The European Commission has proposed a comprehensive reform of the EU Emissions Trading System (ETS). While the proposal permits industry to emit carbon for a longer period, it provides more financial support for investments in clean technologies across Europe.
The ETS, which is the European Union's largest climate change policy, obliges power generation plants, airlines, and maritime transport companies to purchase carbon allowances when they emit carbon, and it imposes a cap on total emissions.
The long-planned ETS reform aims to carry the system into the coming decades and align it with the EU's 2040 climate target of reducing net emissions by 90%. Furthermore, this regulation softens the plan in response to pressure from industries and countries including Italy and Poland, which argue that the system undermines competitiveness.
Brussels is attempting to balance these concerns against warnings from parties, including Spain, that weakening the ETS would penalize industrial companies that have made early expenditures to cut emissions.
The Commission proposed lowering the annual reduction rate of the ETS emissions cap from the current 4.3% to approximately 3.7% starting in 2031, and to 1.7% from 2036 onwards.
The regulation also introduces a new requirement obliging national governments to spend half of their ETS revenues on decarbonizing local industries. The ETS has generated 260 billion euros in revenue since 2013.
EU Climate Commissioner Wopke Hoekstra stated, "If we implement this plan, it literally means hundreds of billions of euros of additional investment on European soil."
To help them compete against foreign rivals, the EU allocates certain EU carbon allowances to industrial enterprises free of charge. The Commission's proposal will grant more free allowances to industries for an extended period, albeit subject to new conditions.
The EU will allocate 80% of the free allowances upfront to companies with plans to invest in decarbonization within Europe. Companies will receive the remaining 20% once they execute these investments. Rather than phasing out free allowances by 2034, the proposal extends them until 2038 for sectors including steel and cement manufacturing.
EU lawmakers and governments will now negotiate the final rules.
August 21, 2026
