The European Commission has proposed significant reforms to the EU emissions trading system (EU ETS), Europe’s flagship carbon market, aiming to balance ambitious climate targets with concerns about industrial competitiveness and energy costs. The review comes as Europe experiences increasingly severe climate impacts, including record-breaking heatwaves and destructive wildfires, while remaining committed to reducing greenhouse gas emissions by 90% by 2040 and achieving climate neutrality by the middle of the century.
Since its launch in 2005, the emissions trading system has required major polluters to purchase allowances for their carbon emissions, creating a financial incentive to invest in cleaner technologies and reduce fossil fuel use. The scheme has expanded over time to include sectors such as aviation and shipping and is credited with cutting emissions covered by the system by approximately 47% between 2005 and 2023. The revised EU ETS would further expand its scope by including municipal waste incineration to encourage recycling and extending emissions trading requirements to additional flights within a 5,000-kilometre radius of Europe. Private jets would also be covered for the first time.
The proposed reforms would also introduce greater flexibility for energy-intensive industries. Free pollution allowances for sectors such as steel and cement would remain available until 2038 rather than being phased out by 2034, provided companies commit to investing in cleaner production within Europe. Under the proposal, 80% of free allowances would be allocated based on credible investment plans, with the remaining 20% distributed after those investments have been made. In addition, the annual reduction in available emissions permits would slow after 2031, giving businesses more time to adapt while maintaining the overall direction of emissions reductions.
European officials argue these changes are necessary to protect domestic industries from international competitors that benefit from lower environmental standards, state subsidies, or cheaper labour. Climate Commissioner Wopke Hoekstra described the system as one of Europe’s strongest climate policy tools, stating that it has reduced dependence on imported fossil fuels while strengthening energy security. He argued that encouraging investment within Europe would prevent industries from relocating production abroad without delivering meaningful global emissions reductions.
However, environmental organisations, climate advocates, and some lawmakers have warned that weakening the EU ETS could reduce its effectiveness. Critics argue that extending free allowances and slowing the decline in emissions permits may weaken the carbon price that encourages investment in clean technologies. WWF estimates the proposed changes could allow an additional two billion tonnes of carbon dioxide emissions, potentially making it more difficult for the European Union to achieve its legally binding 2040 climate targets. Several member states, including the Nordic countries, Spain, and the Netherlands, have also cautioned against reducing the system’s environmental ambition.
Business groups generally welcomed the additional flexibility but expressed concerns about increased administrative requirements and uncertainty surrounding the future use of international carbon credits for meeting emissions targets.
The proposed legislation must now be negotiated and approved by both the European Parliament and the EU’s 27 member states before becoming law. While debate continues over the balance between economic competitiveness and environmental ambition, the reforms maintain the overall objective of the EU ETS as the cornerstone of European climate policy. Alongside these changes, the European Commission also announced plans to double electrification across the European economy by 2040 and gradually eliminate fossil fuel subsidies, reinforcing its long-term strategy to reduce emissions while strengthening Europe’s energy independence.