Squamous dysplasia is the histological precursor of esophageal squamous cell carcinoma (ESCC). The optimal management for distinct squamous dysplasia grades remains unclear because the corresponding risk of developing ESCC is unknown. We aimed to assess the ESCC risk in patients with esophageal squamous dysplasia in a Western country. This nationwide cohort study included all patients with esophageal squamous dysplasia, diagnosed between 1991 and 2020 in the Dutch nationwide pathology databank (Palga). Squamous dysplasia was divided in mild-to-moderate dysplasia (mild, low-grade, and moderate dysplasia) and higher-grade dysplasia (high-grade dysplasia, severe dysplasia, carcinoma in situ). ESCC were identified in Palga and the Netherlands Cancer Registry. The primary endpoint was diagnosis of prevalent (≤6 months) and incident (>6 months after squamous dysplasia) ESCC. In total, 873 patients (55% male, aged 68 years SD ± 13.2) were diagnosed with esophageal squamous dysplasia, comprising mild-to-moderate dysplasia (n = 456), higher-grade dysplasia (n = 393), and dysplasia not otherwise specified (n = 24). ESCC was diagnosed in 77 (17%) patients with mild-to-moderate dysplasia (49 prevalent, 28 incident ESCC) and in 162 (41%) patients with higher-grade dysplasia (128 prevalent, 34 incident ESCC). After excluding prevalent ESCC, the annual risk of ESCC was 4.0% (95% CI: 2.7–5.7%) in patients with mild-to-moderate dysplasia and 8.5% (95% CI: 5.9–11.7%) in patients with higher-grade dysplasia. All patients with squamous dysplasia, including those with mild-to-moderate dysplasia, have a substantial risk of developing ESCC. Consequently, endoscopic surveillance of the esophageal mucosa or endoscopic resection of dysplasia should be considered for patients with mild-to-moderate dysplasia in Western countries.