EPICO has published a new Policy Brief, "Flexibility without sacrificing credibility: Assessing the 2026 EU ETS reform," examining how the European Commission's proposed reforms affect the EU Emissions Trading System's core investment signal.
In the run-up to the Commission's proposal in July, industry repeatedly called for a more manageable pace of carbon price increases as the ETS cap tightens. Yet the credibility of the system as the EU's central decarbonisation signal rests on a clear trajectory toward allowance scarcity, one that early movers have already priced into their investment decisions. The Commission's proposal seeks to balance these competing pressures, but the risk is cumulative: supply-easing measures and new flexibilities may look manageable individually, but together they could erode that scarcity.
For each key parameter, EPICO's brief identifies where the Commission's approach offers a solid base to build on, and where more clarity or safeguards are needed.
The guiding principle is simple: the ETS can bend without breaking, if flexibility and credibility move together.
Some of the key findings include:
- Pair a lower Linear Reduction Factor with credible safeguards. Easing the pace of the cap’s decline responds to real industry concerns, but it shouldn’t come at the expense of the predictability that rewards companies for investing early. Its impact on long-term scarcity should be assessed together with the other flexibility measures introduced by the reform, rather than in isolation.
- Establish clear integrity safeguards for carbon removals and international credits before they enter the system. High-quality removals and credits can help moderate price spikes and strengthen international cooperation. Clear volume and quality thresholds are essential. We therefore recommend bringing theCommission’s 2033 market-readiness assessment forward to 2030 to give installations earlier planning clarity.
- Adopt a tiered approach to investment conditionality, while preserving baseline carbon-leakage protection. Rather than applying the new investment obligation across the board from 2031, conditionality should focus on additional free allocation, while baseline allocation continues to serve its core carbon-leakage function. Broader conditionality could then apply from 2036 onwards. This tiered approach gives companies time to develop viable investment cases while maintaining effective carbon-leakage protection during the transition.
- Turn the top-10% conditionality exemption for frontrunners into a genuine additive support, not just relief from a new obligation. Being exempt from conditionality is not the same as being rewarded for early action. Targeted access to the Industrial Decarbonisation Bank and Investment Booster would provide frontrunners with an additive benefit and strengthen the case for early investment in Europe.
Together, these findings point toward a more targeted approach to the ETS reform: one that gives the system room to adapt to industry realities without undermining the scarcity signal that has driven early decarbonisation investment.