On 25 February 2025, ZERO hosted the latest ETS Talk: “(Un)conditional Support to Top Polluting Sectors in Europe: Do They Pay, or Do We Pay?” that discussed how the EU’s upcoming Emissions Trading System for buildings and road transport (ETS2) can be leveraged to truly benefit society, particularly the communities most affected by its impacts. 

This session paid particular attention to key lessons that can be learned from the original EU ETS that applies carbon pricing to pollution from electricity and heat generation, industrial manufacturing and aviation sectors (ETS1).

Timely reports

To guide this discussion, three key reports were presented:

• ’Clean Industrial Revolution in Europe’ by Lidia Tamellini (Carbon Market Watch) and Camille Maury (WWF European Policy Office)
• ’Dirty Thirty’ by Lisa Okken (WWF Germany)
• ’France’s 50 Industrial Sites’ by Aurélie Brunstein (RAC France)

In addition to raising the fundamental question of what can be learned since the introduction of ETS1 in 2005, the exchange of views reflected on the unfairness of the existing system allowing heavy-polluting industries such as steel, cement and chemicals to emit vast amounts of CO2 for free, while ETS2 expects citizens to pay for their emissions.

The speakers also determined what reforms are needed to ensure that the EU ETS becomes truly fair for both people and the planet.

By addressing these critical issues, this session aimed to shed light on the challenges and opportunities in making emissions trading a fair and effective tool in the fight against climate change

Polluters still receiving free rides

The discussion revealed a concerning reality: despite the “polluter pays” principle, the largest carbon emitters continue to receive significant financial benefits under ETS. 

The ‘Clean Industrial Revolution in Europe’ report showed that in 2022, just 30 companies were responsible for half of all ETS emissions, yet they received most of their pollution permits for free. From 2013 to 2021, almost €100 billion in free allowances were handed out, surpassing the €88.5 billion raised from auctions.

In 2023 alone, €40 billion worth of free allowances were distributed, with some companies, such as steel giant ArcelorMittal, receiving more allowances than their actual emissions – 136% in their case.

Major polluters and the role of free allowances

The ‘Dirty Thirty’ report demonstrated how Europe’s biggest industrial polluters, particularly ThyssenKrupp and other steel giants, benefit from free emissions allowances while failing to decarbonise at a pace aligned with EU climate goals. 

The report underscores the need to phase out these allowances urgently rather than waiting until 2034.

Similarly, the ‘France’s 50 Industrial Sites’ report highlighted the French government’s continued financial support to major polluters. Although conditionalities have been introduced, including the linking of subsidies to emissions reductions, there continues to be a lack of stringent social and environmental requirements.

Positive solutions

Speakers not only highlighted the problems but also potential solutions.

The gradual phase-out of free allowances must be accelerated, ensuring polluters pay for their emissions. 

Meanwhile, strong conditionalities should be implemented. Any financial support should be tied to both environmental and social criteria, ensuring industries commit to decarbonisation and fair labour practices.

The Carbon Border Adjustment Mechanism (CBAM) must be expanded. Delays in CBAM implementation could cost the Innovation Fund up to €20 billion between 2026 and 2030, undermining industrial transformation efforts.

Finally, the Innovation Fund can be improved to ensure more funding is allocated to projects that prioritise resource efficiency and genuine emissions reductions, rather than to technological fixes such as carbon capture and storage (CCS) and carbon capture and utilisation (CCU).

ETS2 and the LIFE Effect project: Making the system fair

As the EU prepares to implement ETS2, concerns about fairness and social impacts are growing. 

The LIFE Effect project is investigating how this expansion will affect households and low-income citizens. Revenue distribution will be critical. Without proper allocation of ETS2 funds, the burden may fall disproportionately on vulnerable communities rather than on the industries most responsible for pollution.

The discussion made it clear that the current system unfairly benefits large polluters while citizens bear the costs. To make ETS2 truly fair and effective, urgent policy changes are needed. 

The path forward should prioritise green innovation, fair burden-sharing, and the rapid decarbonisation of Europe’s most polluting industries, leading to a truly Clean Industrial Deal.