On Friday, the Riigikogu's EU Affairs Committee will discuss Estonia's positions on reforming the EU Emissions Trading System (ETS). The debate is more important than it may seem at first glance. Beyond reducing emissions, Europe must determine whether it can do so while preserving its industry, jobs, and competitiveness.

ETS has delivered results: emissions from electricity generation and industry covered by the system have fallen by about half since 2005. But most of the easy reductions have already been made, and the next phase will be far more difficult.

Power‑sector emissions fell quickly thanks to replacing coal with lower‑carbon natural gas and rapid growth in renewables. In industry, however, further reductions often require new technologies, redesigned production processes, and new infrastructure.

This leads to a core problem in European climate policy: climate targets and timelines are set politically, but the technologies, infrastructure, and economically viable reduction options needed to meet them have not developed at the same pace. Targets can be agreed by vote — technological readiness cannot.

Reducing emissions and electrifying the economy are sensible goals. If the same output can be produced with lower emissions and competitive costs, both companies and society benefit. But this requires solutions that exist, work at industrial scale, and are economically sustainable.

The Estonian government's approved positions on ETS reform acknowledge this clearly. Some sectors have already adopted cost‑effective reduction options; in others, solutions are either extremely expensive or lack the necessary infrastructure. CO₂ capture technology, for example, is of little use to a company if there is no way to transport or store the captured CO₂ — and the technology itself is currently very costly.

In such circumstances, policy cannot simply raise carbon costs and assume technology and investment will follow. Emission‑reduction speed must match the pace at which technologies and infrastructure become realistically available and economically usable.

If technological development lags behind political expectations, the emissions‑reduction trajectory — and climate ambition — must be adjustable. Otherwise, ETS becomes an instrument for reducing production and jobs rather than emissions.

ETS is successful only when emissions fall because production technologies improve — not because production leaves Europe. If a European factory closes due to high carbon costs while demand for the product remains, imports replace domestic production. Europe's statistical emissions may fall, but jobs, investment, and production move elsewhere, and global emissions may not fall at all.

This is why ETS includes free allocation of allowances to prevent carbon leakage. Protecting European industry's competitiveness must remain a core principle of ETS design.

ETS1 needs real price protection

Another major issue is the carbon price. ETS is meant to send a price signal: high‑emission production should become more expensive, low‑emission production more attractive. But the signal only works if companies have a viable alternative to invest in.

If no cost‑effective technology exists, a higher CO₂ price does not make it competitive — it simply makes existing European production more expensive.

This is especially critical for export‑oriented industries. Some carbon costs can be passed on domestically, and the EU's carbon border measure offers limited protection. But on global markets, prices are set by international competition, and European companies cannot simply add ETS costs to the price paid by buyers in Asia or America.

ETS1 therefore needs a much stronger and more automatic price‑stabilization mechanism. ETS2 already includes a precedent: if the carbon price exceeds a set threshold, additional allowances are automatically released from the market stability reserve.

Free allowances are not a gift

The same logic applies to free allowances. Their purpose is not to subsidize companies but to prevent carbon leakage when European firms pay for CO₂ and their competitors in third countries do not.

Under the Commission's proposal, 20 percent of free allowances from 2031 onward would become conditional — issued only after companies prove investment and emission reductions.

But supporting investments and preventing carbon leakage are not the same. If a company lacks a technologically feasible and economically viable way to reduce emissions, its leakage risk does not disappear.

Free allocation should therefore continue for sectors genuinely at risk of leakage until EU demand for their products remains and industrial‑scale reduction technologies exist that allow them to compete on open markets.

Estonia's interest is to seek EU‑wide solutions, not national exemptions. If technology gaps and leakage risks are problems in Estonia, they are likely problems elsewhere too. A strong EU‑level solution based on objective criteria would be more effective and achievable.

Estonia's positions are reasonable

The Estonian government's positions are broadly sensible: a smoother reduction trajectory tied to technological readiness, stronger price‑stabilization mechanisms, and free‑allocation rules that consider technological maturity, economic viability, and leakage risk. These are arguments that can be defended at the EU level.

The Commission's proposal shows the problem is at least partly recognized: the reduction trajectory is softened, free allocation extended, and leakage protection maintained.

The Union of Electricity Industries of Estonia argues the changes do not go far enough. The Commission's proposed investment‑obligation measure is particularly odd, implying that all necessary reduction technologies already exist and are ready for use — which is not true.

Estonia cannot change ETS alone. The next work must be done in Brussels: finding member states and MEPs whose industries face similar challenges. Europe's industrial competitiveness problem is far broader than Estonia's, creating an opportunity to build a strong coalition to shape the Council's negotiating position and influence the final reform.

Europe needs an ETS that pushes technological improvement but does not force industry to shut down before those technologies exist.

Climate policy success must also be measured by whether Europe can maintain its industry, jobs, export capacity, and economic strength. Without these, Europe's green transition lacks the economic foundation it needs — and is unlikely to inspire the world.

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