There is a maxim attributed to Napoleon: never interrupt an adversary while they are making a mistake. China appears to be heeding that counsel: remaining quiet as Europe weakens its primary instrument for industrial decarbonisation, while eyeing technological leadership in clean industries and technologies.
The European Commission only unveiled its plan to reform the carbon market, the Emissions Trading System (ETS), at the very end of the summer session. It steers decarbonisation across electricity generation and heavy industry while aiming to boost European firms’ competitiveness in expanding global markets for clean-tech solutions.
The problem: the proposal has weakened precisely at the moment when decisive action was most necessary.
“China seems to be following that advice: watching in silence as Europe weakens its main tool for industrial decarbonization”
Imagine the ETS as festival tickets. Brussels allocates a finite stock, called emission allowances, for every tonne of CO2 released, and entry to the venue (the carbon market) is restricted to those holders. Each year, the supply tightens at a pre-announced, fixed pace, leaving fewer allowances in circulation and driving up prices—just like festival tickets. Power stations and the most energy‑intensive sectors (steel, cement, chemicals, aviation, shipping) require one allowance per tonne emitted. The tighter the supply, the higher the resale value, which steers firms toward investing in low‑carbon technology instead of simply paying the allowances.
The record of the scheme is tangible. Since 2005, it has generated over €270 billion in revenue and achieved a 50% reduction in emissions within the sectors it covers, while keeping output and growth intact. China, the United Kingdom, South Korea and California have each built their own take on the model. The World Bank estimates that about 30% of global greenhouse gas emissions are now under the umbrella of roughly 80 carbon‑pricing instruments.
So why would the European Commission propose dampening its market instruments when other major economies are tightening theirs? The explanation blends legitimate worries with short‑term political opportunism that has leaders using the ETS as a scapegoat for problems they helped create. Let us unpack this.
It is true that European firms contend with a slate of uncertainties—tariffs, trade rules, and geopolitical volatility. Moreover, energy prices rise with every conflict that underscores Europe’s heavy reliance on imported oil and gas, eroding competitiveness. Under the current ETS, the target would have been a complete decarbonisation of electricity and industry by 2039, a goal that is too arduous or costly for many energy‑intensive players. A pragmatic path was needed, but instead the plan grants an additional decade, possibly reducing incentives to innovate and to keep pace with China.
“Policymakers are treating the ETS as a scapegoat for problems they caused”
Simultaneously, several European governments, including Italy and Poland, cast the ETS as the culprit. It was blamed for elevated energy prices even though gas spikes linked to conflict pushed prices higher and fed inflation. Officials also pointed to the ETS when steel demand softened and jobs were at risk. In reality, Chinese steel overcapacity is flooding the EU market.
To be precise, the ETS proposal acts like a Trojan horse. It appears as a concession that grants European businesses more breathing room on cutting emissions, yet it leaves them behind a Chinese industry that keeps gaining speed. This is not unprecedented. A similar dynamic occurred during the transition to electric vehicles: Europe slowed while Chinese producers steadily captured global market share. Heavy industry and the utilities sector could be next, specifically the segments where decarbonization would be most affordable and straightforward.
The reform could be strengthened by firming the decarbonisation path to preserve strong incentives for innovation and investment; prioritizing decarbonisation of the electricity sector first, so industry has more time, and channeling financial aid back to the companies.
Interpretations differ. For segments of European industry already battered by long‑running energy prices, the extra flexibility offers relief. It is also seen as a win for governments that had pressed for a looser ETS for months—Italy and Poland among them—who interpret the proposal as proof that their pressure bore fruit.
Distinguishing between two separate cost drivers clarifies matters, since the debate often blends them together, whether by design or not.
“For part of European industry, worn down by years of high energy costs, the added flexibility comes as relief”
The primary cost driver is energy, rooted in Europe’s reliance on imported gas and oil. This vulnerability emerged after the rupture with Russian gas during the Ukraine invasion and has since been amplified by volatile US policy, notably toward Iran. The ETS does not create this cost. In fact, energy prices spiked due to those geopolitical tensions, while the carbon price remained relatively stable. The International Energy Agency estimates the EU saved €51.4 billion on fossil fuel imports in 2025 thanks to renewables and European policies. Spain illustrates the point: with a higher share of renewables, it paid as much as seven times less for electricity than Italy, which remains heavily gas‑dependent to power industry and heating homes.
The second cost driver does originate from the ETS, though it is far smaller than often claimed. Returning to the festival metaphor: diluting the system at this point resembles organizers distributing free passes to early‑bird buyers who had anticipated continuous price hikes; now they discover that being an early participant no longer yields the expected payoff.
This reform favors firms that have underinvested in decarbonisation for years, or those that have already relocated capital to China, where cheap labor and lower energy costs prevail. In contrast, European rivals that acted early and were beginning to reap returns may view the Commission’s move as a setback, interpreting it as a blow to their progress. The consequence is a short‑term boon for laggards and a mid‑term competitive cost for the rest, benefitting only the one rival that truly matters here. Achieving the 2040 emissions goal could end up costing more than if action had been taken sooner. When competitiveness is at stake, so too are precious jobs and essential sectors. The solar and electric‑vehicle sectors have already shown how swiftly dynamics can shift.
“Reaching the 2040 emissions target may now cost more than it needed to with early action”
The Commission’s plan is only the initial step in revising the law. The dossier proceeds to the Council and the Parliament, with positions expected to converge in December and the first quarter of 2027 as a target for all three institutions to strike a deal. It will be a substantial challenge, particularly given upcoming elections—not only in Spain but across France, Italy, Poland and other member states. The 27 governments are not aligned, split between advocates of deeper cuts and those pressing to loosen the regime further. Meanwhile, the European Parliament has failed to form enduring majorities in recent months.
Ireland currently holds the rotating Council presidency for the latter half of 2026 and has identified the ETS revision as a priority file, aiming to secure a political agreement in principle at the Environment Council in December.
Meanwhile in Beijing, there is little need for intervention. Let Europe finish its internal debate first; that alone could carry the day.
