EU ETS in transition: the key disputes of the upcoming reform

The European Commission: between climate targets and competitiveness

The Commission’s position has changed noticeably in recent years. While ETS reforms over the past decade primarily aimed to reduce the historical surplus of allowances, Brussels is now concerned with a different issue: Could the market become too tight in the 2030s?

This shift is particularly evident in the Commission’s proposal for an MSR adjustment published in April 2026. In it, the Commission argues that the MSR has largely fulfilled its original purpose of reducing allowance surpluses. At the same time, it proposes ending the automatic invalidation of allowances held in the reserve. The message is clear: allowances should no longer necessarily be deleted but retained as a strategic reserve. This would transform the MSR from a market-tightening instrument into a market-stabilisation instrument. For many market participants, this is the first signal that the Commission is taking concerns about future allowance shortages seriously.

Industry: More Allowances, More Planning Certainty

Energy-intensive industries are following the ETS revision very closely. Associations such as BusinessEurope, Cefic, and European Aluminium have long argued that the tightening of the ETS is progressing faster than industrial transformation.

Their main arguments are as follows: The ETS cap is continuously declining, free allocations are being reduced, and the MSR continues to remove allowances from the market. At the same time, many key technologies, from green hydrogen and electrification to CCS, are still in the scaling phase. From the perspective of part of the industry, this creates a situation in which companies may face high CO₂ costs before economically viable decarbonisation solutions become available at scale.

Consequently, some industry associations are calling for a reform of the MSR. Their objective is to limit market tightening and create additional flexibility if a structural shortage of allowances emerges during the 2030s. However, it should also be noted that different associations advocate different solutions, and some companies, particularly those that have already invested heavily in transforming their facilities, have expressed concern that they could be disadvantaged if the EU ETS is “softened.”

Fear of a scarcity market

Among the strongest supporters of reforming the MSR are currently Poland, the Czech Republic, Hungary, Romania, Bulgaria, Slovakia and Italy. These countries have repeatedly called for adjustments to the market stabilisation mechanisms in recent months. While their arguments differ, they follow a common logic: they fear that the European carbon market could transition from a surplus market to a structurally scarce market in the 2030s.

Many of these countries have a high share of energy-intensive industries and electricity systems that still rely heavily on thermal generation capacities. While coal-fired power plants are particularly affected in Poland, Bulgaria, and the Czech Republic, gas-fired power generation plays a central role in ensuring security of supply in Italy. High CO₂ prices therefore have a direct impact on electricity generation costs and, consequently, on economic competitiveness.

At the same time, the financial and technological conditions required for industrial transformation are often more challenging in these countries than in parts of Northern and Western Europe. Governments therefore fear that a permanently tight ETS market could lead to higher electricity prices, rising production costs, and a weakening of industrial competitiveness. As a result, they support reforms that would make additional allowances available, limit the invalidation of allowances, or make the MSR overall less restrictive. Italy in particular has increasingly positioned itself in recent months as an advocate for giving greater consideration to competitiveness and energy prices. Rome argues that decarbonisation can only succeed if climate policy and industrial competitiveness are addressed equally.

On the other side of the debate are several Northern and Western European countries that generally support maintaining a strong and stringent EU ETS. Countries such as The Netherlands, Denmark, Sweden, and Finland have traditionally viewed a robust carbon price as a key driver of industrial decarbonisation and clean technology investments. These countries argue that weakening the MSR credibility of the ETS and delay the transition to a climate-neutral economy. While they recognise the competitiveness challenges faced by industry, they generally favor addressing these concerns through targeted industrial and innovation policies rather than by softening the carbon market itself.

Environmental NGOs: no weakening of scarcity

Environmental organisations such as Carbon Market Watch, Bellona Europa, NABU and WWF view the current reform proposals with considerable skepticism. For them, the MSR represents the success story of the ETS. Without the market tightening achieved over recent years, CO₂ prices would never have risen to levels that make investments in renewable energy, electrification, or hydrogen economically attractive.

From their perspective, any relaxation of the MSR would undermine confidence in the market. Environmental organisations are particularly critical of the Commission’s proposal to end the automatic invalidation of allowances. Their concern is that allowances which are merely parked rather than cancelled today could later re-enter the market, thereby increasing the long-term emissions budget.

The real battleground: free allocation

Even more contentious than the discussion surrounding the MSR may be the debate over free allocation. Officially, free allowances are intended to be gradually replaced by the Carbon Border Adjustment Mechanism (CBAM). In theory, the border adjustment mechanism should prevent carbon leakage and thus make free allocation unnecessary.

In practice, uncertainty is increasing by the energy intensive industries. Industry associations argue that the CBAM still has numerous weaknesses. Export markets, for example, are currently barely addressed. Companies therefore fear competitive disadvantages compared to producers outside Europe.

Environmental organisations, however, argue that extending free allocation would weaken the carbon price signal and reduce incentives for companies to invest in low-carbon technologies. In their view, maintaining the planned phase-out is essential to preserve the environmental integrity of the ETS and ensure that the CBAM can effectively replace free allocation over time.

This leads to one of the central political questions of the ETS revision: should Europe maintain the planned phase-out of free allocation, or should the transition period be extended? It is precisely on this issue that conflicts between industry, Member States and environmental organisations are likely to become particularly intense.

The ETS debate Is focused on the wrong problem

The current discussion surrounding the reform of the EU ETS is often portrayed as a conflict between climate protection and competitiveness. On one side are those who warn against weakening emissions trading and defend the MSR as an indispensable tool for maintaining credible carbon price signals. On the other side are industry associations and several Member States that warn of rising costs, investment risks, and a loss of industrial competitiveness.

In reality, the MSR has played a significant role in reducing the historical surplus of allowances and making the carbon price a meaningful investment signal. At the same time, it is difficult to deny that many energy-intensive industries are currently facing the challenge of reducing emissions without having sufficient access to the necessary alternatives at an economically viable scale.

The key question of the ETS reform should therefore not only be whether Europe should continue tightening the carbon market or release additional allowances into circulation. Rather, it should be whether Europe is creating the conditions for decarbonisation with the same determination with which it has increased the cost of emissions. Many of the technologies on which policymakers and industry alike are relying, such as green hydrogen, CCS, electrification of industrial processes and climate-neutral production of basic materials, are technically available but continue to face infrastructural, regulatory, or economic barriers.

Instead of focusing exclusively on how many allowances should be withdrawn from or returned to the market, the ETS debate should therefore place greater emphasis on how the expansion of the necessary infrastructure can be accelerated and how investments in climate-friendly technologies can be promoted.

Ultimately, the ETS reform should not be understood as a choice between climate protection and competitiveness. The real challenge is to achieve both simultaneously. In the long term, the European carbon market will not fulfil its purpose simply by becoming increasingly scarce, but by ensuring that companies have access to real and economically viable alternatives for reducing emissions. Only once these alternatives are available at scale can the ETS perform its most important function: enabling the transition to a climate-neutral and at the same time competitive European industry.