September 2025 will mark a decisive juncture for Europe’s most celebrated climate instrument, the Emissions Trading System (ETS). For nearly two decades, the ETS has been presented as the crown jewel of EU climate policy, the world’s largest and most sophisticated carbon market, and a model for others to follow. Yet, like all jewels, its brilliance depends on the integrity of its setting. This autumn, the framework underpinning the ETS will be tested on multiple fronts including compliance, solidarity, and ambition.
The jewel of European climate policy under pressure
Since its creation in 2005, the ETS has been a central element of the EU’s climate architecture. It has demonstrated that carbon pricing can work at scale, progressively tightening its cap, refining its mechanisms, and expanding its scope. Initially applied to large industrial emitters, power plants, and aviation, the system is now extending to new sectors, including maritime transport and, from 2027, fuel suppliers for road transport and heating. Each adjustment has been framed as evidence of the EU’s ability to balance market logic with political imperatives. But the months ahead will show whether this delicate balance can be maintained.
The integrity of the system will first be tested in the maritime sector. By 30 September, shipping operators must surrender allowances for their 2024 emissions, marking the first major compliance deadline under the extended ETS. This year’s requirement covers 40% of reported emissions, rising to 70% in 2026 and full compliance from 2027. Beyond carbon dioxide, methane and nitrous oxide will also be brought within scope. The credibility of the ETS depends on this process working smoothly. A clear demonstration of compliance would bolster confidence in Europe’s capacity to extend carbon pricing across borders. Failure would call into question not only the enforceability of the system, but also the EU’s standing as a global climate leader.
Solidarity will be tested through the Modernisation Fund, a €47 billion facility financed by ETS auction revenues to support lower-income member states in their transition to clean energy. By 9 September, governments must submit their priority investment proposals. Here, the tension between market mechanisms and political bargaining becomes evident. The credibility of the ETS depends not only on its cap and price trajectory, but also on how revenues are spent. If funds are directed towards strategic investments in insulation, renewables, and grids, they can strengthen cohesion and demonstrate the fairness of the transition. If, however, allocations are seen as political spoils, old divisions may resurface, undermining trust in the system and reinforcing narratives that carbon pricing is an unjust tax rather than a tool for collective progress.
Ambition, meanwhile, will be debated in the context of the EU Climate Law. The European Commission has proposed enshrining a 90% net reduction target for 2040, a milestone that will define the parameters of the ETS in the next decade including its cap trajectory, the phase-out of free allowances, and the integration of removals and ETS 2. Environment ministers are set to discuss the proposal on 18 September, at the end of a feedback process that runs through mid-month. The decision is not merely symbolic. It will shape the credibility of the EU’s climate architecture ahead of COP30 in Brazil and send an important signal to investors, industries, and international partners about the seriousness of Europe’s long-term commitments.
Trade and competitiveness in the balance
Finally, the Carbon Border Adjustment Mechanism (CBAM) will begin moving from theory to practice. The transitional reporting phase comes to an end this year, and financial obligations will enter into force in 2026. The Commission is currently consulting on the methodology for the definitive period, with delegated acts expected later this year or in early 2026. Here, the ETS is no longer only a domestic market instrument, it is also a tool of trade policy, raising questions about competitiveness, carbon leakage, and international relations.
Taken together, these developments underscore that the ETS is no longer just a market for compliance by large emitters. It has become a compliance regime for global shipping, a funding engine for solidarity within the Union, a volatile commodity market, and an instrument of trade policy through CBAM. The stakes, therefore, are no longer confined to emissions trading specialists, but they also concern the EU’s credibility as a climate leader, the resilience of its internal cohesion, and the stability of its political economy.
A decisive autumn for Europe’s climate project
What lies ahead is a spectrum of possible outcomes. A best-case scenario would see smooth compliance in shipping, credible and strategic deployment of the Modernisation Fund, a robust Climate Law revision, and a workable CBAM methodology. That would cement the ETS as a global benchmark for carbon pricing and provide investors with renewed confidence in its longevity. A worst-case outcome would involve enforcement failures, politicisation of revenues, or dilution of targets. These developments would erode trust and reinforce critics within the EU and abroad. More realistically, the EU may deliver on technical compliance while struggling with political delivery, leaving the ETS intact but exposed to frictions that will not go unnoticed by industries, markets, and partners.
September 2025 will not simply determine the future trajectory of the ETS, it will test whether the EU can sustain the delicate balance of ambition, fairness, and credibility upon which its entire climate project depends. Should the EU succeed, the ETS may continue to sparkle as the crown jewel of global climate governance. Should it falter, it risks being remembered as an experiment too fragile to carry Europe’s ambitions.
