The EU climate policy the world copied is under fire — what's at stake?
The emissions trading system became a global blueprint for pricing carbon and cutting CO2. Now industry groups are pushing back against tougher climate rules. How
The emissions trading system became a global blueprint for pricing carbon and cutting CO2. Now industry groups are pushing back against tougher climate rules. How effective is the scheme and where does it fall short? Europe's carbon market rarely makes headlines. But it has become one of the world's most influential climate policies. The bloc wants to become carbon-neutral by 2050, and its carbon market is the central tool to meet that goal. The European Commission is expected to present a proposal for the next revision of the European Emissions Trading System (ETS) shortly, and the question is whether that will make the system stronger or weaker. Industrial frontrunners, including parts of Europe's steel sector that have already invested in cleaner production, are hoping for a stronger system. But what exactly is emissions trading, and how well does it work? What is an emissions trading system? An emissions trading system (ETS) puts a price on pollution. Companies under the scheme must hold permits for the greenhouse gases they emit. The European system covers aviation, oil refineries, coal-fired power stations, steelworks, cement, glass and paper production, as well as parts of the chemicals industry and shipping. Together, these sectors account for up to 40% of EU emissions, with roughly 10,000 industrial facilities, factories and power plants covered. The ETS put major pressure on the coal industry to accelerate its phase out Image: DHA The idea is simple: the more a company pollutes, the more it should pay. The European Union sets an overall emissions cap and issues a limited number of allowances. Each permits the release of a specific quantity of greenhouse gases. These allowances can be traded on the carbon market. This creates a carbon price that is designed to encourage companies to cut their emissions as quickly as possible. Revenues generated by the European system are intended to help finance the transition towards a greener economy.
To keep the climate targets within reach, the emissions cap is reduced every year. Under the current rules, it falls annually by 4.3%. Where does the system work and where does it fall short? According to the European Environment Agency, the EU's environmental authority, the strongest results have come in the energy sector. Emissions from all stationary industrial sites covered by the system fell by 51% between 2005 and 2024. The energy-intensive steel industry now emits around 20% less than before the scheme began. Aviation tells a different story. According to the non-governmental organization Carbon Market Watch, emissions there continue to rise because the ETS captures only a small share of the sector's full climate impact. One of the system's most powerful levers is also one of its central weaknesses: the free allocation of emissions allowances. They were introduced as a temporary measure to protect industry during the transition. Yet two decades after the ETS system was launched, they remain widespread. According to Carbon Market Watch, around 90% of industrial emissions are still covered by free allowances. This means that industries pay the full carbon price for only a small portion of their CO2 emissions. Free certificates are among the most disputed details in emission trading Image: Nicolas Economou/NurPhoto/picture alliance The current plan is to phase out these free permits gradually, but industry groups are pushing back. "In essence, it's big oil and petrochemicals who are lobbying heavily against it. And they are joined by some of the big manufacturing sectors that are mainly coal-based," said Wijnand Stoefs, EU policy lead at Carbon Market Watch. Stoefs says some companies receive more allowances than they need and sell the rest, essentially turning a profit. Free allowances are not equally distributed, making it harder for small and medium-sized enterprises Image: Piotr Dziurman/imageBROKER/picture alliance EU carbon market: global blueprint with flaws? According to the World Bank, more than 35 emissions trading systems are now operating worldwide.
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