The European carbon market is under pressure ahead of its next review.

A cornerstone of the European Union's climate policy, the emissions trading system (ETS) is the subject of a tug-of-war between advocates of a stricter framework and industrial groups demanding relaxations. The European Commission is expected to present a proposal for revision soon.

Launched two decades ago, the European carbon market now covers approximately 40% of EU emissions, representing some 10,000 industrial facilities, factories, and power plants. Its principle: companies must hold permits for each tonne of greenhouse gas emitted. These allowances are tradable, creating a carbon price intended to incentivize emissions reductions as quickly as possible. The overall emissions cap decreases by 4,3% each year under the current rules.

The results are mixed. The European Environment Agency notes that emissions from all fixed industrial sites covered by the scheme fell by 51% between 2005 and 2024. The steel industry now emits about 20% less than before the scheme came into effect. Aviation, on the other hand, continues to see its emissions increase: the ETS only captures a fraction of the sector's true climate impact, according to the NGO Carbon Market Watch.

The system's main weakness lies in the free allowances. Introduced as a temporary measure to protect industry during the transition, they have never truly disappeared. According to Carbon Market Watch, approximately 90% of industrial emissions remain covered by these free allocations, meaning that companies only pay the full price for carbon on a tiny fraction of their CO2 emissions. Some even receive more allowances than they need and resell the surplus, thus making a profit.

"It is essentially the large oil and petrochemical companies that are lobbying against the elimination of these free quotas, joined by some large manufacturing sectors with a strong coal focus," explains Wijnand Stoefs, head of European policy at Carbon Market Watch.

The debate extends beyond Europe's borders. The World Bank lists more than 35 emissions trading systems operating worldwide. Several countries have accelerated the implementation of their own systems following the entry into force of the EU's Carbon Border Adjustment Mechanism (CBAM), which subjects certain imports to carbon pricing. "Indonesia, the Philippines, India, Turkey—all already have a system or are working to establish one very quickly," notes Stoefs, who sees this as a manifestation of the "Brussels effect."

But other countries also risk importing the flaws of the European model. Turkey and South Korea allow, or have allowed, companies to offset some of their emissions through projects carried out abroad, such as tree-planting programs. Environmental organizations consider these mechanisms often opaque and ineffective. New Zealand offers another example: a World Bank analysis found no statistically significant effect of its emissions trading scheme (ETS) on CO2 emissions, largely because agriculture, which accounts for nearly half of national emissions, was largely excluded.

In Brussels, the political battle is already underway. Swedish Minister for European Affairs Jessica Rosencrantz argued in a recent letter for maintaining a sufficiently ambitious linear reduction factor, which she describes as the "most critical element" for preserving incentives to invest in the industrial transition. She also calls for the inclusion of emissions from waste incineration within the scope of the carbon market.

From the business community, the BusinessEurope lobby is calling for a slowdown in the phasing out of free allowances and a relaxation of the EU's 2040 climate strategy, citing inflation, geopolitical conflicts, global trade restrictions, and the weakness of the European economy. The spokesperson for environmental policy for the EPP, the largest group in the European Parliament, wants to postpone the end of free allowances beyond 2039, while making them conditional on investments within the European Union: "It is no longer acceptable for companies to use their free allowances to invest outside of Europe."

These pressures have already produced concrete effects. A second European emissions trading system, for fuels used in buildings and road transport, was due to come into force in 2027; it has been postponed to 2028. The German Federal Environment Agency warns against any further postponement or weakening of the system, arguing that limiting free allowances and maintaining a robust carbon market are essential for the EU to achieve its climate goals.