The European Commission will propose today a major overhaul of the EU's Emissions Trading System that extends free CO2 permits for European industries until 2037 and slows the pace of emission cuts — a concession to member states warning that climate policy is driving factories out of Europe. The ETS forces power plants, airlines, and shipping firms to buy permits when they emit CO2 and caps their overall emissions. It's the EU's biggest climate policy tool.
Brussels has been preparing this overhaul for months, under pressure from Italy, Poland, and industry groups arguing that aggressive carbon pricing undermines European competitiveness while China and the United States face no equivalent burden. The Commission's trying to balance those concerns with warnings from Spain and others that weakening the system punishes early movers who've already invested in decarbonisation.
Slower Cuts, Longer Subsidies
The Commission plans to cut the annual rate at which the ETS emissions cap falls to around 3.7% from 2031 — five years from now — down from 4.3% currently, and reduce it further from 2036, EU officials told Reuters on Thursday. An EU CO2 permit currently trades at around €79 ($90) per metric ton. The EU gives industries some permits for free to help them stay competitive. The Commission will propose continuing this until the end of 2037 — eleven years from now — rather than ending free permits 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.
The proposals were still being negotiated and could change before publication. A Commission spokesperson declined to comment.
Conditions Attached
The Commission also 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. The ETS has generated €260 billion in revenue since 2013 — thirteen years ago.
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 Headwinds
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. The system covers 40% of all EU emissions, and emissions from ETS-covered sectors have halved since 2005 — twenty-one years ago.
Flight Emissions Expansion
The Commission proposal would expand the ETS to cover emissions from international flights departing Europe for destinations up to 5,000 kilometres 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:
This overhaul reveals the collision between Europe's climate ambitions and its industrial survival. The Commission's concessions — slower emission cuts, extended free permits, delayed border levies — reflect a recognition that European manufacturers can't compete globally while carrying a carbon price their rivals don't face. The €260 billion the ETS has generated since 2013 is substantial, but it's meaningless if the factories it was meant to decarbonise relocate to China or the US. The proposal to condition free permits on domestic investment is an attempt to keep green technology production in Europe, not just green standards. But ten member states are already pushing back, and the year-long negotiation ahead will test whether the EU can design climate policy that doesn't hollow out its own industrial base. The expansion to international flights risks a trade fight with the US and others — another reminder that Europe can't decarbonise alone and that unilateral climate policy has real diplomatic and economic costs.