Napoleon is attributed with the maxim of not interrupting an opponent while they are making a mistake. China has taken note. The Asian giant watches in silence as Europe weakens its main tool for industrial decarbonization, keeping its eye on the technological leadership of the industries and clean technologies.
The European Commission waited until the eve of the summer break to present its reform of the carbon market, the Emissions Trading System (ETS). This market drives the decarbonization of the electric sector and European industry while pursuing that companies gain competitiveness in global markets for clean technologies that continue to grow. The problem is that the proposal has lost momentum at a particularly critical moment.
“The Asian giant watches in silence as Europe weakens its main tool for industrial decarbonization”
Imagine the ETS as festival tickets: Brussels issues a limited number of emission rights, one per ton of CO2 emitted, and only those with a ticket can access the venue, that is, the carbon market. Each year the supply is reduced at a fixed pace, announced in advance, so fewer rights circulate and, consequently, prices rise (just like festival tickets). Power plants and energy-intensive industries (steel, cement, chemicals, aviation, shipping) need a right for each ton they emit. The scarcer the supply, the higher the resale price, which pushes companies to invest in low-carbon technology before continuing to pay for the rights.
The positive results of the system are measurable. Since 2005 it has raised more than €270 billion and has cut emissions from the covered sectors by about 50% without slowing either production or growth. China, the United Kingdom, South Korea and California have adopted their own versions of the model and, according to the World Bank, around 30% of global greenhouse gas emissions are covered by about eighty carbon pricing instruments.
So why is the European Commission weakening its emission policies just as other major economies strengthen theirs? The reason is a blend of legitimate concerns and short-term political opportunism that has led policymakers to make the ETS the scapegoat for problems they themselves have caused. Let us examine it step by step.
It is true that European companies face a host of uncertainties: tariffs, shifting trade rules, or volatile geopolitics are only a few examples. Add to this that energy prices surge with every war that reveals Europe’s heavy reliance on imported oil and gas, a factor that strikes at our competitiveness. In that context, the current ETS rules oblige complete decarbonization of the electricity sector and industry by 2039, a very demanding timeline for some energy-intensive companies.
In that paradigm, a pragmatic exit was essential; but instead companies have obtained ten extra years of leeway, a cushion that dilutes incentives to innovate and not fall behind Chinese industry.
“Policy makers have turned the ETS into the scapegoat for the problems they themselves have caused”
At the same time, some member states, such as Italy or Poland, have turned the ETS into the scapegoat of their problems. They blamed the ETS for the rise in energy prices, when the real reason was gas price increases due to the war, which pushed prices higher and fed inflation. The same policymakers have also pretended that the ETS was responsible for steelmakers seeing demand fall and jobs at risk when what was behind it and what remains behind is the Chinese steel overproduction that floods the European market.
To be clear: the ETS reform proposal works like a Trojan horse. It looks like a gift because it gives European companies more time to cut emissions, but it leaves them at a disadvantage against an accelerating Chinese industry. We have seen the same pattern with electric vehicles: Europe slows down while Chinese manufacturers gain global market share year after year. Heavy industry and the electric sector now face the risk of being next, although these are precisely the segments where decarbonization is cheaper and easier to achieve.
The proposal could be improved in several ways: strengthen the decarbonization trajectory to avoid losing incentives to innovate and invest; prioritize decarbonization of the electric sector to give more time to industry; redirect financial support toward the companies themselves.
Of course, not everyone reads the reform the same way. For a portion of European industry, worn down after years of high energy costs, the added flexibility provides relief. It can also be read as a victory for governments that had been pressing for a looser ETS (Italy and Poland among them), who see in the Commission’s proposal proof that their pressure has paid off.
But it is worth separating two charges that this debate point often mixes, sometimes in a self-serving way.
“For a segment of European industry, worn down after years of high energy costs, the added flexibility offers relief”
The first cost driver is energy, which has a very concrete origin: Europe’s dependence on imported gas and oil. This exposure stems from the rupture with Russian gas after the invasion of Ukraine and has now been exacerbated by the swings in U.S. foreign policy, especially toward Iran. The ETS is not responsible for that cost. In fact, while energy prices shot up due to those same geostrategic tensions, the price of carbon remained stable. The International Energy Agency estimates that the EU saved €51.4 billion in fossil fuel imports in 2025 thanks to renewables and European policy. Spain is a good example: thanks to the weight of renewables in its energy mix, it has paid electricity up to seven times less than Italy, which remains heavily dependent on gas to keep its industry running and its homes warm.
The second cost driver does stem from the ETS, though it is much smaller than often claimed. Return to the festival analogy: diluting the system now is as if the organizers were handing out free tickets to those who jumped the queue at the start. Who bought their ticket early, betting that prices would continue to rise, now discovers that arriving first no longer pays off.
This reform benefits those companies that have failed to invest enough in decarbonization for years or that have already moved capital to China, where labor is cheaper and energy costs less. Meanwhile, European competitors who had been ahead and were beginning to see profitability in that bet read the Commission’s move as a step backward. The result: short-term relief for laggards and a medium-term competitive disadvantage for everyone else, a deal in which only the real rival remains the one that truly matters in this game.
Meeting the 2040 emissions target could now be more expensive than it would have been had action been taken in time. If competitiveness is at stake, valuable jobs and developing critical sectors are also at risk. We have already seen in the cases of solar energy and electric vehicles how fast this can happen.
“Achieving the 2040 emissions target may now cost more than it would have if action had been taken in time”
The Commission’s proposal is only the first step toward reforming the rule. The file now moves to the Council and Parliament, which will define their positions in December, with the first quarter of 2027 as the deadline for the three institutions to close an agreement. It will be a substantial effort, though not impossible, especially with key elections coming up, not only in Spain but also in France, Italy, Poland and other countries. The twenty-seven governments are far from unanimous: some push for deeper emission cuts and others want to water the system down even more. The European Parliament, for its part, has failed to form stable majorities in recent months.
Ireland holds the rotating presidency of the Council during the second half of 2026 and has flagged the ETS review as a priority, so it will push to achieve a political agreement in principle at the Environment Council in December.
Meanwhile, in Beijing they do not need to move. They simply wait for Europe to finish fighting with itself.
