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The European Commission proposed a substantial redesign of the EU Emissions Trading System (ETS) on July 17, slowing the pace of emissions reductions beyond 2030, delivering €6 billion in additional free permits to manufacturers, and introducing controlled access to carbon removals and international credits, as per Chemweek.
It also deploys more than €100 billion toward industrial decarbonization through a new financing instrument.
“Today’s proposal on the ETS brings together three key goals: sustained truly ambitious climate action, much more competitiveness and a huge boost for our independence,” Climate Commissioner Wopke Hoekstra said in a press briefing, calling the approach more “business-friendly.”
“It advances climate action, but at the same time, it transforms the ETS into a genuine engine for innovation and investments and reindustrializing Europe for the clean economy of the future.”
However, European chemical industry association Cefic said in an initial response on July 17 that the revamped proposal “falls short” in how it addresses escalating CO? costs in both the short and medium term, and Cefic noted that underlying barriers to industrial transformation were not tackled.
The proposal now moves to negotiations between the European Parliament and Council, with talks expected through 2026 and 2027 and implementation targeted for 2028.
The ETS overhaul adjusts the Linear Reduction Factor (LRF) to 3.7% for 2031–35 and 1.7% for 2036–40, down from the current 4.3% rate, providing what the commission called “breathing space” for industry as Europe pursues its legally binding target to cut emissions by 90% by 2040.
The LRF is the annual fixed percentage by which the total number of emission allowances is reduced in the EU ETS. The revised trajectory means emission allowances will continue to be issued into the 2040s, addressing concerns that the current pace would eliminate the cap around 2040 and leave hard-to-abate sectors without viable compliance options.
The commission also proposed what it described as a “carefully designed and limited integration” of 250 million metric tons of high-quality permanent domestic carbon removals into the ETS. Only domestic permanent removals certified under the Carbon Removal Certification Framework will be eligible for ETS compliance, with storage subject to monitoring and verification rules.
As of 2036, companies will be able to use international credits to meet up to 2% of compliance obligations, creating additional emissions space as Europe pursues its binding emissions target.
The proposal establishes the Industrial Decarbonization Bank with €100 billion in funding for decarbonization projects across ETS sectors, with an initial €30 billion Investment Booster phase available before 2030.
Member states will be required to spend 50% of national ETS revenues on investments in ETS sectors, adding more than €100 billion in investments before the end of the decade, according to the commission. The move addresses what Hoekstra called insufficient reinvestment in industrial decarbonization, noting that of the roughly 80% of ETS revenues flowing to member states, “less than 10% has been spent on industrial decarbonization.”
“Industry, in our view, rightly demands that significantly more should flow back to decarbonize these sectors,” Hoekstra said.
Free allocation to industry will continue beyond 2030 but become conditional on operators developing “Invest in EU Decarbonisation Plans” and investing an amount equivalent to 100% of the value of their free allocation into decarbonization projects in Europe. The requirement addresses concerns about companies “pocketing the free allocations and then selling them on the market and using the money elsewhere,” according to Hoekstra.
“Free allocation does not mean free cash,” he said. “100% of the free allowances will need to be invested in Europe in decarbonization.”
A separate proposal aims to increase free allocation by €6 billion for 2026–30, while for sectors covered by the Carbon Border Adjustment Mechanism, the phaseout of free allocation will be extended until 2038.
The Market Stability Reserve will be adjusted for a shrinking market, with the absorption rate dropping to 12% from 24%, allowing more permits to remain in circulation longer and supporting market liquidity as the cap tightens.
The reforms provide enhanced access to the Investment Booster for lower-income member states, with guaranteed allocations designed to address disparities in allowance holdings and compliance costs among EU economies.
The reforms come amid mounting political pressure from European industry groups and member states concerned about competitiveness, as carbon prices have traded above €60/metric ton for much of 2026, adding to production costs for energy-intensive manufacturers.
Hoekstra acknowledged that “the world has changed considerably, with key European industries facing an unlevel playing field,” noting that “heavy state subsidies, dumping and dubious labor conditions abroad” affect European sectors.
mrchub.com
