could reduce EU ETS prices by approximately €40–€60 per ton. The EU would likely purchase a large number of allowances from other regions, particularly China. Estimates suggest that global welfare gains from linking ETS systems, measured by increased household consumption, would range from €25 billion in 2035 to €40 billion in 2050.
“In summary, as the EU ETS evolves to meet more ambitious climate goals, the market faces challenges like price volatility and concerns about industrial competitiveness. These issues can destabilize the market, hinder emissions reduction efforts, and increase the risk of carbon leakage. Integrating ETS 2 with the EU ETS, using offsets, or allowing CDR units to offset emissions could mitigate these risks. Additionally, establishing a European Central Carbon Bank (ECCB) and managing allowance supply effectively would ensure the system’s stability, efficiency, and sustainability,” concludes Robert Jeszke.
