European Commission proposes sweeping ETS reform to slow emissions cuts and boost industry funding

On 17 July 2026 the European Commission released a proposal to overhaul the EU Emissions Trading System (ETS). The draft lowers the linear reduction factor for the emissions cap to 3.7 % per year for 2031‑35 and to 1.7 % per year for 2036‑40, slowing the overall reduction of available allowances. Free allocation of permits for industry will be reduced more gradually, with the benchmark cut set at 2 % from 2030, and the trigger for the Market Stability Reserve halved to 12 % of circulating allowances. The plan also extends free permits for sectors such as steel, cement and aluminium until 2038 and for other high‑risk industries until 2040, while permitting limited purchases of international carbon credits (up to 2 % of reductions from 2036).

A new Industrial Decarbonisation Bank with €100 billion of financing is introduced, to be funded by the Innovation Fund, ETS revenues and InvestEU, and at least half of ETS revenue is earmarked for decarbonisation programmes. Member states including Italy, Poland and Germany have voiced concerns about the upcoming ETS‑2 carbon price on heating and transport fuels, arguing it could raise household costs. Industry groups welcome the softer caps, whereas environmental organisations warn the changes could weaken the EU’s flagship climate tool. The proposal will now be examined by the European Parliament and member governments.