As the European Union prepares for the next phase of reform to its Emissions Trading System (EU ETS), the mechanism is facing growing political and economic pressure due to rising compliance costs and concerns over industrial competitiveness.

At the same time, a growing number of industry leaders and policy experts are warning against measures that could undermine the effectiveness of the system. Vattenfall, one of Europe’s largest producers and retailers of electricity and heat, argues that weakening the EU ETS would be a strategic mistake.

“A strong ETS is crucial, not only to reduce emissions, but also to strengthen Europe’s competitiveness in the long term. If the price signal weakens, it will be harder to drive the investments required for the transition, which risks making the EU even more vulnerable,” the company says.

According to Vattenfall, short-term interventions in the EU ETS may appear politically attractive, but they carry significant risks by weakening carbon price signals and undermining confidence that the EU will maintain a stable and predictable path toward its long-term climate objectives.

Furthermore, the company warns that “it would be most unfortunate if decisions were taken that penalise those frontrunner companies that have invested early in the decarbonisation,” noting that any weakening of the EU ETS could disproportionately disadvantage businesses that have already invested heavily in long-term emissions reductions and clean technologies.

At the same time, the company argues that reducing Europe’s reliance on fossil fuels is critical to improving the EU’s competitiveness and limiting its vulnerability to future economic and geopolitical shocks.

In this context, it also advocates using auction revenues to a “greater extent to support industry’s climate efforts,” particularly in accelerating industrial decarbonisation and the transition to fossil-free energy solutions.