This study reveals once again the crucial role that energy efficiency programmes must play in order to maximize the effectiveness of the EU Emissions Trading Scheme (ETS) to meet Europe’s energy, economic, and environmental goals. The ETS is an important tool to guide power markets and investments by large users of fossil-fueled energy. However, carbon pricing alone will not deliver the greenhouse gas reductions needed in the energy sector, and will certainly not deliver those reductions at least cost. This paper examines how wholesale power markets can magnify the consumer cost of carbon prices, without proportional decreases in emissions, and suggests alternatives to reduce costs to consumers and improve the competitiveness of European industries. Drawing on modelling conducted by Cambridge Econometrics and the Energy Centre of the Netherlands, the paper demonstrates that combining the ETS with an energy efficiency obligation can significantly reduce the consumer cost of emissions reductions, while generating additional societal benefits. The authors recommend focusing on the use of carbon revenues, as well as on the level of carbon prices – directly investing EU ETS auction revenues into energy efficiency programs in order to lower the cost of power sector decarbonisation and to ease the path to deeper carbon reductions.