Europe’s Emissions Trading System (EU ETS) has become the central instrument underpinning the continent’s transition to future-proof economies in line with the EU’s climate goals. At a time when European industry faces intensifying global competition, mounting geopolitical uncertainty, and high energy costs provoked by reoccurring conflicts, the ETS provides something rare but essential: a predictable, market-based framework and driver for long-term investments in industrial renewal. The decarbonisation of European power markets demonstrates that carbon pricing, when sustained and credible, drives structural change at scale. That structural change has led not only to lower emissions in the power sector, but also to some shielding from volatile fossil fuel prices related to import dependence.

Recent discussions around the post-2030 design of the ETS risk overlooking this fundamental role. While targeted improvements are both necessary and expected, any reform must start from a clear premise: the ETS is working, and weakening its core design and agreed timelines would come at a high cost to Europe’s competitiveness and industrial transformation. To ensure that companies that are already investing in the renewal of European industry are incentivised, not punished, and that businesses are provided with the stable and predictable policy framework required for continued investments to transform our industries, we call for:

Ensuring a predictable investment environment for the clean transition

Over the past decade, the ETS has evolved into a robust and effective mechanism for reducing emissions across energy and industry, particularly in electricity generation.

As outlined by the European Commission, thanks to the ETS, domestic emissions in the EU dropped by 39%, while the economy grew by 71% between 1990 and 2024. For electricity generation, the decline has been even steeper: the specific CO2 emissions have declined by roughly 60% since 1990 (EEA, 2025), and by about 40-45% since the ETS became effective in 2005 (European Commission). It has massively reduced fossil fuel consumption and lowered the Union's dependence on energy imports, strengthening its resilience. Moreover, the ETS has driven major investments in the clean energy transition through renewables and low-carbon energy sources, enhancing the EU’s energy independence (European Commission, 2026).

In industry, the effects have been more uneven. Sectors that received generous free allocation of emissions allowances have, in many cases, not yet undertaken deep decarbonisation.

The European steel sector is now entering a decisive investment cycle as many old blast furnaces are coming to the end of their lifecycles. With that, first-of-a-kind near-zero emission production routes, including hydrogen-based direct reduction and electric arc furnace steelmaking, are moving from planning to deployment.

These investments are capital-intensive, exposed to global competition, and highly sensitive to policy risk. Carbon pricing is an important condition that makes near-zero emission steel competitive against more polluting manufacturing. Without that price signal, the business case for transformation weakens and, in the worst case, investments flow to relining old polluting blast furnace capacity as opposed to industrial transformation.

Steel investments, like those in cement, chemicals, and hydrogen production, are capital-intensive, exposed to global competition, and highly sensitive to policy risk, with planning horizons extending well beyond 2030. The ETS has begun to deliver what industrial investments need most: a credible long-term, technology-neutral price signal. These decisions depend on confidence in the future trajectory of the system as much as on today’s carbon price.

The priority now should be to consolidate and reinforce the ETS as a stable, market-based system, capable of delivering both emissions reductions and industrial competitiveness. This requires maintaining a clear long-term trajectory, safeguarding market integrity, and ensuring that complementary policies reinforce rather than dilute the system’s core function.

A robust ETS is not only essential for meeting Europe’s climate targets. It is also a precondition for enabling European industry to compete, invest, and lead in the global transition to climate neutrality.

We join several business voices investing in Europe’s future by calling for the following policies (1):

1) Maintain a strong and predictable ETS trajectory beyond 2030, with a carbon price that incentivizes investments to clean technology

The ETS must continue to provide a credible and investable long-term decarbonisation pathway for Europe. This requires maintaining the key parameters that underpin carbon price expectations and investment decisions. In particular, the EU should maintain the Linear Reduction Factor (LRF) at 4.4% to at least 2035, thereafter adjusting the 2035 – 2040 trajectory in line with the 2040 Climate Law.

A carbon price that incentivizes investments is the necessary condition for near-zero emission technologies to compete with conventional, high-emission production. For the European steel industry, where the shift to hydrogen-based steelmaking requires billions in capital expenditure, carbon price predictability and price level are equally important. Any uncertainty around the future cap risks delaying final investment decisions and slowing the deployment of clean technologies across heavy industry.

2) Preserve the integrity of the ETS market architecture and the Market Stability Reserve

The Market Stability Reserve (MSR) has been instrumental in restoring balance to the carbon market by managing surplus allowances. The current design of the MSR is working as intended and should not be altered in the near term. The proposed removal of the MSR invalidation clause should not be made without proper consideration in the next revision proposal. Available analysis indicates that a surplus of allowances will persist well beyond 2030, meaning there is no immediate pressure to release allowances from the reserve (Carbon Market Watch, Öko-Institut, 2025).

Any post-2035 redesign of the MSR should account for the structurally tighter market by adjusting release volumes downward, so as not to undermine the carbon price signal at the point when the system most needs to hold firm. Any political interventions to use extra allowances from the reserve for temporary purpose should be carefully assessed.

3) Ensure the phase-out of free allocation to drive industrial transformation

The agreed phase-out of free allocation between 2026 and 2034 is a critical element of the ETS reform package. The historical record shows that sectors receiving generous free allocations have, in many cases, lacked strong incentives to decarbonise. Maintaining the phase-out schedule sends a clear signal that the transition to low-carbon production is both expected and irreversible.

For the steel sector specifically, the phase-out of free allocation reinforces the investment case for near-zero emission production. Companies investing in hydrogen-based iron and steelmaking, and other breakthrough technologies, need confidence that competitors using conventional, high-emission processes will face rising carbon costs over time. Any delay or reversal of the free allocation phase-out would undermine this logic and weaken the competitive position of first movers.

The phase-in of the Carbon Border Adjustment Mechanism (CBAM) over the same period must proceed in parallel, to ensure that European producers are not exposed to unfair competition from imports that do not bear equivalent carbon costs.

4) Channel ETS revenues into industrial transformation, not general budgets

ETS auction revenues should be directed toward accelerating industrial decarbonisation rather than treated as a general revenue stream for national budgets. As decarbonisation progresses and the cap tightens, auction revenues will inevitably decline. Member states and the EU should therefore treat current revenues as a time-limited opportunity to fund irreversible transformation investments.

Increasing funding for EU-level instruments, notably the Innovation Fund and a proposed Industrial Decarbonisation Bank, would enable more efficient cross-border investment in clean technologies and infrastructure. The broader ETS framework, including the planned ETS2 for buildings and transport, forms part of the architecture that signals the EU’s commitment to comprehensive carbon pricing. Ensuring coherence across these instruments reinforces the credibility of the overall system.

Conclusion and call to action

The EU ETS is delivering emissions reductions while providing the foundation for Europe’s industrial transformation. The task now is not to redesign the system, but to preserve and strengthen what works, and to ensure that the system’s design continues to reward investment in the clean transition.

Maintaining a carbon price that incentivizes industrial decarbonization investments, safeguarding market integrity, completing the free allocation phase-out in the agreed timeframe, and directing revenues toward industrial transformation will ensure that the ETS continues to function as Europe’s central driver of decarbonisation and industrial competitiveness.

“Policy certainty is crucial for Europe’s energy transition and the upcoming EU ETS revision should confirm the role of the market-based ETS as the cornerstone of EU climate policy. The integrity, predictability and long‑term stability of the ETS are essential to drive electrification investments to enable cost-efficient decarbonisation across Europe.”

Markus Rauramo, President & CEO, Fortum

(1) See e.g. Cleantech for Europe, WMBC, CLG Europe, Business for CBAM letter signed by 150 companies and investors, CLC’s Nordic Business Position on the EU ETS for EUCO, CLG Europe’s call for A Robust ETS for a Competitive and Decarbonised EU, CLC, Skift & Haga Initiative’s Nordic Call, and IIGCC’s Investors call for a robust and predictable EU ETS