The EU’s carbon market is heading towards a pivotal review, with tensions mounting between Member States over how the system shapes energy prices, industrial competitiveness and the pace of decarbonisation.
While the European Commission is due to assess the Emissions Trading System (ETS) and its Market Stability Reserve (MSR) by July, a group of ten countries is pushing to bring the timeline forward to May, signalling rising political urgency.
Brussels has already begun moving in that direction, announcing initial measures to reinforce the stability and predictability of the carbon market and address price volatility, pointing to a more immediate response to political pressure.
At the core of the debate is a question increasingly difficult to ignore: how far carbon pricing can go before it begins to weigh on Europe’s economic base.
System under scrutiny
The EU ETS remains the bloc’s primary tool for cutting emissions, covering power generation, heavy industry and, increasingly, buildings and transport.
Its impact has been significant. Emissions from covered sectors have fallen by around 50 per cent since 2005, underscoring its role as a cornerstone of EU climate policy. However, as the system tightens, its economic effects are becoming more visible.
Carbon costs now make up a growing share of electricity prices, particularly for industry. According to the Draghi report on European competitiveness, they accounted for roughly 10 per cent of industrial electricity prices in 2023.
This dynamic has moved to the forefront of political debate, with leaders at the latest European Council meeting explicitly acknowledging the role of carbon pricing in electricity costs – a notable shift in tone.
Why some countries are pushing back
The pressure for an earlier review reflects structural differences across the EU.
Countries with more carbon-intensive energy systems and industrial bases argue that the current ETS trajectory risks outpacing their ability to adapt. Proposals range from extending free allowances for industry to revisiting the pace of emissions reductions.
Italy has maintained one of the most vocal critical positions, calling for a temporary suspension of the ETS until a comprehensive reform is agreed. Rome argues that, in its current form, the system risks adding to cost pressures on energy-intensive industries, undermining competitiveness and compounding already high energy prices.
Underlying these concerns is economic exposure. Analysis by Bruegel suggests that up to 43 per cent of Poland’s GDP is vulnerable to the low-carbon transition – among the highest shares in the EU, with countries such as Bulgaria also facing significant exposure to transition risks.
For these countries, the issue is less about the principle of carbon pricing than its pace, predictability and uneven economic impact across the bloc.
The MSR debate
Much of the discussion now centres on the Market Stability Reserve, designed to manage the supply of carbon allowances and limit price volatility.
Critics argue the mechanism no longer reflects market realities. It relies on the total number of allowances in circulation – an indicator published with a significant delay and one that does not capture real-time liquidity or price dynamics.
The European Commission has acknowledged these concerns, confirming that the upcoming review will assess whether existing tools – including the MSR – remain fit for purpose in responding to market imbalances and price shocks.
Longer-term concerns are also emerging. Under current rules, the supply of allowances is expected to tighten after 2030, increasing the risk of volatility and raising questions about market functioning in a more constrained system.
Energy transition pressures
The debate comes as Europe’s energy system enters a more complex phase. While renewable capacity is expanding, it is not yet sufficient on its own to guarantee system stability. Grid investment, storage and dispatchable generation remain essential.
According to ENTSO-E, additional flexible capacity will be needed to maintain grid adequacy as renewables grow. Even as gas plays a declining role in total generation, it is expected to continue setting electricity prices for a significant share of time, meaning carbon costs will remain embedded in power markets.
Calibrating the system
Despite growing pressure, there is little appetite in Brussels for fundamental change. Ursula von der Leyen has reiterated that the ETS remains the backbone of EU climate policy, while signalling openness to targeted adjustments.
The direction of travel is increasingly clear. The upcoming review is expected to combine short-term stabilisation measures with longer-term structural changes, particularly around allowance supply and market responsiveness.
At the same time, the broader challenge is financial. Estimates suggest ETS revenues will cover only a fraction of the investment required for the energy transition, with needs running into trillions over the coming decades.
The divide between Member States reflects competing priorities: preserving a credible carbon market versus ensuring the transition remains economically sustainable. As pressure builds, the challenge for Brussels will be to recalibrate its flagship climate instrument without undermining the certainty on which it depends.
[BM]
