Strengthening the EU Emissions Trading System

Executive Summary

Beginning in mid-2026, the European Union (EU) will undertake a decisive review of its Emissions Trading System (ETS), the bloc’s flagship carbon pricing instrument and one of its most effective tools for delivering cost-efficient emissions reductions. As the EU moves toward its 2040 climate target, this review represents a critical opportunity to determine whether the ETS continues to deliver credible, high-integrity emissions reductions while adapting to new technological, geopolitical, and economic realities.

Key issues under consideration include the role of carbon dioxide removals; the potential expansion of the ETS to additional sectors; the treatment of non-permanent carbon capture and utilisation; and the risk of carbon leakage in sectors not covered by the Carbon Border Adjustment Mechanism. Each of these elements carries significant implications for the environmental integrity, economic efficiency, and political durability of the system.

This briefing sets out recommendations by Clean Air Task Force (CATF) to ensure that this review of the ETS reinforces the system’s core function: driving deep, rapid, and sustained emissions reductions. It highlights the need for a cautious and integrity-driven approach to integrating permanent carbon removals, alongside greater ambition and policy clarity in the inclusion of aviation and maritime emissions, as well as the expansion to municipal waste incineration and landfills. Across all sectors, robust environmental safeguards and targeted use of ETS revenues will be essential to maintaining credibility and driving real-world decarbonisation.

1. Carbon removals

Integrating permanent carbon removals into the EU ETS is one of the most consequential design decisions of this review. As the EU advances towards its 2040 climate target and net-zero by 2050, carbon dioxide removal technologies — particularly biogenic carbon capture and storage (BioCCS) and direct air carbon capture and storage (DACCS) — will be essential to address residual emissions from hard-to-abate sectors that cannot be fully decarbonised through direct mitigation alone.

The EU Carbon Removal and Carbon Farming (CRCF) Regulation (EU/2024/3012) has established a foundation for certifying carbon removals, but demand-side instruments remain underdeveloped, and the EU ETS represents one of the most credible existing mechanisms to create durable demand at scale, provided that supporting policies are developed in tandem.

Carbon removals also offer a potential solution to the so-called endgame challenge of the EU ETS: as the emissions cap approaches zero under the current linear reduction factor, potentially as early as 2039, issues of price volatility and market liquidity, as well as cost-efficiency are expected to intensify. Integrating permanent carbon removal allowances could help stabilise the system by sustaining traded volumes and mitigating scarcity-driven volatility as the cap declines, offering emitters a cost-effective means to address their residual emissions with carbon removals.

However, integrating removals into a cap-and-trade system designed around emissions reductions requires careful design to preserve environmental integrity and avoid deterring the abatement action the ETS is built to drive.

This comprehensive approach addresses the fundamental challenge that integrating permanent carbon removals into the EU ETS entails careful balancing of trade-offs between environmental integrity, cost-effectiveness, and administrative concerns. Without safeguards, direct integration risks leading to deterrence of emissions reductions as companies substitute carbon removals for emission reductions, potentially allowing gross emissions to increase beyond agreed trajectories.

Integration must be accompanied by comprehensive supporting policies to ensure sustainable deployment, such as public procurement programmes, reverse auctions, or carbon contracts for difference schemes. These should be developed outside or in conjunction with the EU ETS to bridge cost gaps between allowance prices and permanent carbon removal costs, particularly for DACCS, while avoiding weakening support for other critical emission reduction technologies.

A phased approach to carbon removals could be envisioned:

Stage 1 (2026 review)

Initial integration with all five safeguards and design features, set up of supporting policies, including additional EU funding and stronger biomass regulation, and separate reduction and removal targets within the EU’s climate and energy architecture.

Stage 2 (towards 2040)

Potential adjustments to safeguards based on review findings. Any adjustments must be conditional on addressing risks related to abatement deterrence and unsustainable biomass use. This stage should also consider the broader evolution of emissions trading systems and the development of supporting policies.

Stage 3 (post 2040)

Introduction of additional policies for achieving net-negative emissions, such as Member State obligations, net-negative emissions caps, or separate compliance mechanisms, since the integration of permanent carbon removals into the EU ETS alone will be insufficient for post-2050 net-negative commitments.

The role of carbon removals in aviation decarbonisation

Aviation is one of the sectors that are hardest to decarbonise. Synthetic low-carbon fuels are expected to play a central role in this process, as biofuel supply will be insufficient to meet the net-zero demand and may create risks associated with land use, ecosystems, and food security. A mix of energy carriers will therefore be needed, including low-carbon biofuels, synthetic fuels, and other hydrogen-based alternatives. CATF analysis indicates that synthetic fuels could meet a significant share of demand in mid-century scenarios (up to 56%), but their large-scale deployment will depend on substantial cost reductions, access to low-carbon hydrogen and electricity, and strong policy support.

Given the uncertainty around these enabling conditions, it is essential to also assess alternative pathways for reducing the climate impact of aviation, including the role of permanent carbon removals. In this context, the integration of carbon removals into the EU ETS could affect decarbonisation pathways, investment decisions, and the effectiveness of existing legislation like ReFuelEU Aviation. If not carefully designed, the availability of carbon removal options like DACCS could weaken incentives to scale synthetic low-carbon aviation fuels and advanced biofuels, especially for projects that have not yet reached final investment decision.

2. Aviation

A. Non-CO₂ impacts

Contrails are a significant and currently under-addressed driver of aviation’s climate impact, while also representing one of the most immediate and cost-effective mitigation opportunities. The EU ETS should promote early action and contribute to a robust policy framework addressing these non-CO₂ impacts.

Contrails are wispy cloud formations that form when aircraft fly through ice-supersaturated regions (ISSRs) at high altitudes emitting soot particles that serve as nuclei for ice crystal formation. These contrails can trap heat and contribute significantly to warming. Their unique characteristics mean they can be mitigated quickly, at relatively low cost, and through highly targeted interventions.

Depending on the methodology and the timescale of the climate metric employed, the warming impact from contrails is comparable to aviation’s CO₂ emissions. Recent scientific literature finds that near-term warming from contrails (i.e. warming over the 20-year period after a flight) is equal to or somewhat higher than the near-term warming caused by the flight’s CO₂ emissions.¹ Even when assessed over a 100-year period after the flight (which discounts the impact from contrails, since they are short-lived in the atmosphere), contrails add about one third to the warming caused by CO₂ emissions from aviation. Crucially, this impact is highly concentrated: around 80% of contrail warming is generated by just 2% of flights, often on long-haul routes such as transatlantic flights. This concentration makes contrail mitigation particularly effective, as a small number of targeted interventions can deliver disproportionate climate benefits.

Mitigating contrails requires a combination of approaches, as highlighted in the CATF report on non-CO₂ effects of aviation, given that contrail formation depends on fuel composition, engine technology, and atmospheric conditions. In particular:

Small adjustments to flight paths to avoid ISSRs, on a small fraction of flights, can dramatically reduce overall contrail occurrence. Tests performed by Google and American Airlines show that around 2% additional fuel usage to avoid these areas on 3-5% of flights resulted in a 54% reduction in contrail-related warming according to post-flight analysis of satellite imagery. This highlights the potential of targeted contrail mitigation measures.²

SAF contains lower levels of aromatics and sulphur than conventional jet fuel and can significantly reduce soot emissions which play a key role in contrail formation, thereby limiting it. Further reductions may also be achieved through treatment of conventional kerosene to lower its aromatic content.

Advancements in engine technology present a significant opportunity to mitigate contrail formation by reducing soot emissions.³ Supporting fleets modernisation towards lower-soot engines could help cut the non-CO₂ climate impacts from aviation.

B. Expansion of scope to extra-EEA flights

International aviation accounts for a disproportionate share of emissions yet remains largely outside of the scope of the EU ETS. While long-haul flights account for less than 10% of departures, they account for more than half of aviation’s carbon emissions, a proportion expected to rise to around 56% by 2050.⁴ 

Currently, extra- European Economic Area (EEA) flights are excluded from the EU ETS, meaning that the segment responsible for the majority of emissions is not subject to an effective carbon price. This also represents a significant missed revenue opportunity: pricing emissions from all departing flights between 2012 and 2023 could have generated around €41 billion, which could have been reinvested to accelerate the uptake of sustainable aviation fuels and support the sector’s transition to climate neutrality.

Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) was designed to address emissions from international aviation, but its current design and implementation raise serious concerns about its effectiveness. While it is expected to enter its implementation phase in 2027, major aviation countries are unlikely to apply it in practice, calling into question whether it will achieve sufficient global coverage to reach the 70% threshold minimum established by the European Commission.⁵ As a result, CORSIA cannot currently be relied upon to deliver meaningful emissions reductions at scale. This reinforces the need to consider extending the EU ETS to international flights, in line with the original scope agreed in 2008.

While a robust multilateral system remains the optimal outcome for climate, CORSIA’s current design and implementation show that it cannot serve as the main instrument for cutting emissions from international aviation effectively, given that:

• CORSIA is not a cap-and-trade system, but an offsetting scheme based on a baseline (85% of 2019 emissions for 2024–2035).⁶ It aims at “carbon-neutral growth” rather than absolute emission reductions and only covers emissions above that baseline. By contrast, the EU ETS applies to total emissions and provides a clearer pathway to net zero, supported by a significantly stronger carbon price signal to drive emissions reductions and investment in low- and zero-carbon fuels.⁷
• Participation remains low and implementation weak. Major aviation markets, including the US or China⁸, have yet to transpose key elements such as offsetting obligations into domestic law. So far, the US has only implemented MRV on a voluntary basis, without a legal framework to enforce compliance.
• Enforcement is limited under CORSIA. It lacks a binding international compliance system, leaving enforcement and penalties to national authorities or voluntary application, which reduces incentives for airlines to comply. 
• Sustainability safeguards for SAF under CORSIA remain weaker than EU standards, particularly regarding indirect land-use change risks, potentially allowing a greater role for food-based fuels that would not meet EU Renewable Energy Directive (RED) criteria.

C. Earmarking of revenues

We are entering the critical years for the development of sustainable aviation fuels in Europe. With 2030 ReFuelEU Aviation targets fast approaching, reliance on Hydroprocessed Esters and Fatty Acids (HEFA)¹⁰ alone will not be sufficient. As highlighted in CATF’s Decarbonising Aviation report,¹¹ it will be necessary to have a multifuel approach, including scaling up e-SAF and advanced biofuels. There are currently no final investment decisions for e-SAF projects in the EU,¹² highlighting the scale of the challenge and the risk of missing both climate and industrial objectives.

This reflects a persistent investment gap. While the EU ETS Innovation Fund supports investments in SAF-related projects, current support remains insufficient relative to the capital required to bring these technologies to commercial scale, given high upfront costs, long lead times, and a continued price gap with fossil jet fuel. In this context, reinvesting revenues generated by the aviation sector into its own decarbonisation is both necessary and justified, particularly given the limited technological options available to the sector for reducing its emissions.

D. Incentives for sustainable aviation fuels

The EU ETS has been an essential instrument incentivising the uptake of SAF by airlines, particularly the dedicated allowances for the use of SAF. These allowances are intended to partially compensate for the price differential between SAF and fossil kerosene. The level of compensation varies by fuel type, covering up to 95% of the price gap for renewable fuels of non-biological origin and up to 70% for advanced biofuels. Between 2024 and 2030, up to 20 million aviation allowances are reserved for this purpose¹³, but the continuation or scale of this support beyond 2030 has not been clarified.

3. Maritime transport

The EU ETS for maritime remains a critical instrument for driving decarbonisation of the shipping sector, particularly as progress at the International Maritime Organization (IMO) on a global carbon pricing framework has effectively stalled and there are few indications of a near-term breakthrough. Maintaining a robust EU ETS covering international voyages is therefore essential. By upholding a credible carbon pricing signal, the EU plays a key role in advancing innovation and accelerating the transition towards low- and zero-carbon shipping both within Europe and globally.

The system is already acting as a pull factor for the deployment of low-carbon vessels and fuels, including dual-fuel ships and the development of scalable options such as ammonia. As such, the EU ETS should remain a cornerstone of the EU’s shipping decarbonisation strategy and continue to support early investment in clean maritime technologies and infrastructure.

4. Municipal waste incineration and landfills

The waste sector accounts for roughly one quarter of EU anthropogenic methane emissions.¹⁴ While total methane emissions from the EU waste sector have been reduced over the past 25 years¹⁵, likely due to the diversion of biodegradable waste mandated by the EU Landfill Directive, independent measurement campaigns¹⁶ and satellite data¹⁷ continue to reveal significant emissions at many EU sites.

A. Incineration

Municipal waste incineration (MWI), also known as thermal waste-to-energy, refers to a suite of technologies that treat solid waste by combusting it in a controlled environment to reduce its volume and destroy pathogens. At present, MWI falls outside the scope of the EU ETS.¹⁸ Integrating it would require waste management companies to purchase carbon allowances for CO₂ generated in the process. This would add an extra cost to unabated waste incineration, disincentivising this practice and instead bolstering the economic appeal of waste prevention, waste diversion, recycling and emissions abatement with CCS where necessary.

An undesirable consequence of disincentivising incineration would be to encourage landfilling of municipal solid waste as an alternative. Therefore, it is critical that landfill methane emissions be also covered by the EU ETS. Not including them could cause a net increase of greenhouse gas emissions, given that landfilling of biowaste without pretreatment or the use of landfill gas capture systems leads to methane emissions, which are much more potent than CO₂ at warming our planet. Thus, incentivising greater landfilling of untreated solid waste would lead to higher emissions of landfill methane.

It is also important that operators of waste incinerators not be allowed to utilise accounting that allows any form of credit for avoided emissions, either within the ETS or through a parallel mechanism, based on claims of emissions that would have occurred from landfills if waste had not been incinerated. First, given the variability in methane emissions, it is inherently challenging to produce a credible estimate of the amount of methane emissions that would have resulted from landfilling waste, making the “baseline” needed to quantify avoided emissions uncertain. Second, such an approach could lead operators of incinerators to pursue actions that would be detrimental to climate, particularly due to the potential high value of the credits (a result of the high global warming potential of methane). For example, operators might seek to incinerate food waste (despite its low heating value) because food waste generates large amounts of methane when landfilled. It is very challenging to create general guardrails to prevent all such detrimental practices, so they should not be allowed within or outside of the EU ETS for incineration.

B. Landfills

Emissions of methane from landfills are substantial. While regulatory requirements (e.g., mandating pre-treatment of waste, minimisation of landfilling, and restrictions on landfilling recyclable materials), have led to critical mitigation of this source, emissions are highly variable and are determined by a number of factors, including local climate and topography. Including landfills in the scope of the EU ETS as a complement to other regulatory measures would incentivise operators to rapidly implement measures tailored to individual landfills and so prevent the release of methane, further reducing emissions substantially, as well as the harmful co-pollutants that are present in landfill gas. This would also incentivise systems to separate food waste and other organics for composting, as well as research and the dissemination of innovations. It would also complement efforts to capture and use landfill gas (rather than controlling landfill gas through flaring).

The inclusion of methane emissions from municipal solid waste into the EU ETS requires standardising MRV to ensure accurate and credible emissions accounting. No standard MRV framework for landfill methane exists, however best practices use a mix of facility-level direct measurement (using drones, aircraft, or optical gas imaging), facility-specific emissions factors derived from these campaigns, and annual reconciliation with satellite observations. Reporting should be subject to independent third-party verification.

5. Non-permanent carbon capture and utilisation (CCU)

The inclusion of MWI in the ETS increases the possibility of any non-permanent CCU products facing ‘double pricing’ under the ETS – both at the point of capture and disposal at the MWI. CATF and Concito have explored policy options and developed recommendations for the inclusion of fossil-based, non-permanent CCU in the ETS in this report, including downstream (emitter pays) and upstream (capture installation pays) approaches. Both approaches face similar challenges of mitigating double pricing, minimising carbon leakage from the ETS, and ensuring the incentive to decarbonise is appropriately distributed among actors in the value chain. Both approaches require the categorisation of CCU applications to identify those product classes likely to be disposed of at MWIs or other ETS facilities, as well as regular analysis of the scale of leakage pathways for this embedded carbon (via landfill, waste export, product export etc.).

Downstream pricing risks over-incentivising CCU, as captured CO₂ will be freely available to CCU producers. To provide a level playing field with alternative decarbonisation routes, producers of all fossil-based materials would have to be exposed to the costs and carbon price of disposal to some degree. Maintaining upstream pricing would be a more prudent approach, maintaining the incentive on emitters to deploy emissions abatement technologies. To avoid double pricing of CCU products, a Guarantee of Origin (GoO) certification system for select products could be implemented to register the quantity of ‘ETS-paid’ carbon in the system. These GoO would be surrendered in place of an ETS Allowance by MWI or other relevant waste-burning ETS facilities. However, there would be little incentive for fossil CCU production routes in this model, without a mechanism for distributing the benefit accrued by MWI to upstream producers. While a market for GoO certificates could enable this cost pass-through, it may also over-incentivise CCU relative to alternative upstream decarbonisation options, unless used in conjunction with certification and incentives for other, non-fossil feedstocks.

CCU with CO₂ of fossil origin is, in any case, unlikely to play a significant role in meeting the EU’s decarbonisation targets. Fossil CO₂ must be recaptured and either re-used or permanently stored at the product’s end-of-life. The recapture of CO₂ is challenging for most fuel applications, and other routes to the circular use of carbon (such as mechanical or chemical recycling) are likely to be lower cost than recycling (relatively stable) CO₂. As such, modelled pathways to net-zero (including the Impact Assessment underpinning the EU 2040 climate target) shift towards the use of biogenic and atmospheric CO₂ by 2050.¹⁹ Projections by Cefic foresee CCU contributing around 2% of total carbon feedstock for the chemical sector by 2050, while Plastics Europe modelling shows CCU-based materials accounting for 4.8% of European plastic production by 2050 (unclear partition between fossil and biogenic CO₂).²⁰ Consequently, any steps taken to account for fossil CO₂ utilisation in the ETS should also aim to minimise administrative complexity, while ensuring the environmental integrity of the ETS.

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