A closer look to ETC and European competitiveness

Recently, an old narrative has resurfaced: the EU Emissions Trading System (ETS) is undermining European industry and should be weakened.

The framing is politically convenient. It is also strategically misguided.

European industry faces real pressure from US industrial policy, from China’s scale advantages, and from energy price volatility. But weakening ETS will not materially change Europe’s structural position. The relevant question is not whether to dilute ETS, but how to use it more strategically.

The framing problem

ETS and competitiveness are often presented as opposing forces:

This logic is incomplete.

Europe does not compete globally on lowest production cost, with or without ETS. Structural factors such as labour costs, regulatory standards and energy systems already define that reality.

Europe competes on:

Diluting ETS does not change these fundamentals.

Why ETS matters

Before considering reform, it is worth recalling what ETS delivers.

1. A decarbonisation signal

ETS provides a predictable carbon price that drives efficiency, electrification and clean technology deployment. If Europe aims to lead in low-carbon products, that price signal is not a burden — it is an enabler.

2. Cost-effective emission reductions

A cap-and-trade system ensures that the cheapest tonne of CO₂ is reduced first. Weakening the cap or shielding emitters from the price undermines this efficiency.

3. Significant public revenue

ETS generates approximately €40 billion per year for the EU and Member States. This is not marginal funding. It is a major fiscal instrument. Reducing ambition or expanding free allowances directly reduces this revenue.

4. The foundation of CBAM

The Carbon Border Adjustment Mechanism depends on a robust internal carbon price. Weakening ETS risks undermining CBAM’s credibility and protective function.

The risk of current proposals

Two proposals currently circulating deserve scrutiny.

Increasing the ETS cap.

This would lower carbon prices across all covered sectors — including those with no international competition, such as electricity generation. The result would likely be higher emissions and lower public revenue, with limited competitiveness gains.

Reintroducing grandfathering.

Expanding free allowances shields emitters from the carbon price signal that drives long-term efficiency and innovation. It delays adaptation rather than strengthening competitiveness.

Both approaches reduce pressure and reduce incentives.

A more coherent approach: revenue recycling

If competitiveness concerns are legitimate, the solution is straightforward:

Maintain a strong carbon price. Use the revenue strategically.

€40 billion per year provides significant capacity to:

Targeted, temporary, performance-linked support is more economically rational than weakening the system itself.

The argument that “€40 billion is not enough” is revealing. If competitiveness gaps are structural and large-scale, reducing carbon pricing will not solve them. It will only shrink the fiscal space available to address them.

The strategic risk

In periods of geopolitical tension, climate policy becomes politically vulnerable. Competitiveness concerns can serve as an entry point for broader deregulation agendas.

The risk is not minor adjustment. It is narrative capture — where ETS becomes the scapegoat for structural economic challenges unrelated to carbon pricing.

Once diluted, restoring regulatory credibility is difficult.

Conclusion

The tension between ETS and competitiveness is overstated. Europe will not regain global cost leadership by softening carbon pricing. It will remain competitive by leveraging innovation, market scale, and the transition to high-quality low-carbon products.

The real policy choice is not “ETS or competitiveness”. It is whether ETS revenues are used strategically, or whether the system is weakened under short-term political pressure.

For sustainability professionals advising industrial clients, this distinction matters. Carbon pricing is not a temporary constraint. It is a structural feature of Europe’s industrial transition. And it is likely to remain one.

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