Facing harsh economic reality, the European Commission relented on some of the features of its Emissions Trading System that business groups say are most damaging. The changes slow the pace at which European industry must cut emissions, extend free pollution permits, and introduce new flexibility mechanisms.
The announcement came on 17 July after a full night of internal talks and formal objections from at least three commissioners. EU climate chief Wopke Hoekstra described the package as a more “business-friendly” approach to carbon pricing. He insisted the EU had not abandoned its climate goals. Critics say the changes amount to a decade-long reprieve for heavy polluters.
The ETS, launched in 2005, is the world’s first and largest mandatory carbon market. It covers roughly 40 per cent of total EU greenhouse-gas emissions. Since 2005, it has helped cut emissions in covered sectors by roughly 50 per cent. It has also generated around €270bn in revenues since 2013, intended to fund industrial decarbonisation.
What changes, and for whom
The core of the revision is a reduction in the linear reduction factor. That is the annual rate at which pollution caps tighten. Under current rules, the rate stands at 4.4 per cent. Covered sectors must reach zero emissions by 2039. Under the new proposal, the LRF drops to 3.7 per cent between 2031 and 2035. It then falls further to 1.7 per cent from 2036 onwards. That pushes the zero-emissions target well into the 2040s.
Mr Hoekstra defended the numbers directly. “What we put on the table with the 3.7 in the first five years, the 1.7 in the five years thereafter, and that’s delivered, we do way more in the five first years than in the second,” he said. “These numbers are completely climate-law proof.”
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The change benefits steelmakers, chemical producers, power generators, and other energy-intensive industries. These are the sectors that have lobbied hardest against the current trajectory.
Markus Kamieth, chief executive of BASF and president of the chemicals lobby Cefic, had warned ahead of the review that without major changes, “investments will leave Europe before emissions do.” The revised LRF gives those industries more time and more room.
Free allowances and new conditions
The Commission will also extend free carbon allowances beyond 2030. That includes sectors covered by the Carbon Border Adjustment Mechanism, known as the carbon border tax, which will now receive them until 2038. That extension could face challenges at the World Trade Organization.
The key difference from the current system, Mr Hoekstra argued, is conditionality. Free allowances will no longer be unconditional gifts. “Free allocation does not mean free cash,” he said. “One hundred per cent of the free allowances will need to be invested in Europe in decarbonisation.”
Member states, too, will be required to spend 50 per cent of their national ETS revenues on investments in ETS sectors. That is a significant change. At present, less than 10 per cent of the roughly 80 per cent of revenues flowing to member states has gone to industrial decarbonisation.
Credits and removals
To back that up, the Commission announced a new industrial decarbonisation bank. It will carry €100bn in funding. A €30bn ETS investment booster will be available before 2030. The ETS Innovation Fund will continue to support first commercial applications of innovative technologies across a range of sectors.
Free allocation does not mean free cash. — Wopke Hoekstra, EU climate commissioner
From 2036, companies will for the first time have the option of buying carbon credits from outside the EU. The Commission will allow up to 2 per cent of international credits as part of the overall 90 per cent emissions-reduction target for 2040. A 2033 review must first confirm the option is cost-effective. The proposal also introduces 250 million tonnes of domestic carbon-removal credits into the ETS, to be auctioned between 2031 and 2040.
The revision also expands the ETS’s scope. Aviation, the only sector where emissions are still rising, will see carbon pricing extended to any flight landing within 5,000 kilometres of the geographic centre of Europe, as of 2029. All private jets, whether departing or arriving, will be covered.
The unknown geographic centre
“If you ask yourself why a family flying from Brussels to Benidorm, paying ETS for the tickets of two adults and two kids, should pay ETS, while someone flying in a private jet can go up and forth and not pay a single time. That should be changed and that should be stopped,” Mr Hoekstra said. He ducked the question where the 5,000 kilometres is measured from.
Maritime shipping will see around €15bn per year channelled back to the sector. That is roughly eight times the current level. The money will support decarbonisation. Smaller ships will be brought into scope, with some exemptions for ferries. Municipal waste incineration will also fall under the ETS for the first time. The aim is to encourage recycling over burning.
Every year of delay is another year of higher cost, of additional vulnerabilities, another year of exposure to crisis. — Teresa Ribera, European Commission executive vice-president
The proposal now goes to EU member states and the European Parliament. Neither arena looks hospitable. Inside the Commission itself, industry chief Stéphane Séjourné, transport commissioner Apostolos Tzitzikostas, and Raffaele Fitto all tabled objections before the vote.
A fight under way
In Parliament, the centre-right European People’s Party holds the balance of power. It is the political home of both Commission President Ursula von der Leyen and Mr Hoekstra. The EPP has campaigned for an “even more moderate” approach. German EPP lawmaker Peter Liese will lead Parliament’s work on the file. The centre-left Socialists and Democrats have drawn red lines. Any revision must still deliver at least 85 per cent domestic emissions reductions by 2040.
Among member states, a bloc of ten countries led by Poland and Italy has pushed hard for a weaker system. Polish Secretary of State Krzysztof Bolesta was blunt: “Many companies see ETS as one of the problems. We will do whatever we can to deliver a pragmatic revision that ditches dogmatism and gives member states and industries a strong helping hand.” On the other side, Sweden’s Europe Minister Jessica Rosencrantz argued that “the ETS works. Europe should build on its success, not retreat from it.”
Germany and France have quietly edged closer to the Polish camp. Neither has formally broken with the pro-ETS coalition led by Spain, Sweden, and the Netherlands. Their positions will ultimately shape any Council majority.
Squaring the circle
The electrification side of Friday’s package attracted less immediate controversy. It is a plan to double the EU’s electrification rate from 23 per cent to 46 per cent by 2040. It also aims to lower electricity taxes below those on gas and roll out smart meters to at least 50 per cent of customers by 2030.
One hundred per cent of the free allowances will need to be invested in Europe in decarbonisation. — Wopke Hoekstra
Executive Vice President Teresa Ribera framed it as the necessary complement to the ETS revision. “Every year of delay is another year of higher cost, of additional vulnerabilities, another year of exposure to crisis,” she said.
The two proposals together represent Brussels’ attempt to square a circle. That circle has defined EU policymaking since 2024: how to keep industry in Europe while still cutting emissions. Whether the balance struck on Friday satisfies enough competing factions—in Parliament, in the Council, and inside the Commission itself—will define the rest of the legislative year.
