Home European Union The ETS: Climate Policy at Any Cost?

The ETS: Climate Policy at Any Cost?

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By Sebastian Stodolak, vice president of the Warsaw Enterprise Institute

On 2 June 2026, the European Parliament’s Committee on the Environment, Climate and Food Safety organised a public hearing on the EU Emissions Trading System (ETS), entitled “EU ETS: Current Performance and Pathways for the Future.” The hearing focused on the current functioning of the ETS, its role in delivering cost-effective decarbonisation, and possible directions for its future development in light of the EU’s 2040 climate target. Since the meeting failed to address what is arguably the ETS’s fundamental problem and instead engaged in a familiar Brussels exercise of window dressing, this article will examine why the ETS is a dead end.

The ETS has been the EU’s idée fixe for more than two decades. First introduced in 2005, it has undergone numerous reforms over the years, yet its core objective remains unchanged. ETS 2, which extends carbon pricing to road transport, buildings, and small industrial sectors, is set to become a major challenge when it enters into force in 2028. The ETS pursues a noble goal: protecting the environment. Who would not want to live in a world that is not burning? Few people question the intention behind it. As always, however, the devil is in the details. The real question is how to protect the environment without undermining the economic success that post-war Europe has built. The ETS is not the answer, but the eurocrats do not seem to care.

The Warsaw Enterprise Institute, a Polish conservative and libertarian-leaning think tank focusing on economic and political issues, recently published a report entitled “In Search of the Optimal Climate Policy.” The report argues that Poland is particularly vulnerable to the effects of the ETS. This vulnerability stems from the structure of its economy, which relies heavily on energy-intensive industries and conventional power generation. Renewable energy sources are undoubtedly important, but Poland is not yet in a position to depend on them to the extent the EU would like. If the EU seeks to achieve a common objective while ignoring the economic differences between Member States, the policy may ultimately backfire.

Poland, a country that successfully navigated its post-communist transformation, is among the Member States most heavily burdened by ETS-related costs. According to the report, it faces approximately EUR 12.87 billion in additional annual expenses linked to the system. To put this into perspective, Poland is the EU’s leading military spender, allocating around 4.8 per cent of its GDP to defence—the highest share in the Union. In 2026, this amounts to approximately EUR 47.5 billion. In other words, the ETS consumes more than a quarter of Poland’s annual defence budget. One might reasonably argue that challenges such as the refugee crisis orchestrated by Alexander Lukashenko and the ongoing hybrid war with Putinist Russia deserve greater priority.

Although it has not yet entered into force, ETS 2 could become a nail in the coffin for several key sectors of the Polish economy. The report warns that heating costs may increase by between 31 and 41 per cent, while transport costs could rise by approximately 25 per cent. Polish electricity prices are already among the highest in the EU, making the prospect of further increases driven by poorly designed European policies particularly concerning. Just as buying a Rolex is unlikely to financially devastate a wealthy friend, ETS-related costs may be manageable for countries such as Germany or France. The same cannot be said for Poland, whose economic circumstances are far more complex. Yet the EU elite appears unwilling to give these realities the attention they deserve.

In Central and Eastern Europe, the ETS does not encourage governments to proactively improve environmental performance. Instead, it functions more like a punitive measure, with policymakers then expressing surprise when public support is lacking. The burden falls especially heavily on residents of smaller and less affluent towns. The data are telling: on a per-capita basis, the ETS is considerably less burdensome in wealthier countries and far more restrictive in poorer, industrially dependent economies. In Poland, the annual cost is estimated at between EUR 172 and EUR 352 per person. Countries such as Poland feel understandably disadvantaged because they operate with lower productivity, narrower industrial margins, and a greater dependence on conventional energy sources. While heavy industry may be present throughout the EU, economic structures differ significantly from one Member State to another. Poles love their coal, and that reality cannot simply be ignored.

Despite what many Poles perceive as discrimination, double standards, and institutional indifference, the issue extends far beyond the banks of the Vistula. The ETS is an EU-wide scheme that influences investment decisions across the continent. Businesses may tolerate environmental regulations up to a point, but once an investment ceases to be profitable, only the naïve would expect investors to remain out of loyalty. It is not personal; it is business. If greater returns can be achieved elsewhere, the rational response is to relocate. There are no grand ideals involved—just spreadsheets, balance sheets, and profit margins.

This is not merely a Polish problem. The entire EU is affected. Indeed, Europe has already begun losing ground to the United States and China in the competition for innovation and large-scale investment. These countries do not impose the same regulatory burdens that discourage investors, anyone properly analysing the situation should notice. The ETS is not solely responsible for this trend, but it undoubtedly exacerbates it. This is particularly problematic for Poland, which faces pressing security and economic challenges of its own. More broadly, it raises the prospect of Europe gradually becoming an economic museum rather than a competitive global power.

The million-euro question, then, is what should be done instead. The current ETS should be replaced by solutions rooted in free-market mechanisms, as interventionist and heavily state-directed approaches have repeatedly failed to deliver the desired outcomes. Measures such as tax relief, innovation incentives, and targeted investment funds could provide a more effective framework. The EU must recognise that policies based primarily on carbon pricing and penalties are often unjust, ineffective, and economically damaging. While the ETS cannot be abolished overnight, it should be gradually phased out and replaced with mechanisms that encourage investment, innovation, and the development of modern technologies. Without such reforms, the EU risks long-term decline.

Achieving this will require Member States to come together and focus on practical solutions rather than political narratives. Potential alternatives include Decarbonisation Tax Cuts and Rapid Innovation Funds. These ideas deserve serious consideration as replacements for the ETS because they could become something the ETS never managed to be: a mechanism that supports long-term, cost-effective environmental protection without sacrificing economic competitiveness.

The goal of combating climate change and protecting the environment is too important to ignore. Nevertheless, Europe cannot afford to undermine its own economic stability while its global competitors benefit. A new economic approach is not merely desirable—it is necessary. Too many countries are struggling, too many businesses are closing, and too many opportunities are being lost because of a flawed European narrative that too many politicians are unwilling to challenge.

 

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