A crucial policy issue is now flying under the radar in Brussels — even as the European Commission awaits formal approval. Carbon pricing, primarily through the EU’s Emissions Trading System (ETS), is central to the EU's ambitious goal of achieving carbon neutrality by 2050.
The ETS covers sectors like electricity and heat generation, industrial manufacturing, and maritime transport. By attaching a price to emissions, it incentivises reductions in these high-polluting industries.
The aim is to cut emissions by 62 percent by 2030 compared to 2005 levels and reach net-zero by 2050.
However, to meet these targets, carbon prices must rise over time. If prices remain at their current levels— hovering around €65 per tonne in recent weeks — emitters whose abatement costs exceed that price will continue polluting.
Even though it is traded on an open market, carbon is not like other commodities, it has no intrinsic value – the industrial demand for carbon is far below emission levels.
Its value solely rests on the regulatory framework the EU created around emissions. The EU created scarcity and demand by requiring polluting installations to hold an allowance for every tonne of emissions.
Initially, these installations received emission quotas. If they emit beyond their quota, they must buy additional allowances on the market. If they emit less, they can sell excess allowances — a classic cap-and-trade system.
Over time, more allowances are being allocated through auctions (currently, 53 percent of volumes), and the number of available allowances is decreasing. Under the 2023 revision of the ETS directive, the commission set an annual reduction factor of 4.3 percent until 2027, rising to 4.4 percent from 2028.
To put this into perspective, this means that the number of allowances should shrink by about 25 percent by 2030 and should be halved by 2040.
Unless emissions decrease at the same pace — meaning that the European economy has to transform equally rapidly — allowances are going to become rarer and more expensive, fast.
At the same time, carbon pricing is expanding.
A new, parallel system — ETS2 — was introduced in 2023 to cover fuel combustion in buildings, road transport, and additional sectors such as small industry.
It is currently being rolled out across the EU. At the national level, Germany and Austria have also implemented their own carbon pricing markets.
This may seem highly technical — and indeed it is — but its consequences are profound.
When carbon prices exceeded €100 during the winter of 2023 and remained above €80 for most of the last two years, the impact on energy prices and industrial output was severe.
The elephant in the room is that reducing allowances further will push prices higher, generating significant transition risks. The industrial and social fallout from the environmental shift ahead is likely to dwarf what has been experienced so far.
From an outside perspective, it seems European institutions are acutely aware of the coming economic and social upheavals but are hesitant to fully confront them due to the political fallout
The recent report by Mario Draghi on European competitiveness touches on carbon pricing, mainly focusing on revenues from auctioned allowances and the risk of carbon leakage — where industries relocate to countries with laxer environmental standards.
This is the primary concern addressed by the EU’s Carbon Border Adjustment Mechanism (CBAM), which imposes a levy on certain imports to equalise carbon costs for foreign producers.
Yet, there are concerns that CBAM will not fully prevent the offshoring of high-polluting industries.
It is notable that the Draghi report largely sidesteps carbon price trajectories themselves and mostly overlooks the effects of their asynchronous increase compared to our main competitors.
Meanwhile, the commission is setting up a Just Transition Fund to help low-income households cope with the impacts of ETS2 and has created a Just Transition Mechanism to support households, companies and regions negatively affected by the transition.
However, the scope and integration of these tools with future carbon price trajectories remain largely unaddressed, as does the impending phase-out or restructuring of polluting industries — a central objective of the overall regulatory framework.
Equally troubling is the lack of reference to carbon pricing in recent high-level addresses. Ursula von der Leyen’s speech before the European Parliament and the 2023 State of the Union both omitted any significant mention of it.
Similarly, the 'mission letter' for Wopke Hoekstra, the commissioner-designate for climate action, only calls for the efficient implementation of the existing framework and the development of a post-2030 strategy.
From an outside perspective, it seems European institutions are acutely aware of the coming economic and social upheavals but are hesitant to fully confront them due to the political fallout.
The transformative implications of a genuine environmental transition that aligns with carbon neutrality goals are bound to provoke a backlash, particularly in an era of rising populism.
While the transition is essential to stave off the worst impacts of climate change, current political conditions may not allow for the necessary changes. Ignoring the issue only delays the reckoning, leaving the next European leadership vulnerable to crises as the social consequences of the transition begin to bite.
If the EU is to succeed in this defining political ambition, carbon pricing — and its wide-reaching effect — must move to the forefront of the political agenda.
Jean-Baptiste Vaujour is an energy economist and professor of practice at Emlyon Business School in Lyon, France. In 2015 he received the Marcel Boiteux prize for energy economics from the French Association of Energy Economists.
Jean-Baptiste Vaujour is an energy economist and professor of practice at Emlyon Business School in Lyon, France. In 2015 he received the Marcel Boiteux prize for energy economics from the French Association of Energy Economists.