The European Union is preparing to ease the pace of carbon dioxide emissions reductions for industry while increasing the amount of free emissions permits available under its flagship carbon market. These adjustments are part of a broader reform aimed at balancing climate goals with industrial competitiveness across the bloc.
Currently, the EU Emissions Trading System (ETS) sets a schedule to lower emissions progressively, with cuts expected to phase out industrial allowances by 2039. The Commission’s new proposal, expected to be unveiled shortly, would extend the timeline, allowing companies to continue emitting CO2 into the 2040s and providing additional free permits to ease compliance costs.
The ETS requires power plants, factories, shipping companies, and airlines to purchase permits for every ton of CO2 they emit, creating a financial incentive to reduce pollution. The upcoming changes respond to concerns among member states that the existing system risks undermining European industries by imposing high carbon costs.
One notable shift involves increasing the volume of free permits allocated to industries, potentially adding around €6 billion in allowances. These free permits would partly compensate companies subject to the EU’s carbon border adjustment mechanism (CBAM), a tax on imports designed to prevent carbon leakage by equalizing costs for domestic and foreign producers. Previously, free permits were set to phase out once the border tax fully applies around 2034, but the new plan proposes extending this transition period.
The Commission also plans to revise how free permits are distributed, taking into account factors such as heat production and fuel use. Additionally, the so-called linear reduction factor—the rate at which emissions reductions must occur annually—will be lowered from its current level of 4.3%, allowing a slower reduction path for industry.
Revenue from ETS permit sales will see a greater share earmarked for reinvestment into sectors that face carbon costs, supporting industrial decarbonization efforts. Moreover, the proposal aims to extend a dedicated fund that helps less wealthy EU nations shift toward cleaner energy sources, a crucial point for countries with heavy coal dependency.
Several details remain unsettled, including whether and how international carbon offset credits will be integrated into the ETS framework. The European Parliament and member states must review and approve the proposal, a process expected to last for months and involve intense negotiations.