ETS and CBAM: Industry is taking a stand against key EU project

On October 21, an alliance of 80 European industrial companies published an open letter containing a stark warning to the European Commission. According to those companies, the core of European climate policy, the Emissions Trading System (EU-ETS I), is putting 200,000 industrial jobs at risk in Germany alone. The ETS and the Carbon Border Adjustment Mechanism (CBAM), which are closely linked, have moved to the center of debates about the competitiveness of European industry. Recently, these mechanisms faced heavy pressure due to the ongoing challenges that European industries are confronted with, such as high energy prices.

But what exactly are the ETS and CBAM? Let us take a closer look at two instruments that are of key importance in the context of European emissions trading.

The ETS was introduced in 2005 in all EU countries plus Iceland, Norway and Liechtenstein to meet the requirements of the Kyoto Protocol. It covers the energy sector, industry and aviation as well as, since 2024, shipping. ETS I is based on the cap-and-trade principle meaning that the EU sets a fixed amount of CO2 allowances (“cap”) that must be purchased by emitters at auction who may then sell them to other companies (“trade”). The amount of these allowances is gradually reduced to ensure that the total amount of CO2 emitted decreases. To prevent carbon leakage, i.e. the migration of CO2-intensive industries to non-EU countries, companies also receive a fixed amount of free allowances. However, this Regulation will expire in 2026. European industry leaders fear that the costs incurred could not only deter investment but also significantly weaken the competitiveness of European industry. Critics of the instrument also fear that without free certificates, production will be relocated to countries without ETS (“carbon leakage”). European companies thus face an additional cost factor and a competitive disadvantage compared to companies that produce in countries without CO2 taxation.

The EU has introduced an instrument to compensate for this disadvantage. CBAM, the Carbon Border Adjustment Mechanism, is intended to ensure fair CO2 pricing for imported goods from non-EU countries, thereby protecting the competitiveness of European industry and avoiding the relocation of production facilities abroad. A transition phase has been in place since October 1, 2023, during which importers are required to report the CO2-balances of the imported goods. From 2026, they will have to purchase CBAM certificates to offset the CO2 emissions caused by the product. The industry is particularly concerned about the bureaucracy associated with the instrument. At the beginning of October 2025, EU member states therefore decided on an amendment. In the future, importers who import less than 50 tons per year into the EU will be exempt from CBAM. However, as expected, the industry does not consider this change to be sufficient.

But what is next for emissions trading in the EU? It is clear that industry's criticism is getting through to politicians. Export-oriented Germany, which is stuck in a prolonged economic slump, is pushing for ETS I to be relaxed. In mid-October, the EU Commission also announced that it would present a proposal for revising the ETS next year. One option is forthe amount of tradable CO2 allowances to decline slower than projected. However, lowering the cap would require not only the approval of the member states, but also a trilogue procedure in which the EU Parliament agrees to the reduction. Energy-intensive industries in particular, such as the chemical and steel industries, are also calling for an extension of the free allocation of CO2 allowances and thus not to rely on the CBAM in the near future.

In Germany, this demand has prominent supporters in the governing coalition. Federal Minister for Economic Affairs and Energy Katherina Reiche (CDU) spoke out in favor of a longer allocation of free allowances. Even the Social Democratic Federal Environment Minister Carsten Schneider (SPD), who by function advocates for an ambitious climate policy, called for the free allocation of emission certificates to be extended until CBAM would function smoothly. But there are further suggestions from politicians and industrial representatives alike as to what a reform of the ETS should entail. For example, there could be new certificates beyond 2039, which would give companies more time to decarbonize. Another proposal relates to the possibility of crediting negative emissions in the EU and even abroad in the ETS. This would allow companies to acquire the right to emit further emissions by removing CO2 from the air. But one thing is clear: The decisive mechanism of the ETS is the price. If the EU reduces the costs for industry, the incentive to save emissions will decrease. At the same time, the cries for help from industry are becoming increasingly clear. Europe faces a crucial dilemma: How can the industry’s competitiveness be maintained while global warming has even increased recently?