According to Paris-based think tank the Institute for Climate Economics (I4CE), proposals to weaken the EU’s carbon market rules would represent a strategic mistake.
Economists Benoît Leguet and Jean Pisani-Ferry argue that Europe should instead strengthen the EU Emissions Trading System (ETS) in order to support industrial competitiveness, accelerate technological innovation and maintain global leadership in low-carbon technologies.
EU carbon market central to climate policy
The EU ETS has placed a cap on emissions from European industry since 2005. The system currently covers approximately 40 percent of the European Union’s greenhouse gas emissions, including electricity generation, energy-intensive industries and intra-European aviation.
Under the ETS framework, companies must hold emission allowances for their carbon output. These allowances are tradable, creating a carbon market that provides financial incentives for reducing emissions. Following earlier adjustments, the carbon price has stabilized at roughly €60-€80/mt of carbon in 2025.
System entering new phase from 2026
The carbon market is now entering a new phase that has raised concerns among some industrial producers.
Two major policy changes are scheduled to begin in 2026. First, free emission allowances for energy-intensive industries will start declining more rapidly before being completely phased out by 2034, increasing carbon costs for producers. Second, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage. However, the current CBAM framework does not fully address competitiveness concerns faced by European exporters.
Complementary policies needed rather than ETS weakening
According to the I4CE analysis, these challenges should not lead to weakening the ETS itself. Instead, policymakers should introduce complementary policies that protect industry while maintaining the integrity of the carbon market.
One proposed solution is strengthening the CBAM framework or extending it to downstream sectors in order to better address carbon leakage along industrial supply chains without weakening ETS.
Electrification and renewables seen as long-term advantage
The think tank also emphasized that Europe’s long-term industrial competitiveness depends on reducing reliance on imported fossil fuels and accelerating the deployment of low-carbon technologies.
Greater electrification of industrial processes, combined with expanded renewable energy capacity and declining energy storage costs, could create structural advantages for European manufacturers. France, for example, is considered well positioned due to its relatively large supply of low-carbon electricity and biomass resources.
Policy priorities for the next ETS phase
The authors identified several policy priorities for strengthening the system while supporting industry. These include maintaining the planned phase-out of free allowances to provide long-term regulatory visibility, using ETS auction revenues more strategically to fund industrial decarbonisation projects and expanding CBAM coverage to protect European supply chains.
They also warned against introducing a carbon price cap within the ETS. Artificially lowering the price of carbon could undermine investment incentives for clean technologies and weaken the economic case for decarbonisation projects. Instead, the economists suggested that a carbon price floor could provide greater predictability for industry while preserving incentives to reduce emissions.
