Reform of the EU ETS 1 and accompanying instruments: A policy mix for the decarbonisation of industry

The reforms to the European Union’s Emissions Trading System (EU ETS 1) for the energy sector, energy-intensive industries, and aviation and maritime transport, due to take place in 2026, must address two key aspects in particular. The provisions of the EU ETS 1 must be adapted to the new framework set by the legally-binding climate targets for 2040 and 2050. As a central pillar of the EU’s climate policy, the EU ETS 1 is of particular importance in this context. Furthermore, the reform of the EU ETS 1 must strike a new balance between climate protection and industrial competitiveness and the capacity for transformation. The EU ETS 1 should achieve emissions reductions primarily through investment in climate-neutral technologies rather than through the relocation of production. It should be borne in mind that transformation profiles and rates may vary between sectors and companies. Investments that have already been made require planning certainty. In other areas, infrastructural, regulatory and economic conditions must first be established. During transitional phases, the co-existence of conventional and transformative production processes – which is closely linked to industry modernisation cycles – must also be taken into account.

As emissions reductions in the energy sector advance, the focus of the EU ETS 1 is increasingly shifting towards energy-intensive industry. However, as an instrument for greenhouse gas pricing and for highlighting clear transformation pathways, the EU ETS 1 is not sufficient on its own to ensure the far-reaching transformation of industry needed for climate neutrality. Rather, a coherent policy mix of CO₂ pricing and accompanying measures is required. These include, in particular, technology-specific support instruments for electrification, hydrogen and carbon capture and storage (CCS), which address both investment and operating costs. Contracts for Difference, infrastructure development and measures to reduce electricity system costs are key elements of the necessary policy mix. The establishment of lead markets can also create reliable demand for climate-neutral basic materials, at least in some sectors and through a phased approach.