EPICO, in collaboration with Frontier Economics, has released a new policy report outlining a targeted reform strategy to ensure the fair and effective implementation of the new emissions trading system (EU ETS 2).
With its proposed 90% emissions reduction target for 2040, the European Commission has sent a clear signal:
The EU remains committed to climate neutrality. While this target offers planning certainty and affirms long-term ambition, it risks becoming symbolic without the backing of effective implementation tools.
To meet these goals, ETS 2 is indispensable. There is no credible alternative.
Yet political pressure is mounting — particularly from Central and Eastern European countries. Several are calling for delays or structural revisions to the system. The Czech Republic’s recent consideration of an opt-out shows just how tangible this resistance has become.
In our new Policy Report we explore how to safeguard ETS 2 without watering it down — proposing a smart, balanced reform strategy to keep the system fair, credible, and politically viable.
To enable a smoother rollout and secure Member State consensus, we recommend a two-step approach: Early investments through revenue frontloading (2025–2027), followed by activation of a reformed Market Stability Reserve (MSR).
Key Recommendations:
- Frontload up to €50bn in ETS 2 revenues for early investment in heating, mobility, and social compensation measures
- Reform the MSR — extend its operations beyond 2030 and combine it with a more gradual and responsive trigger rule and relative injection rates.
- Do not extend the target price mechanism beyond 2029 to protect price signals and social funding
- Implement an effective policy mix for emission reduction: scale up support via the Social Climate Fund, tax relief, and inclusive tools like e-mobility and renovation
- Reject opt-outs, regional price differentiation & early auctioning — all weaken the system’s fairness and impact