It is talked about all across Europe, politicians speak about it, some argue loudly that it should be abolished because it suffocates our economy and ruins our wallets.. But what exactly is ETS? How does it work? Why has ETS become one of the most frequently discussed topics in the context of energy prices and inflation that we all seem to feel? Who does it apply to? Why should the United Kingdom be satisfied that, along with Brexit, it withdrew from the ETS system?
ETS (short for Emissions Trading System) is a CO₂ emissions trading system. In short, this means that companies – in order to operate in Europe – must hold special permits (allowances) if they want to emit carbon dioxide into the atmosphere. What does this mean in practice? Does everyone pay it? Theoretically no – only larger companies that emit carbon dioxide. In reality, however, we all pay, from the richest to the poorest. Why? Among other things, this article will explain.
ETS is a European Union system – a program intended to force EU countries to transform their economies into less emission-intensive ones, meaning those that emit fewer pollutants and less carbon dioxide. It sounds good, the goal is noble, but in practice it is somewhat worse. How is it supposed to force these countries to move away from high-emission solutions? By applying the principle: "You emit CO2? You have to pay".
ETS is meant to reduce greenhouse gas emissions. It operates on a “cap and trade” basis:
It is easy to notice that the ETS mechanism, apart from limiting CO2 emissions, also contains a mechanism that limits business growth, because in many sectors, such as metallurgy, district heating, or many branches of manufacturing, growth necessarily means increasing emissions. In this way, we are causing, for example, European steel plants to be unable to compete with China and eventually largely disappear. Unfortunately, this is only one of many examples.
ETS is therefore neither a magical tool for transforming the economy nor pure evil in its original assumption. It is an example of dysfunctional bureaucracy and lack of effectiveness among elites, something that produces results different from those intended and, alongside some benefits, causes much greater harm. It is also, unfortunately, an example of the ignorance of EU governing elites, who do not understand basic economic principles or the need for Europe’s competitiveness in a changing world, in the era of geopolitical rivalry with the USA and China, from which we seem to have already slowly fallen out.
Finally, ETS is, despite good declarative goals, an example of dogmatic thinking that does not allow for alternative arguments and limits its perspective solely to climate or environmental issues, ignoring other aspects.
This is related to climate protection, which has been a key point of the EU’s left-leaning agenda in recent years. There were many declared reasons:
ETS is one of the key tools to achieve EU climate goals. On paper, it looks logical, but unfortunately something else has also been achieved – European industry competitiveness has been weakened. ETS has become a burden for European companies, which have lost the ability to compete with companies from Asia or the USA. It is one of the causes of the massive crisis seen, for example, in German industry and spreading across Europe.
In this way, emissions were reduced, because closing a factory certainly reduces emissions to zero. Unfortunately, it also reduces jobs. Companies paying fees that do not exist in China or the USA cannot withstand competition.
Larger companies in Europe have been forced through ETS to purchase carbon emission allowances. The mechanism was supposed to be simple – companies such as combined heat and power plants, steelworks, factories, and even large transport operators or airlines were expected to conclude that instead of bearing ETS costs, it would be better to invest in new, clean technologies that do not emit carbon dioxide. However, this is wishful thinking. ETS costs are relatively high, especially given the financial condition of many companies. When they were burdened with new fees, in practice many of them lost the ability to invest in new technologies, because that requires money. You do not need to be an economist to know that only companies with surplus funds invest and grow. In this way, paradoxically, many companies have been deprived of the ability to evolve toward newer technologies.
In the economic reality of Europe, only some companies are able both to bear new charges and invest in renewable energy in line with the wishes of European elites, despite increasing tax burdens in most EU countries. ETS is not officially a tax, but technically it differs little from a new tax on large-scale business activity, because in many sectors there is no activity without emissions. For example, there are no clean technologies that allow metallurgy without furnaces.
In some cases, ETS may have encouraged companies to look for new technologies, although it is difficult to measure this precisely. However, public perception is different – people rather see industrial decline and company failures. A symbol of this is perhaps the German automotive industry, which was the driving force of the German economy and partly created jobs in other European countries, such as Poland and the Czech Republic. It is difficult to assess the overall balance, because ETS is not the only cause of company failures – the European economy also suffers from excessive bureaucracy, high taxation, and a tendency toward central planning. However, many feel that the balance of ETS is already tragic and that the costs of this kind of energy transition are enormous, turning Europe into an economic museum and the least competitive developed continent.
As a result, the call to abolish ETS has appeared on the banners of many European conservative, right-wing, and centrist parties and movements, which seem likely to gain political momentum in the coming years. This will have major political and social consequences, including for European integration itself.
You might think – it is good that smaller companies that do not emit carbon dioxide are not covered by ETS – let large companies deal with it. Unfortunately, this is not accurate. All of us, living in a developed country, using cars, public transport, processed food, clothing, online shopping, and heating, are affected by the negative impact of ETS on the economy and prices. ETS contains inflationary mechanisms that affect everyone, even if you walk everywhere and buy only the simplest products.
It all starts with combined heat and power plants and power stations. In many countries, fossil fuels are still used and must emit CO2 in order to operate and supply electricity or heat. Therefore, series of electricity price increases are expected across Europe. In some countries they have already occurred; in others, governments introduced temporary price caps to limit rapid increases.
This is not just about higher electricity bills. More expensive electricity = more expensive almost everything. Why? It is a simple economic mechanism. If stores pay higher electricity bills, they will raise prices. If you buy bread – remember it is baked in electric ovens. If you stay in a hotel and use air conditioning – the hotel will include higher energy costs in your bill. Production lines, electrical equipment, heating – rising costs will be passed on to consumers.
Apart from the push toward electric heating such as heat pumps (which use a lot of electricity), district heating plants and gas suppliers are also covered by ETS.
ETS will certainly affect final heating costs, regardless of whether we use gas heating, heat pumps, district heating, or pellet or biomass boilers. Price spikes are already occurring in many countries.
Refineries and fuel companies are one of the main targets of ETS, and it is already clear that they will pass part of the costs onto consumers. As with a typical inflation mechanism, this is not only about how much an average European pays at the petrol station.
A basic rule of economics says that in a modern economy, when fuel becomes more expensive – everything becomes more expensive. Even if ETS did not affect electricity prices for bakeries, bread still needs to be transported. This applies to almost every product.
Modern economies consume huge amounts of fuel. Every day, countless trucks transport goods across Europe. Higher fuel prices will obviously increase the cost of transported goods. Will we be surprised if one day it becomes cheaper to import goods from Asia, where there is no ETS? Will we be surprised if steel production disappears from Europe?
Alternative costs of ETS refer to expenses and financial burdens borne by companies and economies due to the emissions trading system such as EU ETS. These include not only direct costs of buying emission allowances but also indirect costs such as higher energy prices, investments in low-emission technologies, and adapting production processes.
They may also include lost investment opportunities when funds are redirected toward meeting environmental requirements instead of business development, although in the long term ETS may stimulate innovation and energy transition.
At the same time, during the global AI revolution, Europe has largely fallen behind in sectors like semiconductors. In Europe, only one major company participates at scale – the Dutch ASML, which produces lithography machines.
Why do such advanced companies avoid Europe? ETS is one of the reasons.
The emissions trading system such as EU ETS also has significant environmental advantages. It helps reduce emissions through limits and market mechanisms that encourage companies to cut emissions.
Companies can sell unused allowances, so those investing in new technologies can save money. However, this mainly benefits wealthier companies.
ETS also supports innovation and generates revenue for governments, which can be used for climate investments.
As often happens, instead of fixing a system, it is expanded. This is the case with ETS and its extension – ETS2.
ETS2 is a new emissions trading system covering road transport and buildings. Its goal is to reduce emissions by introducing a price on fuels used in heating and transport. This may increase costs for end users, while encouraging energy efficiency and renewable energy, in line with the EPBD directive.
ETS2 is a direct financial burden on average Europeans.
Despite criticism, the future of systems like EU ETS and ETS2 appears stable. Current EU leadership with Ursula von der Leyen does not plan to abolish or significantly weaken ETS.
ETS remains a key climate policy tool, although its future will depend on balancing climate goals with economic competitiveness and public acceptance.
Much depends on elections in Europe in 2026–2029, where more conservative and right-leaning parties may gain power and oppose ETS. French elections in 2027 are particularly important (Jordan Bardella).
France’s position could influence other countries. Similar views are expressed by opposition parties in Poland and by Germany’s AfD.
The final shape of the European Commission in 2029 will be decisive.
Some hope for reform or weakening of ETS, especially ETS2. However, others believe the damage has already been done and Europe has missed key opportunities in the technological revolution.
ETS is certainly not the only internal barrier limiting Europe’s potential.
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