The European Commission will propose slowing the pace of emissions cuts and extending free CO2 permits for heavy industry until 2037 today, in a significant retreat from the EU's climate ambitions that reflects mounting pressure from member states and industrial lobbies. The overhaul of the Emissions Trading System — the bloc's flagship climate policy — comes as Brussels struggles to balance decarbonisation targets with warnings from countries including Italy and Poland that the current system undermines European competitiveness.
The ETS forces power plants, airlines and shipping firms to buy permits when they emit CO2 and caps their overall emissions. It's generated €260 billion in revenue since 2013 — thirteen years ago — and emissions from covered sectors have halved since 2005, twenty-one years ago. But the system has become a political flashpoint as industries warn they can't compete with rivals in countries without carbon pricing.
The Slowdown
Under the Commission's proposal, the annual rate at which the ETS emissions cap falls will drop to around 3.7% from 2031 — five years from now — down from 4.3% currently, and reduce further from 2036, ten years from now, EU officials told Reuters on Thursday. The proposals were still being negotiated and could change before publication, and a Commission spokesperson declined to comment.
The EU currently gives industries some CO2 permits for free to help them stay competitive. An EU CO2 permit trades at around €79 ($90) per metric ton. The Commission will propose continuing free permits until the end of 2037 — eleven years from now — rather than ending them in 2034, when they were due to be replaced by the EU's carbon border charge on imports. That would also likely delay the full phase-in of the carbon border levy to end-2037, the officials said.
Conditions Attached — But Will They Work?
The Commission wants to attach conditions to free permits, granting 80% upfront to companies with plans to invest in decarbonisation in Europe. Companies would get the remaining 20% once those investments are made, the officials said. The proposal would also impose stricter rules on how governments spend their ETS revenue, so that 50% is reinvested in domestic industries.
But ten countries, including Poland and Italy, opposed parts of the EU plans this week, including attaching conditions to industries' free permits. EU countries and lawmakers will negotiate the final ETS revision over the next year.
Political Retreat Amid Climate Emergency
The long-planned ETS revision comes amid political pushback against Europe's climate agenda, despite record-breaking heatwaves and wildfires. Brussels has already weakened environmental rules for cars and farmers after industry concerns. Some governments have urged the EU to uphold ambition on the ETS, partly because a weaker ETS would increase pressure on politically sensitive sectors, such as farming and forestry, to cut emissions faster. Spain has warned that weakening the system would punish industries that spent early on cutting emissions. The system covers 40% of all EU emissions.
The EU executive has long been preparing to overhaul the ETS, extending it into future decades and aligning it with the EU's 2040 climate goal to cut net emissions by 90%. The plans also respond to pressure from industries and countries which say it undermines competitiveness. Brussels is trying to balance those concerns with warnings that weakening the ETS would undermine the bloc's climate credibility.
Aviation Expansion — And Trade Tensions
The Commission proposal would expand the ETS to cover emissions from international flights departing Europe for destinations up to 5,000 kilometres (3,107 miles) away, the officials said. That could capture emissions from flights to hubs in Turkey and the Middle East, but exclude the United States. The American Chamber of Commerce this week warned extending the EU ETS to international flights risked "potentially provoking retaliatory measures from key international partners."
Why This Matters:
The Commission's retreat on the ETS reveals the fragility of Europe's climate ambitions when confronted with industrial lobbying and member state resistance. Slowing the pace of emissions cuts and extending free permits for another decade undermines the bloc's credibility at a moment when climate science demands acceleration, not delay. The ETS was designed to make polluters pay and drive investment in clean technologies — but if the price signal weakens and free permits continue indefinitely, the incentive to decarbonise disappears. The proposal's conditions on free permits are a partial safeguard, but only if they're enforced — and ten member states are already resisting them. The real test is whether the EU can maintain industrial competitiveness without abandoning the climate targets that are supposed to define its global leadership. If the ETS is weakened, the burden of emissions cuts will shift to sectors like agriculture and transport — politically sensitive areas where public resistance is already mounting. The question isn't whether Europe can afford climate action. It's whether it can afford not to.