The Carbon Market Europe Created to Fight Climate Change Is Being Gamed — Here's How

The EU Emissions Trading System was designed to put a price on carbon pollution. Here is how large companies are gaming the system in ways that reduce its effectiveness without violating its rules.

The EU Emissions Trading System — the largest carbon market in the world, covering approximately 40 percent of EU greenhouse gas emissions — was designed around a simple economic principle: if you make pollution expensive, companies will reduce it. The principle is correct. The implementation has produced a mechanism that works reasonably well while being systematically exploited by sophisticated corporate actors in ways that undermine its climate effectiveness without technically violating any of its rules.

The most widespread gaming strategy involves the relationship between production volume and emission permits. The ETS allocates free permits to certain industrial sectors based on production benchmarks — the theory being that new market entrants should not be competitively disadvantaged by having to purchase all their permits while incumbents received theirs for free. The practice has produced a situation where some industrial facilities continue to receive free permits significantly in excess of their actual emissions — 'windfall permits' that can be sold for profit rather than needing to be surrendered.

A European Commission analysis published in 2024 estimated that across the decade 2012-2022, the industrial sector received free permits worth approximately €160 billion more than the value of the permits it was legally required to surrender. This surplus represents a direct transfer of value from the ETS mechanism — which was supposed to make pollution expensive — to industrial incumbents who received free permits they did not need.

The regulatory response — the Carbon Border Adjustment Mechanism and the phased elimination of free permit allocation — is moving toward correction of this problem over the coming decade. But the pace of correction is slow enough that significant gaming value remains available for several more years to companies that understand the system's mechanics well enough to exploit them.

The deeper problem is one of political economy: the industries most capable of gaming the ETS are also the industries with the most political resources to defend the gaming arrangements that benefit them.