The EU emissions trading system works but most industrial decarbonisation is still to come

Survey evidence shows regulated manufacturers respond to the EU carbon price, but want reassurance on policy direction and stringency.

By putting a price on carbon emissions, the European Union’s emissions trading system (ETS) has encouraged regulated firms to invest in cleaner technologies and processes. To a great extent, the scheme has worked well: emissions from electricity generation and industry covered by the ETS have roughly halved compared to levels in 2005, when the ETS was introduced¹. While much of this reduction has come from the power sector, industrial manufacturing has also delivered substantial and meaningful emissions cuts.

The system is now entering a critical phase. The manufacturing industry has so far received a generous share of the allowances needed to cover its emissions for free², but a phase out of free allocation began in January 2026, reflecting the intention for the ETS to become more stringent over time. Complex rules on free allocation were, from the outset, designed to preserve incentives to cut emissions but in practice the system has been only partially constraining for many industrial firms.

The reduction in free allowances is coinciding with high and volatile energy prices and growing geopolitical uncertainty. In this context, a balance must be found between two issues: the planned tightening of the ETS, which should accelerate industrial transformation and support low-carbon innovation, and concerns about the impact of higher carbon costs on EU industrial competitiveness, particularly in sectors exposed to international competition³.

Against this backdrop, the European Commission is due to issue an ETS review in mid July 2026⁴. Understanding how the ETS has operated at the micro level in shaping firms’ decarbonisation choices is particularly relevant and timely. A special survey on ETS-regulated manufacturing firms (excluding power and electricity generation) was carried out by the European Investment Bank (EIB) as part of the EIB Investment Survey (EIBIS) in 2023 and 2025. The ETS survey provides a basis for understanding firms’ decisions to decarbonise. In its 2023 and 2025 waves⁵, EIBIS included ETS add‑on modules that focused explicitly on industrial manufacturing firms (excluding power companies regulated by the ETS).

Manufacturing firms with ETS regulated installations

The ETS covers approximately 2,000 manufacturing firms with roughly 4,000-5,000 industrial installations in Europe. Responses to the survey were received from more than 300 firms, equating to a 15 percent response rate, the standard for this type of business survey. Some selection bias cannot be excluded, as the survey was voluntarily undertaken by participants.

In the 2025 wave, about half of participating firms reported that more than 75 percent of their turnover over the past five years came from ETS‑regulated installations, while about one third report a share below 25 percent. The survey thus captured firms for which the ETS is central to business activity. 

The survey results show that decarbonisation strategies are widespread, with 80 percent of ETS-regulated industrial firms having one (Figure 1). Strategies are also increasingly mature – in 2025, 45 percent of respondent firms reported that their strategy was initiated more than five years earlier. Seventy percent of firms consider their decarbonisation strategies to be as ambitious as the previous year, while 22 percent increased their level of ambition in 2025.

But only a minority of firms have so far been constrained significantly by the ETS. Only 15 percent of firms reported that their largest reductions have already taken place, while 64 percent anticipate that the biggest cuts will occur within ten years (37 percent within the next five years). This suggests that the most intensive phase of industrial decarbonisation still lies ahead, making it essential to maintain strong and credible incentives.

A particularly important finding concerns how genuinely constraining the ETS is. About 40 percent of firms report being net buyers of allowances, indicating that their allowance trading costs exceeded the associated financial benefits and that the ETS has effectively constrained their business decisions. Other firms have been largely shielded by the cushioning effect of free allowances, with trading costs lower than, or broadly offset by, financial benefits. As free allocations are phased out, carbon price signals are expected to become increasingly significant for many more firms.

Figure 1: Presence and impact of a decarbonisation strategy for ETS-manufacturing firms (% of survey respondents)

^{Source: authors based on ETS Survey, EIBIS module (see footnote 5). Note: responses to question: 1. Does your company have a decarbonisation strategy? 2. If yes, when did you first implement a decarbonisation strategy for your company? 3. When thinking about the decarbonisation strategy of your company, when do you expect to achieve the biggest reduction in your carbon or greenhouse gas emissions.}

ETS-covered manufacturers are investing to reduce emissions

ETS manufacturing firms are actively investing to reduce their emissions (Figure 2). Energy efficiency and sustainable transport are the two most reported areas of investment, but firms are also looking into new less-polluting business areas and technologies (innovation), onsite renewables and electrification. Among firms investing in innovation, 64 percent claim to have developed new products and services internally, 16 percent rely only on acquisition of externally developed technologies and 20 percent do both. 

Figure 2: Firms investing or implementing strategies to reduce emissions (% of survey respondents)

^{Source: authors based on ETS Survey, EIBIS module (see footnote 5). Note: responses to question: 1. Has your company invested or implemented the following, to reduce Greenhouse Gas Emissions?} 

The survey asked firms to self-define as leaders or laggards in decarbonisation, compared to peers in the same sector or market. The self-reporting was cross checked with emissions-reduction data. Some 30 percent of surveyed firms classified themselves as leaders, six percent as laggards and the remaining 64 percent as on par with peers. 

Consistent with their self-assessment, decarbonisation leaders invest more in cutting emissions (Figure 3). They allocate almost half of total investment to decarbonisation, much more than laggards, which devote some 29 percent. Leaders are less likely to perceive that they have underinvested, with only 13 percent saying so, compared to 47 percent of laggards. Leaders show stronger engagement in innovation, adopting new technologies and engaging in green product and services innovation. For the next five years, all firms say they will prioritise investment in new technologies, while leaders are much more likely to signal that they will engage in product innovation. 

Figure 3: Investment by ETS manufacturing firms by decarbonisation status (% of survey respondents) 

^{Source: authors based on ETS Survey, EIBIS module (see footnote 5). Note: responses to questions: Over the last five years did your company…..Over the next five years does your company plan to ….?  Do you consider your company to be ahead, at par or behind other companies in the same industry or market, in terms of decarbonisation efforts and achievements?}

Business opportunities and regulation

Firms are clearly differentiated in terms of drivers of decarbonisation investment (Figure 4). Current and expected energy prices, along with policy and regulatory pressures, are major drivers for all firms, but slightly more so for laggards. Leaders are more likely to be incentivised by business opportunities, including the potential to develop new markets and benefit from public procurement and labelling schemes. A comparison with the 2023 ETS survey wave shows that public procurement is increasingly perceived as a supporting factor by leading firms, suggesting that demand-side policies are becoming more important for firms at the technological frontier. Subsidies also appear to play an important role in encouraging both leaders and laggards to innovate and transform.

These differences in the drivers of decarbonisation show that abrupt changes to the ETS could be detrimental for both leaders and laggards. For innovative leaders, weaker decarbonisation incentives could undermine investment plans built around new technologies, business models and market opportunities. For laggards, for which decarbonisation efforts are more strongly driven by regulation, a weakening of expected carbon-price signals could further delay the transition.

Figure 4: Factors affecting investment in decarbonisation or new green technologies or processes (% of survey respondents stating ‘very important’ or ‘very likely’) 

^{Source: authors based on ETS Survey, EIBIS module (see footnote 5). Notes: responses to questions: when thinking about decarbonisation, how important, if at all, are each of the following to encourage you to initiate or accelerate action to tackle climate change? (very important, fairly important, not very important, not at all important) – for policy and regulation, energy prices and opportunities to develop new markets. How likely or unlikely are each of the following policies to encourage your company to invest in green technologies or processes? Very likely, fairly likely, not very likely, not likely at all, for subsidies and grants, standards and regulations and public procurement.}

No evidence of widespread relocation despite tighter conditions

A prominent concern in the policy debate about carbon pricing is the risk that a tightening of the ETS could trigger relocation of production to less-regulated jurisdictions outside the EU – so-called carbon leakage. The survey evidence provides little support that this is happening. This suggests that a combination of emissions-reduction policies, including carbon leakage measures, have been effective.

In terms of managing decarbonisation over the last five years, 92 percent of firms state that investment in new technology is a major part of the strategy, while 38 percent have reduced output to deal with higher energy and carbon costs. More than 94 percent of firms state that relocating production abroad to avoid climate regulation is not part of the strategy. Over the next five years, 90 percent of firms say they will rely on investment in green technologies to decarbonise, seven percent plan to reduce production capacity while less than two percent plan to relocate abroad. 

The main binding constraint on decarbonisation: uncertainty

The most frequently cited constraint on decarbonisation remains uncertainty: about future energy and carbon prices and about regulation (Figure 5). Interestingly, leading firms are slightly more likely to be constrained by uncertainty, as they often build business models on decarbonisation, which might be challenged in case of a major shift in regulation or the carbon-price trajectory. Such uncertainty discourages capital‑intensive investment and increases reliance on public support and clear regulatory signals. 

Figure 5: Obstacles to climate investments (% of survey respondents)

^{Source: authors based on ETS Survey, EIBIS module (see footnote 5). Note: responses to question: To what extent, if at all, is each of the following an obstacle to investing in green technologies and processes?}

Financing costs, technology-related challenges and lack of skilled labour are additional concerns for firms in implementing decarbonisation plans, suggesting complementary support policies can further help to incentivise decarbonisation. These could include targeted incentives for innovation and clean-tech adoption, targeted training and information sharing, first-of-a-kind technology experimentation and incentives for diffusion, and risk-sharing mechanisms for new technology adoption.

The analysis shows that the ETS has provided the right incentives for firms to decarbonise, but uncertainty on future developments might be detrimental. Firms that are ahead in the decarbonisation process have invested in transformation, exploiting new business models and new market opportunities, innovating and benefiting from incentives. Firms that lag in the decarbonisation process have been guided in their first decarbonisation attempts, mostly by regulation and expectations about future carbon prices increases. In both cases, uncertainty about future carbon prices and regulation might derail progress. 

The priority for the 2026 ETS review should therefore be to strengthen the clarity, credibility and predictability of the policy framework, without diluting the carbon-price signal or the planned tightening of the system. In this context, the review could further improve the targeting of residual free allowances, making allocations conditional on firms taking transformation measures. It should direct ETS revenues more forcefully towards innovation, technology deployment and industrial decarbonisation.

By reducing investment risks and financing constraints, such measures can help firms remain competitive while accelerating the low-carbon transition. This could be accompanied by greater use of instruments such as the EU Innovation and Modernisation Funds, which take shares of ETS allowance revenues and deploy them for emissions-cutting initiatives⁶, carbon contracts for difference (which trigger payments between governments and companies, depending on variation in the carbon price against a benchmark⁷), targeted financing and risk-sharing mechanisms that support the development and deployment of low-carbon technologies. 

The industrial transition is already under way. Progress is uneven and shaped by risk and uncertainty, but evidence from ETS survey shows the direction is clear: firms are transforming through investment and innovation, not stepping back from decarbonisation.

Source : Bruegel