EU Commission unveils sweeping overhaul of Emissions Trading System

The European Commission has presented a comprehensive revision of the EU Emissions Trading System (ETS). The plan slows the annual reduction of the emissions cap to 3.7% per year from 2031‑2035 and to 1.7% from 2036‑2040, halves the trigger for the Market Stability Reserve, and extends free allocation of allowances to industry until 2038. It also proposes that 80 % of free permits be awarded to firms that commit to decarbonisation projects, with the remaining 20 % released after verified investment.

To support the reform, the Commission will create an Industrial Decarbonisation Bank targeting €100 billion of financing for large‑scale clean‑technology projects, funded by ETS revenues, the Innovation Fund and InvestEU.

The proposal has sparked a split among member states. Ten countries – Italy, Poland, Bulgaria, Cyprus, Czechia, Estonia, Greece, Hungary, Romania and Slovakia – have asked the EU to reconsider the upcoming ETS2 carbon price on heating and transport fuels, warning of higher household costs. Seven other states, including Spain, the Netherlands and the Nordic members, argue that weakening the system would jeopardise the bloc’s emissions‑reduction goals. Industry groups such as the European Chemical Industry Association criticize the changes as insufficient to sustain a competitive transition.