Few policies have done more to combat climate change than the European Union’s emissions trading system. By putting a price on carbon dioxide — currently about €70 per metric ton — it has given companies throughout the bloc a powerful incentive to invest in going green.

Europe’s leaders should stand by it — and improve it — rather than bowing to industry pressure to walk away from it.

Cap-and-trade systems, in which the government sets the quantity of allowable emissions and the market determines the price, have proved effective. The EU’s system is the world’s largest: The greenhouse gas output of covered companies has roughly halved since its inception in 2005 — a reduction of about 1 billion metric tons annually, far more than similar systems elsewhere.

The system is also helping to strengthen the EU’s strategic independence from major fossil fuel producers, including Russia. And it is generating more than €40 billion in annual revenue that benefits EU nations. Some of that money, for example, has helped turn Poland into the world’s second-largest manufacturer of lithium-ion batteries after China.

In the years ahead, that revenue is expected to grow as coverage expands to buildings and transportation — and as the EU phases out free allowances for industries such as chemicals, steel and cement. In line with best economic practices, the EU seeks to channel the additional funds to people and regions that struggle with the costs of the green transition, and to more investments aimed at scaling up clean technologies.

The EU’s cap-and-trade system works in large part by setting clear expectations: Companies and governments know they must act, because they can see the trajectory of allowable emissions trending toward zero and the carbon price rising. That provides companies with predictability for budgeting and planning purposes, which — amid trade tensions and wars that are spurring energy volatility — is increasingly rare and increasingly valuable.

Now, however, industrial companies slammed by the loss of cheap Russian gas, rising Chinese competition and chaotic US tariff policy are taking aim at the system and pressuring European leaders to weaken it. That would be a terrible mistake. There is ample evidence that it’s been no hindrance to economic growth, and it will be crucial to moving the green transition beyond power generation to sectors where CO2 output is harder to abate.

The EU has already postponed the coverage of buildings and transportation from 2027 to 2028. Now, it is considering further pullbacks, including by prolonging free allowances and removing entire sectors from the system. When German Chancellor Friedrich Merz suggested that he might be open to weakening the system (comments that he later softened), the price of carbon immediately notched its largest drop in almost three years — the kind of move that undermines incentives to decarbonize. It slid further still when Italy later called for a suspension of the market.

Of course, the system isn’t perfect. It can and should be improved, and other flaws in the EU’s green transition should be addressed, too. Burdensome consumer energy rules and costly mandates have understandably angered voters and played into the hands of opponents of climate action. Worse, they often do so without achieving their stated goals — and sometimes, they even run directly counter to them. A significant portion of cap-and-trade systems’ revenue, for example, ends up subsidizing fossil fuel projects.

The system needs to be better managed, not abandoned — and it can be done. Insist that member states spend the revenue as intended. Reassure voters that aid will be properly targeted to avoid waste and protect the vulnerable. Ensure that the carbon tax on imports truly achieves fairness for EU companies, particularly when they export to markets where competitors don’t pay an equivalent carbon price.

The EU’s cap-and-trade system is a major achievement. Don’t scapegoat it. Stick with it — and improve it.

© Bloomberg