Why Europe’s Carbon Market Can Cut Emissions While Fossil Fuel Use Still Rises

What the 2025 data says about EU ETS performance and its limits

The latest EU ETS data shows a clear downward trend in covered emissions. In 2025, verified emissions fell by 1.3% versus 2024, and the sectors covered by the system have roughly halved emissions since 2005. The long-term direction is still intact, with the 2030 target set at a 62% cut versus 2005.

That matters because it shows the carbon market in Europe is still doing its core job. It is pushing covered sectors toward lower emissions, and it is doing so through a compliance framework that affects real investment decisions.

The power sector remains the main driver of the decline. Fossil-based electricity generation emissions fell again in 2025, while net electricity production in the EU rose moderately. For industrial buyers, that is a useful signal for Scope 2 decarbonisation. It does not, however, prove that fossil fuel use across the wider economy is falling at the same pace.

ETS performance is not only about emissions cuts. The Commission also points to the financial side of the system. More than €258 billion has been raised through ETS auctions from 2013 to the end of 2025, and those revenues are often used for industrial innovation, energy efficiency, and CCUS. For B2B operators, that financing role is part of the market’s value.

The 2025 picture is stronger than a single headline number suggests. The ETS still works as a compliance tool and as a way to steer capital toward lower-emission assets. But the system covers sectors with different dynamics, including aviation and shipping, so the trend is not perfectly linear.

The key distinction is between emissions covered by the ETS and fossil fuel use overall. Covered emissions can fall even when total energy demand stays stable or shifts into sectors that are not fully covered. That is the paradox at the center of the debate.

Why lower emissions in covered sectors do not equal a full fossil fuel decline

Lower ETS emissions mainly reflect the electricity mix and efficiency gains in covered installations. They do not automatically mean that final consumption of coal, gas, and oil has fallen by the same amount across the whole economy. A buyer can see lower regulated emissions without seeing a matching collapse in fuel demand.

Industrial emissions are moving more slowly than power-sector emissions. The Commission’s 2024 and 2025 data show weaker progress in industry than in electricity generation. That matters for cement, steel, chemicals, and paper, where decarbonisation is harder and slower.

Some emissions also fall for cyclical reasons rather than structural ones. The Commission has pointed to lower cement output and a rebound in fertilisers, which is a reminder that emission intensity and absolute activity are not the same thing. For operators, that distinction is essential.

Transport makes the picture even less uniform. Aviation emissions rose in 2025 versus 2024, while shipping has only recently entered full compliance dynamics. So the total fossil fuel picture can remain sticky, or even rise, while the ETS trend still points downward.

That leads to the real policy question. Which parts of energy demand are still outside, or only partly inside, the ETS perimeter?

The policy gap: sectors, fuels, and behaviours the ETS does not fully reach

The EU ETS covers around 10,000 installations in power and manufacturing, plus intra-EEA aviation and shipping from 2024. It still does not fully cover the emissions from buildings, road transport, and small industry. That is the main reason fossil fuel consumption can stay high outside the ETS perimeter.

ETS2 is designed to close part of that gap. It is set to start in 2027 for buildings, road transport, and additional sectors, with permit and monitoring plan requirements already in place from 1 January 2025. For fuel buyers and distributors, that means carbon pricing is moving upstream in the value chain.

Even inside ETS1, there are asymmetries. The system measures emissions that can be verified, but many consumption choices are only indirectly regulated. Retrofit decisions, modal switching, private vehicle use, and heating demand all affect emissions, but not through direct control of the final user in the same way.

The inclusion of maritime emissions and support for sustainable aviation fuels show that the EU is widening the framework. But the transition is still partial and phased. For logistics operators, shipping companies, and aviation fuel suppliers, compliance remains uneven.

These gaps are not just technical. They are driving the debate about how fast Europe should expand carbon pricing, and how to protect competitiveness, households, and investment at the same time.

What the political debate in Europe reveals about the next phase of climate policy

The debate has moved from whether to how. In 2025 and 2026, EU institutions have focused on the 2040 climate target and on how EU ETS, ETS2, the Social Climate Fund, and industrial policy tools should fit together. The next phase looks more distributive than purely environmental.

ETS2 is politically sensitive because it affects fuels used in buildings and road transport. That is why the debate centers on compensation, timing, and the ability of member states to support investment. The social impact is part of the policy design, not an afterthought.

The EU is also using ETS revenues and linked funds to support industrial decarbonisation. The Innovation Fund and the new IF25 Heat Auction show that climate policy is not only about restriction. It is also about directing capital toward lower-carbon industrial heat and process change.

Competitiveness is now part of the carbon pricing debate. Energy-intensive sectors want more visibility on carbon prices, while policymakers are trying to avoid carbon leakage and market fragmentation. That tension will shape the next review cycle.

This is why the paradox matters. The fact that emissions are falling while fossil fuel use is not falling fast enough changes how investors, regulators, and market participants should read the system.

Why this paradox matters for investors, regulators, and carbon market participants

For investors, the signal is mixed but useful. The EU ETS remains a credible mechanism for cutting covered emissions, but persistent fossil fuel use outside the scope means demand for compliance, hedging, and transition assets is likely to stay structurally important.

For regulators, the risk is not that the ETS is failing. The risk is that emissions reductions and energy-system transformation are moving at different speeds. That calls for a policy mix that includes electrification, efficiency, grids, and other rules that reach beyond the cap-and-trade system.

For companies under compliance, the message is practical. Procurement, fuel switching, carbon budgeting, and cost pass-through all need to be treated as core financial issues. Cement, steel, chemicals, shipping, and aviation cannot treat the carbon price as a side cost.

For carbon credit and tokenisation participants, the lesson is also clear. Future demand will depend not only on reduction volumes, but on measurement quality, asset granularity, and the ability to connect compliance, project finance, and ESG reporting. MRV matters more when the market gets more complex.

The European paradox does not weaken the carbon market. It makes it more mature. The buyers, investors, and analysts who understand the difference between ETS performance and fossil fuel decline will be better placed to assess regulatory risk and transition opportunity.