To strengthen European industry, let’s strengthen the ETS

Several voices are now being heard in Europe, coming from Member States – including that of Chancellor Merz – and from industry, calling for the rules of the CO2 quota system to be weakened. For Benoît LEGUET and Jean PISANI-FERRY, this would be a mistake for Europe. And for France. On the contrary, we must strengthen this unique public policy in order to develop our industry. 

Since 2005, the Emissions Trading System (ETS) has imposed an emissions cap on European industry. This public policy is unique in terms of its scale – it covers 40% of the EU’s greenhouse gas emissions, including the electricity sector, energy-intensive industries and intra-European flights – and in terms of how it is implemented: quotas are tradable and, after a running-in period, prices have stabilised, reaching €60 to €80 per ton of CO2 in 2025. 

By gradually reducing the volume of quotas, the ETS has enabled emissions to be cut by almost half in twenty years. At these price levels, it has also stimulated innovation among manufacturers. 

2026 will see two major developments in the ETS. To reduce the risk of relocation to countries with lower carbon prices, energy-intensive sectors have until now benefited from free quotas: these will be gradually reduced until they are completely phased out in 2034. This is what worries manufacturers. 

On the other hand, to protect the European market, a carbon border adjustment mechanism has been put in place. However, it does not protect export industries. This fundamental issue can be addressed without weakening the ETS, as proposed, for example, by the Institut Montaigne. This is the first imperative.

Low-carbon leadership 

To ensure not only the survival of its industry but also its development, Europe must break free from its costly dependence on imported fossil fuels. It must therefore assume low-carbon technological leadership, the only sustainable guarantee of export competitiveness. 

This requires more innovation and more electrification. With the rise of renewables and the spectacular fall in storage costs, Europe has an increasingly abundant potential decarbonisation resource, from which manufacturers will benefit. France is particularly well placed in this respect, with abundant electricity and a good supply of biomass for decarbonisation. 

A firm hand 

It is therefore not a question of weakening the ETS, but of strengthening it. Restricting its scope or delaying its timetable would penalise manufacturers who have chosen to invest in decarbonisation and discourage future investment at a time when, on the contrary, we need to accelerate. 

The second imperative is to maintain the gradual reduction of free allowances, giving visibility to manufacturers. The auctioning of allowances enables Member States to recover substantial revenues. In France, the allowances auctioned to date represent around €2 billion per year, a figure that is set to increase. 

Supporting industry, promoting innovation 

In the future, allowances will also need to provide more substantial funding for the decarbonisation of European industrial sectors – this is the third imperative. It should be noted that this is already the case in France: French industry now receives much more for decarbonisation than it pays for the ETS. The fourth imperative is to strengthen the carbon border adjustment mechanism, for example by extending it to downstream sectors. 

The fifth and final imperative is to avoid getting bogged down in negotiations on a price cap, which could result in a very low price that would undermine the economic model of many projects and stifle innovation. It would be better to negotiate a floor price that would give manufacturers greater visibility, but this would then need to be financed. 

The same applies to the ETS as to the other components of the Green Deal: flexibility in implementation must not compromise the credibility of the objectives. This would send a disastrous signal of indecision to businesses. In an increasingly hostile international context, Europe must remain firm. This is the best service it can do for its industry.