• The EU would slow the annual decline in carbon allowances, extending compliance flexibility for power producers and heavy industry.
• Free permits for sectors including steel and cement could continue until 2038, with additional support linked to European decarbonisation investment.
• Up to €100 billion in carbon allowances could fund electrification, hydrogen, carbon capture and low-emissions manufacturing.

Brussels is preparing to loosen parts of Europe’s flagship carbon market as pressure grows to protect industrial competitiveness.

The European Commission proposed broad changes to the EU Emissions Trading System on Friday. The package would give companies more time to reduce emissions. It would also redirect more carbon market revenue toward clean industrial investment.

The Commission maintains that the revised system would support the EU’s target to cut net greenhouse gas emissions by 90% by 2040. However, the proposals would ease several near-term obligations facing manufacturers and power producers.

The ETS currently covers sectors responsible for about 40% of the bloc’s emissions. Any adjustment will therefore influence carbon prices, industrial investment and Europe’s wider climate trajectory.

Carbon Cap Would Tighten More Slowly

Companies covered by the ETS must surrender one allowance for every metric ton of carbon dioxide they emit.

The EU restricts the number of allowances available and reduces the supply annually. This shrinking cap raises the cost of pollution. It is designed to push capital toward cleaner technologies and production processes.

Under the proposal, the annual reduction rate would fall to 3.7% in 2031. It would then drop to 1.7% in 2036. The current reduction rate is 4.3%.

The Commission also wants to reduce the adjustment rate of the market stability reserve. That mechanism removes or releases allowances when supply moves outside agreed thresholds.

Its intervention rate would decline from 24% to 12%. Together, the changes would leave more allowances available for covered companies.

International carbon credits would also enter the system from 2036. These credits could account for 2% of the emissions reductions required from ETS sectors.

For industrial groups, the reforms offer greater compliance flexibility. For investors, they introduce new uncertainty around carbon prices and domestic emissions reductions.

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Free Permits Extended for Heavy Industry

The Commission proposed extending free carbon allowances for heavy industry until 2038. They are currently scheduled to end in 2034.

The extension would cover sectors affected by the Carbon Border Adjustment Mechanism, including steel and cement. The full introduction of the EU border levy would also move to 2038.

Companies would initially receive 80% of their free allowances after submitting plans for European decarbonisation projects. The remaining 20% would be released when the investments are completed.

The 10% most efficient industrial installations would be exempt from those conditions.

Brussels also wants to slow the annual tightening of benchmarks used to calculate free allocations. The rate would fall to 2% from 2030, compared with 2.5% today.

A separate adjustment covering 2026 to 2030 could provide industry with another €6 billion, or about $6.86 billion, in free permits.

Carbon Revenues Shift Toward Industry

The ETS has generated €260 billion since 2013. Around 80% of that revenue has flowed into national government budgets.

The Commission wants member states to direct at least half of future revenues toward domestic industries. Finance ministries may resist the requirement because carbon income often supports wider fiscal priorities.

Brussels also plans to reserve 400 million allowances, worth about €30 billion, for an industrial investment booster through 2030.

Companies could compete for another €70 billion in allowances from 2031. Eligible projects would include electrification, hydrogen, carbon capture and low-emissions manufacturing.

The Modernisation Fund would continue beyond 2030. It would receive 280 million allowances to support clean energy investment in lower-income member states.

Aviation, Shipping and Waste Face Expansion

ETS aviation coverage would expand to flights departing Europe for destinations within 5,000 kilometres. Routes to Dubai and Istanbul would qualify. Most flights to the United States and China would remain outside the system.

Shipping coverage would extend to vessels as small as 400 gross tonnage, down from 5,000 today. Maritime companies would receive 110 million free allowances to help finance cleaner fuels and technologies.

Waste incineration would enter the market gradually between 2031 and 2034. Countries could delay participation until 2035 under certain tax or recycling conditions.

EU governments and the European Parliament will now develop amendments before final negotiations begin. The legislative process could take at least a year.

For executives and investors, the proposal reflects a recalibration of European climate governance. Brussels is trying to preserve long-term emissions targets while reducing near-term industrial strain. The final rules will shape carbon prices, public financing and European manufacturing competitiveness well into the next decade.