The Green Tank submitted detailed positions in response to the European Commission’s Call for Evidence on the revision of the EU ETS Directive, along with comprehensive answers to the related questionnaire, actively contributing to the shaping of Europe’s flagship climate policy. It supports strengthening the EU Emissions Trading System (EU ETS) and the Market Stability Reserve (MSR) to accelerate the transition to a climate-neutral economy in a fair and socially equitable manner.

The EU ETS has already achieved significant results, reducing emissions in the power and industrial sectors by 51.2% since 2005, approaching the target of a 62% reduction by 2030. The MSR has played a crucial role by cancelling 3.15 billion allowances, boosting carbon prices, and driving emission reductions primarily in the power sector, which has not received free allowances since 2013. These elements have added substantial value to the ETS architecture and must be maintained or even strengthened.

However, significant weaknesses remain that undermine the system’s full potential. Free allocation of emission allowances has slowed down emission reductions in industry, while emissions from aviation continue to rise. To address these challenges, free allowances for industry should be gradually phased out, accompanied by an expansion of the Carbon Border Adjustment Mechanism (CBAM) to bolster decarbonization investments and increase resources for the Innovation Fund. At the same time, indirect cost compensation should be phased out, and including indirect emissions in the CBAM would protect the competitiveness of European industry without delaying the transition.

The MSR needs further strengthening by keeping the intake rate at 24% beyond 2030 and by narrowing the activation thresholds, as emission reductions in the power sector have altered hedging needs.

In aviation, the current EU ETS covers less than 10% of the sector’s total climate footprint, since it excludes international flights and non-CO₂ impacts. The EU should eliminate the remaining free allowances and expand coverage to all departing flights, aiming for a system that ultimately includes all flights to and from the EU. Public funds should be shifted away from unsustainable fuels toward solutions like e-fuels. In parallel, exemptions for flights to the outermost regions should be phased out to increase the volume available for sustainable aviation fuel (SAF) allowances, funded by revenues from ending free allocations. All private jet flights should also face a carbon price multiplier to ensure that every polluter pays their fair share.

Equally critical is ensuring that ETS revenues are genuinely used to reduce emissions. The European Commission should strengthen oversight of how these funds are spent, especially to prevent indirect fossil fuel subsidies disguised as social support. Member States should be required to publish detailed reports on the use of ETS revenues, with clawback provisions for projects that fail to align with ETS objectives.

The Modernisation Fund should be extended beyond Phase 4 of the ETS to continue bridging energy gaps within the EU, with a far more transparent project selection process at both EU and national levels. Projects related to fossil fuels should become entirely ineligible, while priorities must be defined with greater clarity.

Similarly, the Innovation Fund remains vital for industrial decarbonization, but must avoid supporting projects that merely postpone emission reductions. Large-scale carbon capture and storage (CCS) projects should be coupled with maximum fossil fuel replacement and electrification. The Commission should publish both expected and actual emission reductions for each project and apply clawback clauses where targets are not met.

In its submission to the Call for Evidence, the Green Tank also supported extending ETS1 under the “polluter pays” principle to include municipal waste incineration and other waste management processes, additional maritime emissions from smaller and offshore vessels, international aviation, and smaller thermal generation units.

In contrast, The Green Tank opposes integrating various Carbon Dioxide Removal (CDR) technologies into the ETS, due to the significant risk that removals could substitute for the urgently needed emission reductions. Instead, separate EU-level policies are required, such as directing ETS revenues to CDR projects without allowing offset credits into the ETS, creating a standalone Removals Trading System targeting major polluters and financially stronger sectors, and setting national carbon removal targets.

You can read The Green Tank’s full responses to the European Commission’s questionnaire here.

You can also read the proposals it submitted as part of the Commission’s Call for Evidence here.

This article first appeared on The Green Tank website on 9 July 2025