The European Commission has unveiled its long-awaited reform of the Emissions Trading System (ETS), striking a delicate balance between aggressive climate targets and industrial competitiveness.
The proposal aims to align Europe’s carbon market with its newly established target of a 90% emissions reduction by 2040, transforming the cap-and-trade system into a dedicated economic investment tool.
A central piece of the reform addresses mounting panic from heavy industry in Germany, France, and Italy, where trade groups have increasingly criticized the ETS as a punitive tax.
To prevent companies from relocating outside the bloc to escape carbon costs, the Commission will extend the distribution of free carbon allowances beyond 2030, introducing a gentler reduction curve from 2031 to 2035. Between 2036 and 2040, as free allowances dry up, businesses will also be permitted to offset up to 2% of their obligations via decarbonization projects in third countries.
Forcing Carbon Revenues Back into Industry
However, these corporate lifelines come with strict, performance-based conditions. Under the new rules, 80% of a company’s free allowances will be withheld until they publish concrete, annual decarbonization roadmaps. The remaining 20% will only be unlocked once those green plans are actively executed.
The reform also forces a radical shift in how governments spend carbon cash. Over the last two decades, the ETS has generated €260 billion (~$297 billion), which member states have routinely absorbed into general public finances.
Relevant: Carbon Gap: The ETS Review Is A Landmark Opportunity To Kickstart CDR In EU
“Currently, barely 10 per cent of the revenue is spent on industry,” noted Climate Commissioner Wopke Hoekstra. To fix this, Brussels is mandating that at least half of all future ETS revenue must be ring-fenced exclusively to fund industrial decarbonization projects.
Furthermore, the revised framework will gradually pull waste management into the ETS network, backed by specific structural safeguards to protect operators who manage public municipal waste streams.
The market’s geographical boundaries are also expanding, with the Commission moving to wrap private aviation, commercial flights under 5,000 kilometers (3,106 miles), and nearby international maritime ports into the compliance web.
Read more: IOGP’s Caterina De Matteis: Europe Needs Enabling Measures, Not Just CO2 Storage Targets
The newly presented revisions have not been well-received by all, however. Carbon Market Watch EU policy lead Wijnand Stoefs said it ‘scuppers the EU’s key climate tool,’ while the organization’s industrial decarbonization expert Lidia Tamellini called the proposal ‘mostly carrots with very few sticks.’
“It’s not the time for more empty promises, benefits must only be granted to those who deliver emission reductions,” she warned.
