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 have to 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 dynamics are 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 has 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.

Toward a turning point with ETS-2

Adopted in 2023, ETS-2 (expected to come into force around 2028) marks a scaling up:
Extension to energy and fuel suppliers
Strengthened 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 given 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 establishing itself 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.