Could a modernised EU Emissions Trading System help Ireland ensure a more self-reliant and resilient energy supply? 

In response to rising energy prices and their impact on European industry, the European Commission published a proposal to modernise the EU Emissions Trading System (ETS) on the 17 July 2026. Ireland has been severely impacted by the rising cost of energy caused by Russia’s war of aggression against Ukraine, and the ongoing conflicts in the Middle East. In addition to sparking public protests, the energy crisis has imposed significant costs on industry, the State, and consumers.

With this in mind, this blog will explore how a modernised ETS could support Ireland in its energy transition.

What is the EU Emissions Trading System (ETS)?

The EU ETS is a European Union (EU)-wide carbon market on which carbon emission allowances, each worth the equivalent of one tonne of carbon dioxide, are exchanged via a cap-and-trade system. Under this system, companies must cover their carbon emissions with allowances that have either been freely allocated to them, that have been auctioned off by Member States, or that have been bought from other companies. This creates an economic incentive for companies to reduce their carbon emissions. Each year, the overall cap on allowances is lowered, in theory, driving a gradual reduction in carbon emissions. The EU ETS is the primary decarbonisation policy of the EU’s Green Deal and has proven to be fairly effective. Since is was launched in 2005, the ETA has helped emissions to be cut by around 50%, and since 2013, it has raised over 270 billion euros in auction revenues.

Ireland has taken in 1.28 billion euros through EU ETS allowance auctions since 2013. From the 139 million euros raised in 2024 under the scheme, the vast majority (102.3 million euros) has gone to the Department of Transport and been invested in public transport projects. In addition the EU ETS revenue has also funded specific projects in Ireland through EU-level funds. For example, the ETS revenue funded an EU Innovation Fund grand of 39 million euros to the Saoirse Wave Energy Project located in Ireland. For these EU-level funds, the Irish National Contact Point is the Environment and Climate Research and Advisory Unit in the Department of the Environment, Climate and Communications (DCEE).

Ireland’s energy supply vulnerability

Recent geopolitical events have exposed one of Ireland’s strategic vulnerabilities as one of the most import-dependent economies in the EU when it comes to energy, with 80% of its energy supply being imported in 2024. This number can be explained by the fact that Ireland continues to rely heavily on fossil fuels. Of Ireland’s 168.0 TWh energy supply in 2024, fossil-fuel made up for 81.3%. Meanwhile, the country as yet does not produce or harvest much energy of its own. Therefore, to minimise the impact of future energy crises and to render Ireland’s energy supply more independent, policymakers should certainly consider how to foster the country's homegrown energy production capacity. For this, a modernised EU ETS, as proposed by the European Commission could be useful. 

How a modernised EU ETS could support Ireland’s energy transition 

In response to the ongoing energy crisis, the European Commission was invited by the European Council to draft a proposal for a review of the EU ETS. The aim of this review is to make the EU ETS a more effective instrument to strengthen independence, innovation and competitiveness in Europe. Its guiding idea is to redirect current expenditure on imported fossil fuel towards investments in the green transition.

In the proposition published by the European Commission, two elements are particularly relevant to Ireland’s situation.

First, the Commission’s proposal includes provisions to reform the Market Stability Reserve (MSR). The MSR was first established in 2018 as, at that time, carbon prices were considered too low to provide companies with a sufficient incentive to reduce their emissions. A mechanism that invalidates the carbon allowances surplus was thus introduced. Today, however, the opposite problem seems to be the case, as excessively high carbon prices are being passed on to electricity prices, thus increasing costs for businesses and consumers. Therefore, the proposal suggests stopping the invalidation of the surplus, and instead, sets it aside as a buffer that could be used if prices rise unexpectedly in the future. In principle, this reform of the MSR should ensure better market stability and reduce price volatility, which should be of interest to Irish policy makers.

Second, the Commission’s proposal introduces a number of measures aimed at improving the use of EU ETS revenue. The underlying principle is that EU ETS revenue should go back to industry to support its decarbonisation efforts. If funds to that effect were already in existence, such as the aforementioned Innovation Fund, the proposal aims to establish an Industrial Decarbonisation Bank (IDB) that will enable investment at a bigger scale.  The Commission also considers that there should be better control over the way Member States spend their EU ETS revenues. The revenue should be spent on genuine climate action, which, according to the WWF, is not always the case.

How could this benefit Ireland?

A modernised ETS with an amended MSR could protect the EU, and thus Ireland, from carbon-price volatility in the allowance market, limiting the extent to which fluctuations in allowance prices contribute to electricity costs.

In the longer term, clean energy investments, such as those supported by a modernised EU ETS, can help reduce the impacts of energy crises. Ireland is rich in resources such as wind and solar, and could benefit from developing them further. The revenues generated under the EU ETS could be used by Ireland, through the Member State auction revenue or through the direct support of projects via the Innovation Fund and the Industrial Decarbonisation Bank, to expand domestic energy production and diversify supply. Relying more on homegrown energy options would make Ireland more resilient going forward.  

However, there are reasons to question whether a modernised EU ETS can deliver for Ireland and the rest of the EU. Notably, EU ETS revenues have been identified as a possible new source of own resources for the EU under the Multiannual Financial Framework (MFF). Under its proposal for the MFF, the Commission envisaged allocating 30% of EU ETS revenues to EU own resources, with an expected yield of 9.6 billion euros annually. Over the seven-year budget period, this would amount to approximately 3.7% of the projected total EU budget of 1.8 trillion euros.

This raises the question of whether the Commission is being overly ambitious. On the one hand, it seeks to make greater use of EU ETS revenues by developing funding instruments and allocating part of those revenues to the EU's own resources under the MFF. On the other hand, the allowance market is designed to shrink over time. While a shrinking market is likely to drive prices up in the short term, it will ultimately lead to a decline in overall ETS revenues. A tension therefore emerges between the Commission's expanding spending ambitions and a revenue source whose long-term yield may decline, raising questions about whether the proposed reforms are seeking to achieve more than the ETS can realistically support.

In addition, there is always some risk when using an instrument designed for one purpose to achieve another. Before serving as a tool for innovation and resilience, the EU ETS is, first and foremost, an environmental instrument. While the modernisation of the EU ETS has significant potential, other considerations should not be allowed to take precedence over its original environmental purpose. Some of the more controversial measures in the Commission's proposal, such as the slowing of the annual reduction of the emissions cap, may suggest that the modernisation of the EU ETS could come at an environmental cost that it should not entail.