How should Europe reinvent its carbon market?

For 20 years, the European Union’s (EU) Emissions Trading System has been one of Europe’s most consequential climate achievements. It created the world’s most advanced carbon market, helped cut emissions across major sectors and showed that carbon pricing can work at scale within a democratic economy.

While that track record is still significant, the context within member states has changed.

Europe is no longer in the earlier phase of decarbonization, when fuel switching and incremental efficiency improvements could do much of the heavy lifting. The next phase is tougher, costlier and much more political. Climate policy now has to reduce emissions while remaining fair, economically credible and strategically smart.

A strong carbon price remains essential. It rewards efficiency, pushes investment towards cleaner options and gives industry a reason to take decarbonization seriously. However, it also lands unevenly.

Higher energy and transport costs hit hardest those households with the least room to absorb them. People with savings, access to credit or secure housing can respond by insulating their homes, installing heat pumps, switching to electric vehicles or installing solar on their roofs. Those without that flexibility usually have no equivalent route out.

The same pattern is visible in industry. In hard-to-abate sectors such as steel, cement and chemicals, a rising carbon cost comes on top of structurally high European energy prices, thin margins and tougher global competition.

That does not automatically produce a clean investment. It can just as easily produce delay, contraction or relocation. A climate strategy that steadily weakens the industrial base Europe depends on will eventually meet political resistance, however elegant it may appear in economic theory.

Carbon does not recognize borders and forcing industry to relocate does not result in a net reduction of emissions, merely their relocation.

That is why the next phase of climate policy needs more levers. Carbon markets still matter but they need to sit inside a more complete strategy; one that spreads the load, recognises industrial realities and makes better use of international cooperation.

It should also foresee that very high carbon prices are unlikely to be necessary or desirable, as cost-effective decarbonization implies reducing emissions where abatement is cheapest, provided integrity and other policy objectives are safeguarded.

The cost to consumers must be urgently taken into account if governments want durable support for an ambitious transition.

Carbon market revenues should be used more deliberately to protect lower-income households and widen access to low-carbon technologies. Without that correction, the transition becomes hardest to defend among the very people being asked to shoulder the greatest relative cost.

There is also a strategic cost issue that Europe can no longer sidestep. As decarbonization deepens, each additional tonne becomes harder and more expensive to eliminate. What remains are the tougher transitions: heavy industry, deep retrofits, carbon capture, hydrogen, clean dispatchable power and the networks required to support them.

Treating every marginal tonne as a purely domestic challenge pushes the cost curve up fast and political friction rises with it.

This is why Article 6 of the Paris Agreement deserves a more serious conversation than it often gets.

International carbon credits still carry the baggage of earlier offset markets and much of that scepticism was earned, yet the framework has moved on. One of the most important changes in the architecture following the 26th Climate Conference in Glasgow (COP26) is the requirement for corresponding adjustments, which means a credit transferred internationally cannot also be counted by the host country towards its own climate target.

That does not solve every integrity problem but it creates a much stronger basis for genuine cooperation. Europe should take that seriously.

High-integrity international credits can ease some of the pressure on domestic compliance costs while directing finance towards emissions reductions in countries where the same investment may go further and yield development gains that are often much greater.

Clean cooking, forest protection, blue carbon and distributed renewable energy all sit in that space. They reduce emissions, improve lives and strengthen resilience in countries that have contributed least to climate change and often face its worst consequences.

Used well, this both reduces the cost of carbon in the EU and gives European climate policy a wider international purpose.

That broader intent is becoming harder to ignore. Climate cooperation is moving into a more geopolitical phase. Access to high-integrity mitigation outcomes will be limited. Trust between buyers and host countries will matter more and so will institutional credibility and the ability to connect climate ambition with development and partnership.

This is where Europe has a real opening. Through the Samoa Agreement and its broader relationship with African, Caribbean and Pacific countries, the EU already has the political foundations for a more credible North-South climate compact. What has been missing is the practical layer: the institutions, legal arrangements and capacity-building needed to turn political intent into investable cooperation.

That means procurement frameworks with clear quality standards, bilateral agreements that protect host-country sovereignty and avoid the over-export of mitigation outcomes, benefit-sharing rules for local communities, safeguards for land and livelihoods affected, and support for monitoring, reporting and registry systems in countries that want to participate but still need institutional backing.

Without these elements, international carbon markets will remain politically fragile. With them, they can become one of the most useful tools for aligning climate ambition, development finance and strategic partnerships.

This is the larger point Europe now needs to absorb. The next generation of climate policy will not rest on a single instrument. It will rest on combinations: carbon pricing and public investment; domestic decarbonization and international cooperation; environmental integrity and political durability.

That is where the EU carbon market now stands. Its first chapter showed that carbon can be priced. The next chapter will decide whether carbon policy can also become fairer, smarter and more globally relevant.

Europe should aim for that larger role.