European carbon market: where do we stand today?

The European carbon market is based on a simple principle: the polluter pays.
Companies must hold carbon allowances to cover their emissions: the more they pollute, the more they must buy.
Each year, free allowances are allocated based on sector benchmarks (steel, aluminum, etc.), which assess the level of emissions per ton produced.

Initial objective: prevent carbon leakage and preserve the competitiveness of European industries.
Today, the dynamic is evolving:
Gradual reduction of free allowances

Incentive to invest in greener technologies
But this transition raises a key question: are European companies at a disadvantage?
To address this, the European Union introduced the CBAM (Carbon Border Adjustment Mechanism):

• A carbon border adjustment mechanism to limit unfair competition.
  
• Still limited to certain sectors for now.

Looking back at ETS-1
ETS-1 (2005–2007), implemented under the Kyoto Protocol, was a pilot phase.
Its limitations were notable:
Too many free allowances
Very low carbon price
Weak incentive to reduce emissions

A system useful for learning, but not very effective environmentally.A turning point with ETS-2
Adopted in 2023, ETS-2 (entry into force expected around 2028) marks a scaling-up:
Extension to energy and fuel suppliers
Stronger targets: −42% emissions by 2030
Annual reduction of allowances by ~5%
To limit negative effects:
– a carbon price threshold is being considered (~€45/tCO₂) to reduce volatility
– attention is paid to the impact on the end consumer by avoiding price volatility and limiting the direct impact on electricity costs.

Unlike ETS-1, ETS-2 is now established as a central tool of European climate policy.

Conclusion

In the current context of a tight market, worsened by geopolitical uncertainties and rising energy prices, the ETS-2 system remains highly criticized. Finding the balance between climate ambition, economic competitiveness, and social acceptability remains a real challenge for Europe.