Michael Button
Senior Policy Manager - Real Economy
The EU Emissions Trading System (ETS) is entering a crucial review period, and investors want a stable, credible carbon price signal that supports long-term capital allocation, industrial decarbonisation and EU competitiveness. This Insight sets out why the review should strengthen the ETS's role as the backbone of Europe's climate and industrial strategy.
Why investors care
Since its introduction in 2005, the ETS has proved to be one of the most successful and cost-effective climate policy tools globally. Emissions from electricity generation and industry covered by the mechanism have fallen by about 50%, and the European Commission expects that to reach 62% by 2030. This demonstrates that carbon pricing can drive real reductions at scale.
Most of those emissions cuts have come from the power sector, where coal use has declined and renewable generation continues to grow. Indeed, in 2024 renewable sources generated 47% of the EU’s power and accounted for over a quarter of final energy consumption, up from around 10% two decades ago.[1] This reflects the investment incentives set by the ETS alongside complementary policies and technological innovation.
The ETS’s cap-and-trade design also allows emissions to be reduced where it is cheapest to do so. For investors with diversified portfolios, this makes the framework not just a climate policy tool, but a framework that supports predictability, capital allocation and wider market confidence.
What is at stake
The upcoming review should strengthen, not weaken, the ETS by preserving a robust long-term carbon price signal. Investors care most about a credible long-term trajectory for the ETS cap, clear rules-based market governance and avoiding policy volatility or ad hoc interventions that would undermine capital planning.
That is not an abstract concern. The carbon price is already making investment in electrification and cleaner production methods commercially viable. As Europe scales these technologies, the ETS acts as a building block for industrial innovation and economic growth. If the framework is weakened, that signal is diluted – penalising the companies already investing in the transition.
ETS as industrial policy
The ETS should remain the backbone of the EU's clean industrial strategy. Its value is that it helps ensure competitiveness and decarbonisation advance together, rather than being treated as competing objectives.
That is especially important as the EU accelerates demand-side measures, such as the Industrial Accelerator Act (IAA) – which aims to speed deployment of strategic technologies through the creation of lead markets for clean industrial products. These measures are welcome, but they will only work if they are built on a credible ETS price signal. Industrial policy should support the transition, but it cannot replace the carbon price signal that underpins it.
Revenues and carbon border measures
ETS revenues and carbon border measures should support investment and innovation. The ETS already generates substantial resources for Europe’s clean transition: €38.8 billion in 2024 alone, and €250 billion in auction revenues since 2013. While these represent one of Europe’s most scalable funding sources, they have historically been underused for industrial decarbonisation. EU countries report spending less than 10% of their revenues from ETS auctions directly on this area.[2] The next phase of the ETS should do more to channel these funds into innovation, scale-up and the industrial investments the transition requires.
Carbon border measures matter for the same reason: meaningful emissions cuts depend on stronger climate policies outside the EU as well as within it. The EU carbon border adjustment mechanism (CBAM) helps reinforce fair competition and incentivises carbon pricing beyond the EU. Globally, countries are adopting carbon taxes and ETS-like frameworks, covering 24% of emissions compared with 7% a decade ago.[3] Trading partners more exposed to CBAM have sharply increased carbon‑pricing announcements since the EU first outlined the mechanism in 2019.[4] This shift demonstrates a clear direction of travel: stronger carbon pricing is becoming the norm, not the exception.
Get involved
IIGCC is supporting investor engagement on the ETS review, and we welcome feedback on a draft statement until Friday 8 May here. Members who would like to know more or contribute should get in touch with Michael Button.
[1] https://www.eea.europa.eu/en/analysis/indicators/share-of-energy-consumption-from
[2] https://www.eea.europa.eu/en/analysis/indicators/use-of-auctioning-revenues-generated?activeAccordion=546a7c35-9188-4d23-94ee-005d97c26f2b
[3] https://www.worldbank.org/en/news/press-release/2024/05/21/global-carbon-pricing-revenues-top-a-record-100-billion
[4] https://www.bruegel.org/working-paper/carbon-pricing-beyond-borders-assessing-climate-policy-spillovers-eu-carbon-border