Belgium’s ETS Reform Dividend

Why a lower-cost Member State could still gain up to €2.7 billion a year from redesigning Europe’s carbon-pricing architecture

Belgium is not among the European Union’s most heavily burdened Member States under the Emissions Trading System. That is precisely why its case matters. If even a relatively well-positioned economy can generate substantial gains from reform, the issue is not merely one of compensation for the most exposed countries. It is a question of whether the EU’s principal carbon-pricing instrument is the most efficient architecture for achieving decarbonisation while preserving industrial competitiveness.

Author: David R. Hohl

A new analysis by the Warsaw Enterprise Institute, In Search of the Optimal Climate Policy: A Comparison of the Economic Impact of the ETS and Its Alternatives, puts this question in quantitative terms. The report estimates the economic impact of the ETS across Member States and compares it with alternative climate-policy instruments. For Belgium, the findings are significant: the current system imposes a moderate but real cost, while reform could generate a much larger net economic gain.

Around 35 million tonnes of Belgian stationary emissions are covered by the ETS. According to WEI estimates, the system’s current net negative effect on Belgian GDP amounts to €0.3–0.7 billion per year. In relative terms, this is not an extreme burden. Free allocation covers 80.7% of Belgian stationary emissions, one of the highest coverage ratios in the EU, and Belgium’s current per capita ETS burden is estimated at €24–59.

Yet these figures should not be read as an argument for complacency. They point to a more important conclusion: Belgium’s relatively favourable starting position does not eliminate the economic case for reform. On the contrary, it strengthens it. The central question is not whether Belgium is among the largest current losers under the ETS. It is whether the Belgian economy would perform better under a climate-policy model that directs resources more efficiently toward decarbonisation investment.

The WEI estimates suggest that it would. The report calculates that replacing the current ETS logic with a system based on Decarbonization Tax Cuts and Rapid Innovation Funds could generate a net gain of €58–228 per person in Belgium. At the national level, this corresponds to €0.7–2.7 billion per year. That range is economically material. It is large enough to matter for industrial investment, energy-intensive production, innovation capacity and household welfare.

This is the core of the Belgian case for ETS reform. The argument is not that climate policy should be weakened. Nor is it that carbon pricing has no role in the transition. The argument is that the design of the instrument matters. A system that primarily extracts capital through compliance costs may be less effective than one that channels resources directly into investment, productivity gains and technological upgrading.

The difference is not semantic. Under the current approach, companies face a cost that may or may not translate into faster decarbonisation, depending on their ability to absorb it, pass it through or finance technological change. Under an investment-oriented model, the policy objective remains the same – lower emissions – but the mechanism changes. Instead of treating decarbonisation mainly as a liability to be priced, it treats it as a transformation to be financed.

For Belgium, this distinction is especially relevant. The country combines an advanced industrial base, high integration into European value chains and significant exposure to energy and regulatory costs. In such an economy, the opportunity cost of misallocated climate-policy capital is high. Money absorbed by compliance obligations is money not automatically available for process innovation, cleaner production, electrification, energy efficiency or other forms of industrial modernisation.

The WEI proposal centres on two alternative instruments. Decarbonization Tax Cuts would reduce the fiscal burden on firms undertaking emissions-reducing investment. Rapid Innovation Funds would support faster deployment of technologies capable of accelerating the transition. Together, these instruments aim to preserve the climate objective while improving the route through which capital reaches the real economy.

This is where Belgium’s numbers become strategically important. A current per capita ETS burden of €24–59 may appear manageable. But if an alternative policy architecture can produce a net gain of €58–228 per person, the relevant comparison is no longer between action and inaction. It is between two different forms of climate action: one centred on compliance costs, the other on investment incentives.

The same applies at the macroeconomic level. A current annual GDP loss of €0.3–0.7 billion is already non-negligible. But the estimated reform upside of €0.7–2.7 billion per year changes the scale of the debate. It suggests that ETS reform is not simply a defensive measure to reduce burdens. It could be a proactive competitiveness strategy.

That distinction matters for European climate policy more broadly. The credibility of decarbonisation depends not only on the ambition of targets, but also on the economic quality of the instruments used to reach them. If policy weakens the investment capacity of the very firms expected to decarbonise, it risks creating a structural contradiction. If, however, policy improves the business case for emissions-reducing investment, climate ambition and competitiveness can become mutually reinforcing.

Belgium’s position therefore deserves close attention. The country is not an outlier defined by extreme ETS exposure. It is a test case for a broader proposition: even where the current burden is moderate, a better-designed system can deliver higher economic value. That makes the Belgian evidence particularly difficult to dismiss.

The conclusion is clear. Belgium has more to gain from reform than from defending the ETS as it currently operates. The objective should not be to abandon emissions reduction, but to redesign the policy architecture so that decarbonisation capital is deployed more productively. On the WEI estimates, such a shift could be worth up to €2.7 billion a year to the Belgian economy.

For Belgium, ETS reform is therefore not a retreat from climate policy. It is an opportunity to make climate policy economically stronger, more investment-oriented and more compatible with long-term industrial competitiveness.

Cover photo: ChatGPT

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