The EU ETS: a cornerstone of European climate and industrial strategy
The EU Emissions Trading System (EU ETS), originally conceived as a tool limited to a few energy-intensive sectors, has evolved to become the central pillar of the Union’s industrial and climate policy. For Italian companies, it is no longer just a regulatory compliance requirement, but a decisive macroeconomic variable that cannot be ignored.
As the “Fit for 55” package enters a crucial phase, businesses and some member states have pointed out that the EU ETS imposes burdens that foreign competitors are not required to bear. Based on these industrial competitiveness concerns, some states have questioned Europe’s climate commitment in a global context marked by disparities in energy and climate costs. Countries like Italy, Austria, Poland, and the Czech Republic would like the EU Commission to weaken the EU ETS, arguing that it exacerbates heavy industry costs. Conversely, countries that have pushed harder for decarbonization, such as Spain, do not want substantial changes to the mechanism.
As reported by the Financial Times, the Commission intends to impose a carbon price ceiling, following pressure from industries shaken by the consequences of the war in Iran. This emergency brake would be triggered in the event of a price surge. Brussels is expected to announce the measure shortly. Ursula von der Leyen stated that the EU ETS is working but announced corrective measures to make it more flexible.
So far, the EU ETS has enabled significant emissions reductions in the sectors concerned: by 2023, emissions from European power plants and heavy industry had decreased by almost 47% compared to 2005 levels.
In this in-depth analysis, we will try to examine the economic impact of the EU ETS, the differences with ETS2, and strategies to transform a cost into an investment opportunity.
The costs of the EU ETS for Italian businesses
The EU ETS operates on the “cap-and-trade” principle: a maximum cap on total emissions is set, which decreases annually, and companies are required to hold an allowance for each ton of CO2 emitted. The mechanism compels polluters to pay for their emissions, internalizing the cost of carbon into business decisions, but also provides flexibility through allowance trading, so that reductions occur where they are most economical. While many allowances were initially allocated for free to prevent relocation, their progressive elimination is now foreseen. By 2030, the EU ETS 1 system aims for a 62% reduction in emissions compared to 2005 levels.
EU ETS 1 vs EU ETS 2
To incentivize emission reductions in the road transport and building sectors, which were not covered by the current EU ETS, a separate but parallel ETS system, named ETS2, will come into force starting in 2027 for emissions produced by fuels used in these sectors. Regulated entities covered by ETS2 are required to surrender allowances for their verified emissions corresponding to the quantities of fuels they have placed on the market for consumption.
The surrender of allowances under ETS2 will only begin in 2028 for 2027 emissions, but emissions monitoring and reporting started on January 1, 2025. ETS2 allowances will not be combinable with allowances traded in the existing EU ETS and will be placed on the market only through auctioning (no free allocation is foreseen). The total number of allowances issued under ETS2 will be reduced annually by 5.10% at the start of the system and by 5.38% from 2028.
Key deadlines for 2026-2027
The 2026-2027 biennium will represent a significant transition period because:
- in 2026, the transition period for the CBAM (Carbon Border Adjustment Mechanism) begins, which will lead to the first tangible reduction of free allowances for protected sectors.
- In 2027, EU ETS 2 will officially debut, extending the carbon price to the building, road transport, and small industry sectors not covered by the current system.
“After a transitional phase characterized by merely declarative obligations and a predominantly experimental and informative function, from January 1, 2026, the CBAM is effectively an operational and binding instrument, destined to structurally impact procurement strategies from abroad, internal governance, and compliance safeguards for companies operating in sectors most exposed to the risk of carbon leakage,” observed Pier Paolo Ghetti, Global Trade Advisory Leader at Deloitte Italy, illustrating the entry into force of the CBAM on Voices, the platform hosting comments by Deloitte experts on current affairs.
2026 will be decisive for the CBAM and, more generally, for the implementation of the European Green Deal. Businesses are called upon for increasingly conscious, integrated, and preventive compliance management, in a context characterized by ever-increasing regulatory complexity and greater attention to cost control.
What changes for the national productive fabric
The two systems affect different segments of the economy in different ways. EU ETS 1 continues to monitor “hard-to-abate” industrial sectors: steel, cement, chemicals, energy, and aviation. The main novelty is the extension of the system to the maritime transport sector. Companies in these sectors must manage the reduction of free allowances. This means that an ever-increasing share of emissions will have to be purchased at auction.
EU ETS 2: SMEs, transport, and heating
Unlike EU ETS 1, which directly impacts industrial installations, EU ETS 2 is an “upstream” system: the cost is applied to fuel suppliers. However, this cost will inevitably be reflected in the final prices of heating and fuel. The purpose, however, is to incentivize energy efficiency in buildings and electric mobility.
Economic impact: price forecasts and competitiveness
For years, the EU ETS suffered from low prices due to an over-allocation of allowances. Subsequent reforms, such as the Market Stability Reserve, reduced supply, and carbon prices rose from less than 10 euros a few years ago to almost 80 euros per ton recently (exceeding 100 euros in 2023). While this strengthened the decarbonization signal, it also increased costs for European industries.
In recent years, we have therefore seen a significant increase in carbon costs, but long-term forecasts suggest more complex scenarios. As an Institut Montaigne analysis explains, the programmed scarcity of allowances will cause carbon prices to rise. Although there is natural volatility, estimates indicate that we could reach 150-160 euros per ton of CO2 by 2030. Such an increase would significantly alter the cost-benefit calculation for any industrial investment.
Direct and indirect costs
The impact for Italian companies includes direct and indirect costs:
- Direct costs: The purchase of allowances required to cover their emissions.
- Indirect costs: The price of carbon paid by electricity producers is reflected in companies’ energy bills. Even though the electricity sector has already significantly reduced emissions, as reported by the EU Commission, the use of residual fossil fuels keeps the marginal price of electricity high.
Adaptation strategies: decarbonization as an investment
Carbon pricing can, however, play a significant role in reducing industrial emissions, considering that operational and investment decisions are highly sensitive to costs. As the IEA indicates, in the medium term, it can make large-scale energy efficiency improvements more cost-effective. In the long term, it can also represent a fundamental incentive for investments in innovative technologies, such as carbon capture, utilization, and storage (CCUS) and electrolytic hydrogen, for example, in the steel sector.
For businesses, passively enduring the EU ETS means being exposed to a progressive loss of competitiveness. The winning strategy involves transforming regulatory compliance into an efficiency lever. The EU ETS mechanism is not punitive; instead, it serves to signal to the market where it is more convenient to invest, fostering innovation. Therefore, companies should aim for:
- Energy efficiency because reducing energy consumption is the quickest way to contain allowances.
- Electrification of processes because replacing gas-fired furnaces with electric technologies powered by renewable sources allows for almost complete exclusion from the EU ETS 2 scope.
The CBAM: the shield against unfair competition
To prevent EU companies from being penalized compared to non-EU competitors, such as China or India, who do not pay for emitted carbon, the Carbon Border Adjustment Mechanism (CBAM) was introduced. This instrument imposes a tax equivalent to the European carbon price on imported products in sectors such as steel, aluminum, and fertilizers. Thus, the CBAM is an essential protection tool to maintain a level playing field globally.
The CBAM Regulation entered into force on October 1, 2023. From 2023 to 2025, during the pilot phase, importing companies were asked to report the emissions of their products. From January 1, 2026, however, companies must purchase CBAM certificates, based on EU ETS prices, to cover their CO2 allowances. Chinese steel importers, for example, are now required to pay a difference between Beijing’s carbon price and that of the European Union, ensuring that this steel complies with the same environmental criteria as that produced in Europe.
Due to this mechanism, EU producers who use such materials to produce downstream goods in the value chain may incur higher costs due to the gradual introduction of the CBAM and the gradual elimination of free EU ETS allowances. 94% of the affected downstream products have a high content (on average 79%) of steel and aluminum. All this could push producers to relocate production to third countries with weaker climate policies. For this reason, the Commission has proposed an extension of the CBAM’s scope to selected downstream products with high steel and aluminum intensity.
Launch of the definitive CBAM regime
Among the main obligations introduced by the definitive regime is the annual declaration requirement: by September 30 of each year (starting from 2027), importers must submit a CBAM declaration relating to imports made in the previous calendar year, indicating for each product the embedded emissions, which are determined according to Union-level standardized methodologies.
There are also novelties regarding actual and default values: the calculation of emissions can be based on actual data, certified by an accredited verifier, or on default values, which are higher and more penalizing. The choice of methodology therefore holds direct economic relevance, incentivizing companies to maintain proactive and accurate management of information flows throughout the supply chain.
“The CBAM is conceived as a dynamic mechanism capable of progressive expansion. Starting in 2028, a possible extension of the objective scope to approximately 180 categories of downstream products is indeed foreseen, including mechanical components, vehicle parts, and industrial equipment, with the aim of intercepting ever larger portions of value chains.
However, significant profiles of uncertainty remain: the absence of compensatory measures for Union exports, interpretive doubts relating to the application of the CBAM to special customs regimes, and the need for further clarification from competent authorities. The main challenge will consist of ensuring a sustainable balance between environmental protection, legal certainty, and the competitiveness of the European productive system,” commented Ghetti.
The EU Commission’s proposal: suspend CBAM for some products
In the context of the recent revision of the CBAM regulation, the European Commission has proposed introducing an emergency clause (Article 27a) that would allow Brussels to discretionarily suspend the application of the CBAM on certain products in case of unforeseen circumstances or sharp price increases. Article 27a (bis) introduces an indefinite and potentially retroactive suspension mechanism for some products included in the CBAM list.
At this point, it is feared that such discretionary power creates paralyzing uncertainty because if CBAM protection against polluting, low-cost non-EU imports can be removed at any time for political reasons, the multibillion-euro investments already initiated for decarbonization will no longer be profitable. Italy and France have also asked to exclude fertilizers from CBAM. The pressure to weaken the rule is actually led by a dozen EU governments concerned about rising costs for farmers. However, exempting the sector would destroy the green ammonia market. Furthermore, granting an exemption to one particular sector would lead to similar requests from all other sectors, emptying the CBAM of its effectiveness.
Significant shortcomings and risks regarding Article 27a (bis) have been identified. The risk is thus to compromise the central objectives of the CBAM. For Hydrogen Europe, the proposal will generate uncertainty, unpredictability, and a potential loss of billions in investments for sectors such as low-carbon ammonia, steel, and fertilizers, especially due to its possible retroactivity. Organizations representing clean hydrogen and green ammonia have sent a joint letter to the European Parliament requesting the removal of this article from the CBAM revision.
The Social Climate Fund and auction revenues
The EU ETS generates billions in revenue. In the last year alone, auctions raised billions of euros which, according to EU directives, must be reinvested to support the transition. Italy is called upon to use these proceeds to:
- support businesses in investments in green technologies;
- mitigate the social impact of EU ETS 2 through the Social Climate Fund, helping vulnerable families and micro-enterprises cope with rising energy costs.
The positions of Confindustria and the aviation sector
Despite evident environmental benefits, the debate is very heated. Confindustria has expressed strong concerns about the resilience of the productive system. It has officially requested a temporary suspension of the EU ETS expansion, arguing that, in the current scenario of energy crisis and geopolitical instability, additional costs could compromise European competitiveness compared to the United States and China. The request is for a more pragmatic approach that considers the reality of company balance sheets.
As for the aviation sector, as InfluenceMap explains, sector lobbies have implemented strategies to slow down overly stringent climate regulations. Often, these strategies aim to exclusively promote sustainable aviation fuels (SAFs) as a sole solution, seeking to avoid measures that introduce taxes on kerosene, which would thus remain exempt compared to other energy carriers.
Aviation sector trade associations have publicly committed to achieving net-zero emissions by 2050 but systematically oppose policies that make emission reduction binding, using adherence to CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) as a pretext. However, while the EU ETS imposes an absolute cap on emissions (which decreases annually), CORSIA is an offsetting system, designed to allow companies to continue emitting carbon by purchasing credits, often at much lower prices than EU ETS allowances.
Why attacking the EU ETS is economic self-sabotage
Despite the difficulties, undermining or dismantling the EU ETS would be a strategic mistake for the European and Italian economies. As analyzed by Bruegel, there are five fundamental reasons why attacking the carbon market should be considered economic self-sabotage:
- Investment uncertainty: Businesses need clear and stable price signals in the long term. Changing the rules now would destroy the confidence of those who have already invested billions in decarbonization.
- Loss of tax revenue: EU ETS auction revenues are a vital resource to finance industrial modernization and social protection. Without the EU ETS, these funds would have to be raised through other taxes.
- Technological leadership: The EU ETS pushes Europe to focus on green technologies (hydrogen, CO2 capture, batteries). Giving it up means ceding ground to competition.
- Strategic autonomy: Reducing the use of fossil fuels through carbon pricing means decreasing dependence on gas and oil imports from third countries.
- Market efficiency: The EU ETS is the most cost-effective tool for reducing emissions. Without it, to achieve the same climate goals, governments would have to impose much stricter and more expensive direct regulations on companies.