Factsheet: What is EU ETS and why should we keep it?

The EU ETS operates on a “cap and trade” model. A cap is set on the total amount of emissions allowed and is reduced each year in line with the EU’s climate targets. Companies must surrender allowances for every tonne of CO2 emitted, creating a financial incentive to cut pollution. Allowances can be bought, sold, and traded on the carbon market. By allowing companies to reduce emissions where it is most cost-effective, the ETS helps achieve climate targets at lower overall economic cost. Since 2005, the EU ETS has helped reduce emissions from Europe’s power and industrial sectors by around 47%.

ETS is a cornerstone of the EU’s climate policy, but it is not only a climate tool; it is a critical piece of the EU’s long-term industrial, economic and security strategy. If used properly, the revenues it generates can support investments in competitive clean industries, innovation, modern energy infrastructure, and accessible net-zero technologies, while also helping households and workers navigate the social and economic impacts of the transition.

Read CAN Europe’s position paper on ETS1 and on ETS2.

Yet despite its importance, in the first half of 2026, the EU ETS has been cast as a scapegoat in an increasingly heated debate over Europe’s industrial future. The coordinated attack from fossil fuel incumbents and vested interests is unprecedented in scale.

At the same time, there is a broad and growing support to maintain the EU ETS – not only from civil society, but also from a wide range of businesses and industrial actors calling to stay the course on climate action.

A majority of 59% of respondents across France (66%), Germany (47%), Italy (65%), the Netherlands (71%), Poland (40%) and Spain (68%) think that heavy industries, such as steel, cement, and chemicals, should pay for their CO₂ emissions. Support rises to more than two-thirds in Spain, France, Italy and the Netherlands, while opposition across the six countries stands at just 23%. Beyond pricing polluters, respondents also expect the system to reward climate ambition, with 7 out of 10 participants believing that companies emitting the most – or failing to reduce their emissions – should pay more than others. 

Support goes well beyond the “green electorate”, including even voters of governing parties that have called for changes to or a weakening of the EU ETS. This becomes strikingly clear in Italy, where 71% of voters of Fratelli d’Italia, the party led by Prime Minister Giorgia Meloni, express support for making heavy industries pay for their emissions. In France, 73% of Emmanuel Macron’s voters and 55% of Marine Le Pen’s voters back the same principle. In Poland, 57% of voters of Koalicja Obywatelska (KO), led by Prime Minister Donald Tusk, are in support.

At present, there is still very limited transparency on how revenues are used and only a small share is directed explicitly towards financing the transition. The current list of eligible spending priorities is outdated and needs a fundamental overhaul. Member States should also be required to publish clear, detailed and comparable information on how ETS revenues are spent.

Check how Member States use ETS revenues.

Revenues should be invested transparently and strategically in industrial transformation, clean infrastructure, innovation, and social support. A strong focus must be placed on helping lower-income households and vulnerable groups through measures such as building renovation, energy efficiency, affordable renewable heating and cooling, clean mobility, and better public transport. This is essential to ensure that the transition reduces both emissions and inequality, rather than deepening existing vulnerabilities.

Some Member States are already showing how ETS revenues can be used effectively. In Belgium and France, auction revenues have supported targeted renovations of social housing, cutting emissions while improving living conditions and reducing energy bills for low-income households.

Since 2005, emissions in the sectors covered by the EU ETS have fallen by around 50%. The strongest progress has been achieved in the power sector, where the combination of carbon pricing, renewable deployment and fuel switching has driven rapid reductions. Business representatives have recently called it a “competitiveness engine for Europe”, which has “driven billions of euros of investments by early movers, has provided a market signal for innovation and can be the demand signal for European cleantech solutions to scale.”

Weakening the EU carbon price would push investment in clean industrial production to regions that are moving faster and providing greater certainty, while penalising first movers who already launched investments in Europe. Without a strong and predictable ETS, the business case for clean steel, green chemicals, circular materials and electrified production weakens significantly, undermining the objectives of both the Clean Industrial Deal and future instruments such as the Industrial Accelerator Act.

The ETS already is an independence instrument, as it has allowed the EU to save 100 billion cubic metres of fossil gas consumption.

Lowering the Linear Reduction Factor to 3.7% from 2031 onwards and 1.7% afterwards, from currently 4.4%, would simply allow more pollution from power plants and heavy industry, while a large part of decarbonised solutions are already available. Those emissions would not disappear. Instead, they would impose additional costs on European citizens and companies, and force deeper and politically more difficult cuts from sectors such as buildings, agriculture and transport if Europe is to meet its legally binding 2040 climate target. CAN Europe is also concerned that a substantial amount of international credits would be allowed in the framework.

The ETS review must end European industry’s dependence on free pollution permits, which have consistently undermined decarbonisation investments in energy-intensive sectors such as steel. Extending free allocations until 2038 for sectors covered by the Carbon Border Adjustment Mechanism (CBAM) runs counter to the objective of phasing them out, particularly given that some sectors have faced very little – if any – effective carbon price signal in recent years.

Allowing carbon removals in the mix would dilute the environmental integrity of the ETS. Carbon removals may have a role in addressing genuinely unavoidable emissions, but they must never become an excuse for delaying emissions reductions at source.

CAN Europe’s priorities for the next review:

• The current cap trajectory and linear reduction factor should be preserved at least until 2036, providing the predictability needed for immediate long-term investments. Discussions about additional flexibility should concern only the period thereafter, when limited liquidity risks might need to be addressed.

• The phase-out of free allocations must continue. In 2024 alone, free allocation still represented more than €30 billion in forgone auction revenues, while also weakening the carbon price signal for industry. Maintaining generous free allowances would only delay investment in cleaner production and undermine the effectiveness of the ETS. Conditionalities attached to any remaining free allocations should be strengthened in order to force additional investments in industrial transformation and deep emission cuts.

• ETS revenues must be used strategically. Auction revenues should support in the first place a just transition for citizens, while also speeding up the transformation of European industry. This means investing in clean industrial technologies, infrastructure and deployment of renewables, while also helping households and workers cope with the costs of the transition, both within Europe and internationally. Within Europe, there is also a need to continue allocating revenues specifically to those regions where transition costs are higher.

• The integrity of the ETS must be protected. International credits and carbon removals should remain outside the system. Introducing them into the ETS would weaken the carbon price, reduce incentives for real emission cuts in European industry and risk undermining confidence in the system. 

Read our position paper for more details on these priorities.

Between 2008 and 2021, heavy industry received approximately €200 billion worth of EUAs at no cost. In 2024 alone, nearly 500 million allowances – valued at over €32 billion were still handed out for free. These are forgone revenues that could otherwise fund climate action, social support, and the transformation of the European economy. Sectors like metals, minerals, chemicals, and paper firms often received more allowances than their verified emissions, generating windfall profits concentrated in iron and steel, cement, petrochemicals, and refineries, estimated between €26 billion to €46 billion. Despite these handouts, the industry has favoured short-term financial gains over long-term investment in the green transition. Many companies have prioritised share buybacks and dividend payouts while dropping capital expenditure, which on average has fallen from 18.4% in 2010 to 14.9% in 2023. 

Free allocations were always intended as temporary. To restore integrity to the EU ETS, free allocations must be fully phased out. For CBAM-covered products, the planned phase-out trajectory must be respected. For non-CBAM ETS sectors deemed at risk of carbon leakage, including refineries and chemical producers, free allocation must end no later than 2034 by including sectors such as plastics into CBAM. Any remaining free allocations must be made strictly conditional on additional, verifiable decarbonisation investments. 

Countries such as Canada, the United Kingdom, Switzerland, New Zealand, South Korea, and China have implemented carbon pricing systems. China, in particular, operates the world’s largest emissions trading system by emissions covered. Several US states, including California and those participating in the Regional Greenhouse Gas Initiative (RGGI), also use carbon markets. In Latin America, countries such as Chile and Mexico have introduced carbon taxes, while South Africa and Singapore also apply carbon pricing mechanisms.

Check the World Bank Carbon Pricing Dashboard, which tracks carbon pricing systems around the world.