Executive summary: Why CLC supports strong EU ETS and how the review should be implemented

The EU ETS review is a strategic choice about Europe’s industrial future.
As the system moves from power‑sector decarbonisation to deep industrial transformation, the review must safeguard long‑term predictability, market stability and an investable environment as the emissions cap approaches zero.

Maintain ambition now, add realism for the endgame.
Keeping the agreed 4.4% Linear Reduction Factor through the mid‑2030s is essential for credibility, but the late‑2030s trajectory must become more gradual to reflect technological realities, while still delivering the 2040 target and climate neutrality by 2050.

Redesign the Market Stability Reserve for scarcity, not surplus.
In a shrinking market, the main risk shifts to price volatility. The MSR must evolve with more flexible thresholds, faster responses and the removal of invalidation, while remaining strictly focused on carbon‑market stability, not power prices.

Use the ETS as Europe’s most powerful industrial investment tool.
Free allocation should be phased out as planned and aligned with CBAM. All ETS auction revenues should be treated as strategic capital, channelled into electrification, grids, industrial decarbonisation, clean fuels and carbon removals, aligned with EU‑level instruments.

Integrate Carbon Dioxide Removals and pursue international cooperation while protecting ETS integrity.
Permanent domestic carbon dioxide removals must be integrated into the EU ETS with robust rules and early investment signals, as they will be essential for balancing residual emissions in the system’s final phase. International ETS linking should be limited to systems of comparable ambition, and Article 6 credits should remain outside the EU ETS to preserve a strong, predictable and credible cap.

To ensure that the EU ETS remains a stable, credible and investable framework through the 2040s, CLC recommends the following:

I Adapt the system to the needs of a declining emissions allowance market

Adapt the Linear Reduction Factor (LRF) to meet the needs of the late 2030s

Update the Market Stability Reserve (MSR) to prevent destabilising price volatility in a shrinking market

Integrate high-quality, permanent carbon removals into the ETS with clear rules and early investment signals

II Accelerate the transition through the strategic use of auction revenues and the phase‑out of free allocation

Phase-out free allocation as planned without further delays

Allocate all EU ETS revenues to advancing the transition and increase transparency in their use

Ensure Competitive and Sustainable Aviation and Maritime Transport

III Pursue international cooperation responsibly but safeguard market integrity

Pursue international ETS linking only with systems that share comparable ambition, design and enforcement standards

Do not allow the use of Paris Agreement Article 6 to avoid undermining the integrity of the system.

Read the full policy brief as a pdf below.