Frontier Economics has published a new study for EPICO Klimainnovation titled The EU ETS at a Turning Point: Balancing Competitiveness and Decarbonisation, examining how the EU Emissions Trading System (EU ETS) can reconcile climate ambition with industrial resilience as the ETS cap tightens toward the end of the 2030s.
As free allocation of CO2 certificates under the ETS is phased out for sectors covered by the new EU carbon leakage protection instrument, the Carbon Border Adjustment Mechanism (CBAM), and the system moves toward structural scarcity, the EU ETS is entering a new phase. At the same time, rising CO2 prices, persistently high energy costs, and uneven global climate ambition have intensified the political debate about the pace of the ETS cap trajectory and the future of carbon leakage protection.
The study distinguishes clearly between two key dimensions of this debate:
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The trajectory and overall stringency of the EU ETS cap.
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The evolution of the carbon leakage protection architecture under a tightening cap.
While recognising the political discussion around possible adjustments to the cap, the report shows that significant scope exists to modernise carbon leakage protection without undermining the credibility or integrity of the EU ETS.
Among its key findings and proposals, the study highlights:
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The importance of strengthening and refining CBAMas the central pillar of long-term carbon leakage protection.
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A more strategic use of remaining free allocation through a tiered, risk-based approach that concentrates protection on sectors with the highest measured exposure to competition from outside the EU with no or lower CO2 pricing.
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The option to redirect part of the allowances freed up by the introduction of CBAM to non-CBAM sectors, or adjust the share of certificates that are auctioned, while keeping the overall cap unchanged.
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The need to prepare complementary instruments, including benchmark-based cost compensation, for the post-2039 phase when free allocation becomes structurally unavailable at the current ETS cap.
A central theme of the study is regulatory credibility. Companies that invested early in decarbonisation have done so under a clear and steadily tightening framework.
Overall, the study concludes that a targeted and adaptive policy mix - combining a balanced cap trajectory with refined carbon leakage instruments, offers the most robust pathway to safeguard both Europe’s industrial base and its long-term climate objectives.
Author
Executive Director
Senior Principal
Senior Principal
17 March 2026
