• The EU will assess a 46% electrification target for 2040, which could reduce annual fossil fuel imports by €260 billion ($298 billion).
• ETS reforms would direct more than €100 billion into industrial decarbonisation before 2030, while extending free allocation for industry.
• Brussels plans to narrow the electricity-gas price gap, accelerate grid connections and expand support for heat pumps, electric vehicles and industrial electrification.

The European Commission has unveiled a wide-ranging electrification plan and carbon market overhaul aimed at lowering energy costs, strengthening industrial competitiveness and reducing Europe’s exposure to imported fossil fuels.

The package seeks to make Europe the world’s first “electro-powered continent.” It combines incentives for households and businesses with changes to the EU Emissions Trading System, or ETS.

Around 70% of EU electricity now comes from domestic clean energy sources. However, electricity still accounts for only 23% of final energy demand. That rate has barely changed over the past decade.

The Commission will assess an indicative 46% electrification target for 2040 through the post-2030 Energy Union package. Reaching that level could cut the EU’s fossil fuel import bill by €260 billion each year.

“The best way to reduce Europe’s fossil energy dependency is to power our economy with electricity from clean, homegrown sources. Today we are proposing to make Europe the world’s first electro-powered continent. From lowering electricity prices to adapting our carbon market to the changing global realities, this is also an investment and independence plan. To keep the clean transition on track, bring relief to our industry, and support decarbonisation. Let’s switch it on,“ European Commission President Ursula von der Leyen said.

ETS Reform Redirects Capital to Industry

The ETS has generated more than €270 billion since its launch in 2005. Those revenues have supported energy modernisation, industrial decarbonisation and clean technology development.

Emissions from sectors covered by the market have fallen by about 50%. Yet policymakers face growing pressure to balance climate targets with industrial costs and global competition.

The Commission proposes a more gradual reduction in the supply of allowances. The Linear Reduction Factor would be set at 3.7% from 2031 to 2035 and 1.7% from 2036 to 2040.

Companies could also use high-quality international carbon credits for up to 2% of their obligations between 2036 and 2040. The measure is intended to provide flexibility when domestic emissions reductions become harder and more expensive.

Investment sits at the centre of the revised framework. The proposed Industrial Decarbonisation Bank would mobilise €100 billion for projects across Europe. An ETS Investment Booster would begin operating before 2030 as its first phase.

Member states would also have to invest 50% of national ETS revenues in decarbonising covered sectors. Together, the measures are expected to deliver more than €100 billion in investment before 2030.

Free allowances will continue beyond 2030. However, access will be linked more closely to investments in European decarbonisation projects.

For sectors covered by the Carbon Border Adjustment Mechanism, the withdrawal of free allowances would slow. The phase-out would run until 2038. A separate benchmark proposal could provide industry with another €6 billion in free allocation from 2026 to 2030.

The revised system would also integrate permanent carbon removals. This could provide compliance flexibility for hard-to-abate sectors while creating demand for emerging removal technologies.

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Market Stability and Sector Expansion

The Commission plans to reform the Market Stability Reserve to reduce excessive price volatility and protect market liquidity. The change complements an earlier proposal to stop the automatic cancellation of allowances held in the reserve.

ETS provisions for aviation and maritime transport would also be strengthened. Waste incineration would enter the system, creating new compliance obligations and investment opportunities across the waste sector.

Meanwhile, the Modernisation Fund will continue supporting energy and industrial upgrades in lower-income member states.

Electricity Costs Remain the Main Barrier

The Electrification Action Plan targets the cost gap between electricity and fossil fuels. Electricity can cost three times more than gas in parts of Europe, weakening the financial case for electrification.

The Commission wants member states to reduce network charges for selected consumers and lower taxes for energy-intensive businesses. It also aims to prevent electricity from being taxed more heavily than gas.

Faster smart meter deployment could help households shift consumption to cheaper periods. Social leasing, the Social Climate Fund and a proposed Clean Heat Market could reduce upfront costs for electric vehicles, heat pumps and other technologies.

According to the Commission, an electric vehicle can cost up to 78% less to operate than a comparable fossil-fuelled car. Replacing a gas boiler with a heat pump could reduce average household heating bills by as much as 60%.

Grid capacity remains a critical constraint. Connection queues can last years, while existing infrastructure is not always used efficiently. Brussels is pressing EU lawmakers to adopt its Grids Package by the end of 2026.

For executives and investors, the package points to a deeper alignment between carbon pricing, industrial policy and energy security. Its success will depend on whether Europe can convert regulatory ambition into grids, factories, skilled jobs and investable projects at sufficient speed.