OPIS Insights

Political and industrial momentum is building across the European Union as institutions prepare for the upcoming review of the EU Emissions Trading System (EU ETS), widely regarded as the cornerstone of the bloc’s climate policy. The debate intensified during the European Industry Summit in Antwerp on Feb. 11, following the European Parliament’s positive vote on Feb. 10 that formalized the EU’s 2040 climate target (Read more: EU Climate Law Amendment).

At the center of this growing discussion lies a critical question: how should the EU ETS evolve to align with the newly endorsed 2040 objective while safeguarding Europe’s industrial base?

The Reform

The European Commission is expected to submit in July 2026 a comprehensive proposal to adjust and align existing climate legislation, including the EU ETS, with the new long-term trajectory. The review will address several structural and politically sensitive elements, including:

• The integration of carbon removals into the EU ETS framework;
• The potential expansion of the system to additional sectors, including municipal waste incineration and landfills, international aviation, international maritime transport, smaller ships and small energy units;
• Addressing carbon leakage risks in sectors not covered by the Carbon Border Adjustment Mechanism (CBAM);
• The functioning of the Market Stability Reserve and other measures in the event of excessive price fluctuations;
• The allocation and strategic use of EU ETS revenues, including the Modernization and Innovation Funds; and
• Prospects for international carbon market linkages (UK ETS).

A breakthrough in the recent Parliament vote is the formal acceptance of carbon removals within the EU Climate Law. This legislative shift opens the door for the EU ETS to integrate negative emissions technologies into its market structure. Peter Liese, a leading Member of the European Parliament (MEP) on environmental affairs, has pushed to include domestic carbon removals and the use of high-integrity international carbon credits under Article 6 of the Paris Agreement.

The Endgame

One of the more contentious aspects of the current discussion concerns the EU ETS trajectory beyond 2039, when allowances are scheduled to end.

The system’s emissions cap is reduced annually through the Linear Reduction Factor (LRF), which is set to increase to 4.4% during 2028-2030 to ensure a 62% emissions reduction by 2030. Some policymakers, however, argue that this trajectory may require adjustment to avoid a situation in which no allowances remain after 2039. Basically, this is an unknown scenario that brings uncertainty to the industry sector.

Liese has suggested the LRF could be softened to 3.4% while maintaining alignment with the 2040 objective. He also said “the situation where there are no more allowances from 2039 onwards cannot remain as it is,” emphasizing that extending allowances and amending the emissions cap would not endanger the bloc’s 2040 target. This view is supported by Redshaw Advisors and Germany’s Environment Minister.

The Industrial Dissent

The European Chemical Industry Council (Cefic) recently labeled the current ETS framework “obsolete,” a sentiment amplified by Josu Jon Imaz, chief executive officer of Repsol, a Spanish energy and petrochemical giant. Imaz argued that the ETS currently encourages “delocalization” rather than true decarbonization, calling for a shift toward incentives to maintain global competitiveness.

Stakeholders from Central Europe have expressed similar concerns. Karel Havlíček, the Czech Industry and Trade Minister, proposed capping allowance prices at 2020 levels, while Czech Prime Minister Andrej Babis advocated for expanding the system to cover 36 industrial sectors rather than only 14. Daniel Tamchyna, representing the Czech chemical industry, has warned that current EU climate policies risk driving industrial relocation outside the Union. Notably, the chemical sector is not yet covered by the CBAM, creating concerns about carbon leakage.

The Commission’s Defense

At the summit, EU Commission President Ursula von der Leyen issued a message to industry emphasizing that the problem is not the EU climate policy tool but the poor support to decarbonize industry by EU countries [video replay].

Von der Leyen said that “since it was introduced in 2005, emissions dropped by 39% while the economy of sectors covered by ETS has grown by 71%, so it shows that decarbonization and competitiveness can go hand-in-hand.”

The total of the EU ETS revenue under the EU control is reinvested in industrial innovation. A good example of the EU’s efforts is the Euro 100 billion Industrial Decarbonization Bank, which next week will conclude its first pilot auction committing Euro 1 billion (USD 1.2 billion) to industrial decarbonization. President Von der Leyen promised more support once the bank is fully operational.

However, 62% of the 2024 ETS revenue was directed to national budgets, from which Member States reinvested only 5% on industrial decarbonization, according to the latest EU Climate Action Progress Report 2025. Von der Leyen said that “channeling more ETS revenue back to industry will be a core focus of the upcoming reform of our ETS this summer, because these resources come from the industry and have to be reinvested in the industry.”

A Defining Moment

The future of the EU ETS will ultimately depend on its ability to evolve into a more flexible instrument without compromising the survival of Europe’s industrial core. A primary conclusion of the current debate is that the integration of additional industrial sectors and the operational launch of the EU ETS2 could provide a strategic pathway to recalibrate the emissions cap. By broadening the system’s scope, the union may be able to sustain the availability of emission allowances beyond the 2039 endgame, thereby avoiding a total supply vacuum that would otherwise destabilize the stakeholders. Further, as the upcoming review identifies a wider range of sectors at risk of carbon leakage – most notably the chemical industry – there are likely to be significant adjustments to the CBAM to ensure a level playing field against non-EU competitors.

In addition to internal dynamics, the expansion of sectoral coverage for aviation and maritime transport remains contingent upon progress within the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and the International Maritime Organization’s (IMO) Net-Zero Framework. While CORSIA is not yet under threat, this period is of significant uncertainty: a potential U.S. withdrawal – consistent with its exit from the Paris Agreement and a threatened withdrawal from the IMO’s Net-Zero Framework – could undermine the operational viability of the entire mechanism. Should this occur, the European Union is prepared to integrate these sectors into the EU ETS as early as 2027 and 2028.

Ultimately, the successful adoption of the 2040 target hinges on a delicate regulatory balance. By potentially including high-integrity carbon credits under Article 6 and domestic removals, the EU can create a more resilient compliance framework for industry.

As the Commission prepares its proposal, lobbying efforts have intensified and will continue to scale.