Sweeping across the Kruunuvuorenselkä, the bay that separates the island district of Laajasalo from the centre of Helsinki, is the Kruunuvuorensilta. At 1.2 kilometres, it is the world's longest bridge built exclusively for trams, pedestrians and cyclists. Opened in April 2026, it sets a new benchmark in sustainable construction. Built with concrete and steel produced to advanced environmental standards, and designed to last an extraordinary 200 years, the Finnish Concrete Structure of the Year winner is only the most spectacular emblem of Helsinki’s Net Zero ambitions, now encompassed in its Mission City contract. Alongside it, the Finnish capital has envisioned a range of projects requiring low-carbon steel, cement, and aluminium, aimed towards a future where its residents live in warm, renovated buildings, travel by foot, bicycle, and tram, and work in industries powered by renewable energy. Helsinki is one of 103 Climate-Neutral and Smart Cities that hold the EU Cities Mission Label for an approved Climate City Contract. Each is committed to a future like Helsinki's, amounting together to €650 billion of demand for the products of a decarbonised European industry.
As of the 17th of July 2026, however, this opportunity for an era-defining lead market stands in peril. On this day, the European Commission published its proposal for Phase 5 of the EU Emissions Trading System (2031–2040). The key feature is a reduction in how fast the EU lowers the amount of CO₂ industries are allowed to emit each year. Under the 2023 Fit-for-55 legislation, this allowance would decline by 4.3% in 2027 and 4.4% in 2028, bringing the allowance to zero by around 2039. The Commission now proposes reducing the allowance by only 3.7% between 2031–2035, and a paltry 1.7% from 2036, with the result that carbon emissions continue to be permitted until almost 2050. Heavy industry, which till now has been relatively exempt from this allowance system, will see that exemption extended by four years to 2038. These are only two of several measures in the proposal, most of which substantially lessen the pressure on industries to decarbonise.
For a group of cities making investments now that will impact the lives of their citizens for generations, this makes an existing dilemma especially acute. With this blow to the ETS, the weight of the “green premium” in their decisions becomes far heavier. The green premium is the gap between the cost of investments using products in line with Net Zero ambitions and dirtier alternatives that would detract from them. Under the existing ETS, that gap will close. Cities can easily justify meeting Net Zero commitments as the premium grows smaller. With a weakened ETS, buying rolling stock produced with renewable energy, or low-clinker cement for new social housing, comes with a greater opportunity cost. Products from non-decarbonised industries offer savings cities cannot ignore. And without the effect of lead markets in helping to scale industries, lower costs, and increase demand elsewhere, the premium never goes down.
The argument being made by several member states and many MEPs, and which is implicitly accepted by the Commission, is that this change is necessary to support the competitiveness of European industry. The irony is that it is the failure of states to follow the competitiveness model outlined in the Draghi report that has brought European industry to this point. The ETS, for Draghi, was supposed to be applied as part of a broader system supporting both decarbonisation and competitiveness. Member states get the lion’s share of revenues and are obliged to spend them on climate and decarbonisation goals, CBAM protects decarbonising industries from cheaper, dirty imports, and NZIA and IAA procurement rules ensure stable markets for European industries.
However, along with renovating building stock, member states have actually spent the bulk of the revenues on subsidising electricity. As Draghi observes, ‘there is no evidence that meaningful amounts of ETS revenues have been channelled to clean technologies manufacturing by Member States’. Ensuring a just transition requires some electricity price supports for the most vulnerable, but the funds that were supposed to be used to position European industry to remain competitive as emissions allowances tightened, have actually been used to spare even wealthy Europeans from reducing energy consumption. Thus, we find ourselves paraphrasing Chesterton: the ETS has not been tried and found wanting, it has been found inconvenient and not tried.
The irony grows even more bitter when one realises, as Draghi does, that while Europe lags behind the US, China, South Korea and others in innovation generally, ‘it is a leader in clean tech innovation’. Again, the ETS is not merely a tool to achieve climate goals. It is the demand pull to EU innovation’s clean tech supply push. With cities acting as lead markets, European clean tech innovation can scale and the spectre of another solar industry – where Europe led the world only for its indecision to squander this lead to China – can be dispelled. Within Draghi’s competitiveness system, climate policy is supposed also to be industrial policy.
Furthermore, failing to decarbonise leaves Europe locked into a dependence on fossil fuels that events continue to prove is ruinous. It is also a prime contributor to Europe’s continued dependence on imported raw materials. The recovery of materials – through, for instance, urban mining – typically involves a fraction of the CO₂ emitted by the production of virgin materials. Allied to CBAM then, the ETS brings the price of virgin materials into line with their true cost, thereby incentivising the reduction of Europe’s strategic dependence on foreign sources of critical raw materials. By 2050, local recycling could provide the Union with half to three quarters of its metal requirements for clean technologies. This decoupling of prosperity from material extraction is crucial if European competitiveness is to be resilient to political shocks. With the contest to dominate artificial intelligence accelerating, and critical minerals increasingly sought after to build AI infrastructure, attempts to use materials as political leverage are likely only to grow more frequent. Weakening the ETS undercuts the EU’s move to circularity at precisely the moment when it is most urgent.
Still, we are where we are, revenues that ought to have been spent on decarbonising European industry were not, so does this mean that we must accept the Commission’s proposal? For many reasons, it does not. Most obviously, because the world’s fastest warming continent cannot afford to miss climate targets. But even within a narrow competitiveness frame, where does it end? The temptation to push targets back ever further is not going to diminish. Meanwhile, ETS revenues decline and much needed clean tech investment goes a-begging, while the opportunity to create stable demand for these industries through city procurement is lost. The signal even this proposed rollback has sent to industries and investors has proved a disaster. Investment is being withdrawn because the EU cannot guarantee a stable regulatory environment. One of the few industrial advantages Europe has is being squandered yet again.
How have we come to this pass? European industry needs cheaper and dependable energy, investment in its efforts to decarbonise and build circularity, and stable demand for its leading sectors. The ETS is thus the backbone of future European prosperity. To make sense of attacks on it, then, it is hard not to look across the water to a UK where a relentless campaign in the media has been waged against the minister responsible for Net Zero targets, or further still to a US where the power of government is being used punitively against organisations working in the climate industry. Behind the misapplied language of competitiveness may well lie a culture war motive. We should thus focus on a truly competitive Europe. It is one where majestic bridges, built by European industry, bring us ever closer together.
Michael Keary was lead author of this article