The evolution of the EU ETS can be seen as an ongoing quest to strike a balance between market forces and political guidance. While the system was originally designed primarily as a market mechanism in which an increasingly scarce emissions cap was intended to stimulate investments in emissions reductions through price formation, the ETS is increasingly being used to support broader economic and industrial policy objectives as well. The recent revision thus represents not only the next step in the system’s development but also marks a further shift in the role of the EU ETS.
This analysis first describes the development of the EU ETS and the key proposed changes that have been implemented in anticipation of Phase 5. It then examines three broader insights from the review: the political significance of ETS revenues, the evolution of the ETS toward a hybrid policy instrument, and the growing uncertainty regarding the future role of the ETS price as an investment signal.
