EU ETS Reform: my comment in Il Sole 24 Ore

Italy's leading financial newspaper Il Sole 24 Ore has published an article by Chiara Bussi on the ongoing battle between European governments and Brussels over the future of the EU Emissions Trading System. The piece includes my contribution on the need for a structural reform of the mechanism.

→ Read the full article on Il Sole 24 Ore

A system drifting away from market principles

In its current configuration, the EU ETS risks becoming a critical obstacle — both for the competitiveness of European industry and for the achievement of its own decarbonisation targets. The progressive departure from market mechanisms is making it increasingly similar to a carbon tax, eroding the economic efficiency principle that originally drove its success.

This is not a minor shift. It undermines the very logic that made the ETS one of the most effective climate policy instruments ever designed.

The original model worked — the numbers prove it

Between 2005 and 2025, emissions from Italian companies covered by the ETS fell by 49%. The carbon intensity of industrial turnover has decreased by more than 20% over the same period.

The original design was straightforward and consistent with market principles: set a cap on total emissions and let the trading system discover the price, rewarding the most efficient operators and driving innovation. That is the logic worth preserving — not dismantling.

Three structural fixes - EU ETS Reform

In my contribution to the article, I identify three priority interventions to bring the system back to its original rationale.

1. Rebalance the allocation model Shift back towards predominantly free allocation, with volumes declining progressively over time and reduced reliance on auctioning. This would relieve competitive pressure on energy-intensive industries while preserving the long-term decarbonisation trajectory.

2. Allow pragmatic use of CO2 credits Permit the use of CO2 credits to cover 10–20% of ETS compliance obligations, in line with the Paris Agreement and European climate targets. This would reintroduce flexibility into the system and reconnect the EU ETS with the broader global carbon market infrastructure.

3. Stop the distortion spiral End the cycle of compensations, emergency interventions and ad hoc corrections that are progressively hollowing out the economic effectiveness of the mechanism. Every distortion introduced to fix a previous distortion weakens the system's credibility as a market instrument.

The real challenge

The goal is not to weaken carbon pricing. It is to preserve its market nature — maintaining a sustainable balance between climate policy and European industrial policy.

A well-designed ETS is not the enemy of competitiveness. A distorted one is. EU ETS reform is very much needed