How Europe’s carbon market can boost clean
investment: Design options for the 2026 EU ETS Review

The EU Emissions Trading System is instrumental in driving cost-effective emission reductions. As Europe’s industry enters a decisive phase of decarbonisation, the system needs an upgrade – to align with Europe’s 2040 target and with changing economic and political conditions. The review should strengthen the role of the EU ETS to support decarbonisation investments, enhance competitiveness and reduce fossil dependence. This brief looks at three core issues of the 2026 review: the future trajectory of the cap, the revision of the Market Stability Reserve, and options to make remaining free allocation conditional on decarbonisation investments. The leitmotif of the review should be unlocking future investments in climate-neutral solutions, and protecting investments already made. Conditional free allocation and the targeted use of auctioning revenue can help to achieve this but need to be embedded in an industrial policy that combines demand-side instruments with infrastructure investments and safeguards for international trade.