EU ETS II – What resistance and reform proposals are there?

The European Emissions Trading System II (EU ETS II) is currently the subject of heated debate on the European stage. Together with accompanying measures, such as the Climate Social Fund and other instruments, the EU ETS II is intended to lead Europe into a climate-neutral future. This series of articles discusses the basics and background of the EU ETS II and addresses the issue of the use and distribution of revenues. It also summarizes the reform proposals on the table and evaluates their impact on individual households. This series of articles is aimed at anyone who wants to understand the background to the current debate and how the EU ETS II works and what its impact is. The third article in this series deals with the issue of what resistance and reform proposals exist.

Following recent expressions of scepticism by individual states regarding the European Emissions Trading System (EU ETS II) and the publication of various proposals for reforming the EU ETS II, concrete adjustments are currently being proposed and decided upon. This article deals with the various reform proposals as well as the question of which of these are currently – in mid-January 2026 – being implemented of considered.

Reform proposals

On July 2, 2025, a “Joint non-paper on ETS2 price uncertainties and possible improvements” was submitted by the Czech government to the European Commission. This document was endorsed by at least 18 EU member states [1], including Austria, Belgium, Bulgaria, Croatia, Czechia, Estonia, Germany, Italy, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, and Spain [2]. The non-paper raises concerns about the initial certificate price under the EU ETS II, the volatility of certificate prices, and the potential social impacts of excessively high prices. In response, the document proposes a series of reforms to the EU ETS II [2]. These proposals are presented below and compared with recommendations from other reform papers on the EU ETS II [1], [3], [4], [5].

Reform proposals from the Joint Non-Paper of 18 EU Member States

1. Regular publication of information to improve certificate price forecasts: This proposal calls for continuous official updates on the progress of transformation in sectors covered by the EU ETS II. Indicators such as the uptake of heat pumps or electric vehicles could serve as proxies for the deployment of target technologies. Since the penetration of these technologies is assumed to be inversely proportional to certificate demand, they are expected to influence certificate prices.

2. Advance auctions in 2026 to reduce price uncertainty for 2027: By conducting auctions ahead of the system’s launch, reliable price forecasts for 2027 could be established. This would enable households, businesses, and fuel suppliers to better prepare for the introduction of the EU ETS II.

3. Limiting certificate price volatility through adjustments to the Market Stability Reserve (MSR): This includes defining a more gradual and responsive triggering mechanism and examining whether the volume of certificates released from the MSR should be increased under highly stressed market conditions.

4. Extension of the MSR beyond 2031: This measure aims to ensure long-term price stability and strengthen market participants’ confidence.

5. Strengthening the price control mechanism: The soft price cap of €45 (2020 value) per tonne of CO₂ should be reinforced either by adjusting the volume of certificates or by increasing the frequency of market interventions.

In addition to the proposals in the Joint Non-Paper, Poland, Czechia, Slovakia, Cyprus, and Hungary sent a letter to European Commission President Ursula von der Leyen at the end of October 2025 calling for the start of EU ETS II to be postponed until 2030 [6].

Several of these reform proposals are echoed—either identically, similarly, or in adapted form—in other studies. Figure 1 provides an overview of the level of consideration, rejection, or non-consideration of proposals two through five. It becomes evident that all studies include recommendations for adjusting the MSR, while proposals two and five in particular reveal divergent positions.

As previously mentioned, all four studies examined alongside the Joint Non-Paper include reform proposals related to the MSR. Studies [1], [3], and [4] propose increasing the MSR volume at the start of the EU ETS II or raising the threshold for surplus certificates (currently set at +30%) to stabilize certificate prices during market launch. Additionally, studies [1] and [3] recommend making the intervention conditions more responsive to mitigate abrupt market interactions with the MSR. A complicating factor in designing the MSR is that its annual certificate volume—100 million—is fixed and does not adjust to the number of certificates in circulation. This could lead to shortages, especially in scenarios with high remaining emissions. To address this potential shortage, study [5] suggests linking the annual MSR volume to the number of certificates in circulation—for example, 24% of the circulating volume, but not less than 100 million certificates. To ensure price stability beyond 2030, studies [3] and [5] also propose extending the MSR beyond that year.

The question of whether price control mechanisms should be strengthened or newly introduced to regulate certificate prices under the EU ETS II remains controversial. Although study [4] generally favors compensation payments funded by EU ETS II revenues, it also anticipates situations in which price spikes may occur so abruptly that immediate compensation is necessary. Direct compensation can be achieved through national measures that regulate the financial burden within a specified price corridor. Study [1] discusses three types of price control mechanisms: A fixed price ceiling managed through the release of certificates from the MSR; A fixed price ceiling with retrospective compensation for the difference between the average EU ETS II certificate price and the ceiling as well as using the EU ETS I price level as a benchmark ceiling. Compared to other reform proposals in the study, these mechanisms are considered less suitable for preserving the functional integrity of the EU ETS II. Study [3] explicitly rejects strengthening the price control mechanism, arguing that it could lead to a short-term oversupply of certificates, thereby dampening prices and weakening the system’s steering effect.

Further proposals under discussion include advance certificate auctions in 2026 and the early activation of the Social Climate Fund (SCF). The former is rejected in study [3] due to concerns that it could soften market dynamics. In contrast, study [1] assesses advance auctions as neutral to slightly positive, citing prior market experience indicating that early auctions do not alter the total number of certificates issued. The early deployment of the SCF is viewed positively across studies. This measure could facilitate preparatory actions and foster public acceptance before the CO₂ price takes effect [3]. It is considered feasible for all EU member states, and the European Commission could draw on unspent resources from the Recovery and Resilience Facility to finance early SCF activities—without requiring amendments to the SCF’s legal framework at the EU level [4].

Additional proposals address either adjustments to the implementation of the EU ETS II or supportive measures for sectoral transformation. The first category includes suggestions such as allocating at least 50% of revenues as direct financial support to citizens, although current legislation permits only 37.5% of SCF funds to be used for this purpose [4]. Other proposals advocate revising the SCF’s allocation key to place greater emphasis on national income levels and poverty risk. Increasing the SCF’s overall budget—potentially by allocating a specific share of certificates to the fund—could enhance its redistributive impact across member states [1]. The second category includes measures aimed at improving energy efficiency [5] and strengthening national energy and climate plans (NECPs) [4].

As illustrated in Figure 2, the reform proposals discussed across the studies cluster around several core areas. There is broad consensus on the need for accompanying instruments that support sectoral transformation and can help mitigate certificate price levels. Additionally, there is strong agreement on the necessity of strengthening compensation mechanisms, such as through the SCF.

Current ongoing adjustments

The resistance and reform proposals have led to adjustments. The launch of EU ETS II will be postponed by one year to 2028. This postponement was approved by the EU environment ministers on November 5, 2025 [7]. The European Parliament also approved it on November 13, 2025 [7]. For the postponement to formally take effect, an official amendment to Directive (EU) 2023/959 must be published in the Official Journal of the EU [8]. This is expected in early 2026 [7].

In addition, on November 27, 2025, the EU Commission presented a proposal to adjust the MSR of the EU ETS II [9]. The number of allowances issued when the prevailing allowance price exceeds the target price of €45/ t CO₂ (2020 value) will be increased. The proposal allows for the release of up to 80 million allowances per year from the start of auctions – expected in January 2028 – until the end of 2029. Furthermore, the validity of allowances from the MSR will be extended beyond 2030 if this is necessary to stabilize the allowance price. Finally, it is proposed to amend the clause stipulating that 100 million allowances from the MSR will be released if there are fewer than 210 million allowances in circulation. It is proposed to start the release when there are 260 million allowances in circulation. The number of allowances to be released from the MSR increases linearly from the upper threshold of 260 million allowances in circulation to the lower threshold of 210 million allowances in circulation [9,10]. For this proposal to adjust the MSR to take effect, the European Parliament and the European Council must amend their existing decision on the MSR – Decision (EU) 2015/1814 [11].

Furthermore, the EU Commission is working on further proposals for adjustments in the context of EU ETS II. On the one hand, the first auction is to be brought forward to 2027 – one year before the official start of the regulatory phase of EU ETS II. Secondly, the EU Commission is working with the European Investment Bank to examine whether expected revenues from EU ETS II of up to €6 billion can be made available ahead of schedule in order to enable e.g. targeted subsidies in 2026 and 2027 [10].

A comparison of the planned adjustments with the core areas from Figure 2 shows that proposals from the categories of strengthening and extending the market stability reserve, bringing forward auctions and postponing the start of EU ETS II, as well as financial compensation measures, are to be implemented in particular.

Literature

[1] Centrum für Europäische Politik. The EU Emissions Trading System EU-ETS 2. Under Pressure, But Indispensable for Decarbonising Heavy-Duty Transport, Freiburg, 2025.

[2] Joint  non-paper by Austria, Belgium, Bulgaria, Croatia, Czechia, Estonia, Germany, Italy, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Spain (and others TBC) on ETS2 price uncertainties and possible improvements, 2025.

[3] EPICO KlimaInnovation and Frontier Economics, The EU ETS 2 at the Crossroads. Evaluating Reform Options, Policy Report, Berlin, 2025.

[4] T&E. How to turn ETS2 implementation into a success, 2025.

[5] Öko-Institut Consult GmbH. The EU ETS and the 2040 Climate Target, Berlin, 2025.

[6] Finanznachrichten. Brief an von der Leyen: Staatenbündnis will ETS2 verschieben. https://www.finanznachrichten.de/nachrichten-2025-10/66737969-brief-an-von-der-leyen-staatenbuendnis-will-ets2-verschieben-003.htm. Accessed 24 Jan 2026.

[7] Deutsche Emissionshandelsstelle. EUETS 2 Berichtsphase (2024-2026). https://www.dehst.de/DE/Themen/nEHS/EU-ETS-2/eu-ets-2-berichtsphase-2024-2026/eu-ets-2_node.html. Accessed 24 Jan 2026.

[8] EU Parlament. RICHTLINIE (EU) 2023/959 DES EUROPÄISCHEN PARLAMENTS UND DES RATES vom 10.Mai 2023 zur Änderung der Richtlinie 2003/87/EG über ein System für den Handel mit Treibhaus-gasemissionszertifikaten in der Union und des Beschlusses (EU) 2015/1814 über die Einrichtung und Anwendung einer Marktstabilitätsreserve für das System für den Handel mit Treibhausgasemissionszer-tifikaten in der Union: 2023/959, 2023.

[9] EU Kommission. Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Decision (EU) 2025/1814 as regards the market stability reserve for the buildings, road transport and additional sectors: 2025/0380, 2025.

[10] European Commission. Commission proposes targeted adjustments to the Market Stability Reserve Decision to support a smoother start for ETS2. https://climate.ec.europa.eu/news-other-reads/news/commission-proposes-targeted-adjustments-market-stability-reserve-decision-support-smoother-start-2025-11-27_en. Accessed 24 Jan 2026.

[11] Official Journal of the European Union. DECISIONS (EU) 2015/1814 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC: 2015/1814, 2024.