Critics have warned that Europe’s most effective tool for cutting dangerous planet-heating emissions could be weakened after the European Commission proposed major changes to its flagship carbon market.
In a long-awaited review of the European Union Emissions Trading System (ETS), the Commission suggested giving companies a less demanding and cheaper way to reduce greenhouse gas emissions.
The review of the ETS—widely seen as Europe’s most effective policy for cutting emissions that heat the planet—comes after deadly wildfires in Spain and extreme heatwaves across the continent. Western Europe just experienced its hottest June on record, with scientists saying the record-breaking temperatures would have been “virtually impossible” without climate change.
The review was needed to align the ETS with Europe’s goal of cutting greenhouse gas emissions by 90% by 2040, as part of the transition to a fossil-fuel-free economy by mid-century.
But the EU executive has also faced pressure from 10 EU member states, who argue that the ETS drives up energy costs and hurts Europe’s competitiveness.
In response to these concerns, some heavy industries will benefit from free pollution permits for longer, while the number of permits in circulation will be reduced more slowly, giving companies more flexibility.
Since 2005, the EU’s biggest polluters have been required to buy permits to pollute, creating an incentive to invest in cleaner energy and manufacturing. The ETS, later extended to cover flights and shipping within the EU, is credited with cutting planet-heating emissions by 47% by 2023 compared to 2005 levels.
Under the latest proposals, the ETS would be expanded to include municipal waste, aiming to boost recycling and reduce the amount of rubbish sent for incineration.
The Commission also wants to extend the ETS to flights within a 5,000km radius of a central point in Europe. This would affect airlines flying to North Africa and the Middle East, but not to China or the US, avoiding a new conflict with the Trump administration.
For the first time, the ETS would also apply to private jets, ending a privilege for the wealthiest passengers that has long been seen as unfair.
EU Climate Commissioner Wopke Hoekstra told reporters that the ETS is “a phenomenal asset” and that without it, Europe would have consumed an extra 100 billion cubic meters of gas, “making us even more vulnerable” to energy market volatility.
But he acknowledged that “the great design” has weaknesses, arguing that key European industries face unfair competition from non-European rivals that use “heavy state subsidies” and “dubious labour conditions”—issues that even a new carbon border levy doesn’t fully address.
Hoekstra said some companies have chosen to move operations abroad instead of investing in clean production in Europe. “This can no longer stand,” he said.
Michael Bloss, a German Green MEP, accused the Commission of giving industries “a licence to pollute for even longer and at a lower cost.”
He said: “Weakening the emissions trading scheme harms companies that create jobs and growth through climate-friendly production. Those who have invested in the industries and jobs of the future will be penalised.”
Camille Maury, a senior policy officer on industrial decarbonisation at the wildlife conservation charity WWF’s European policy office, said the Commission’s proposal “jeopardises a predictable and effective price on pollution that businesses and investors need to invest in clean technologies.”The ETS worked, Maury said, “because its core elements reinforce one another: a declining cap on emissions, a meaningful price on pollution, and revenues that support the clean transition.” She added, “Just like a Jenga tower, when you start removing building blocks, it destabilises the whole structure.”
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For the first time, the ETS would also apply to private jets, ending a privilege for the richest passengers that has long been seen as unfair. Photograph: Eric Gaillard/Reuters
The commission has been under heavy pressure to weaken the ETS as member states deal with the latest energy shock triggered by the Iran war, which has exposed Europe’s reliance on imported fossil fuels.
Earlier this year, Italy led the push to scrap the ETS and is among 10 member states that recently called for “pragmatic” reforms, arguing that the current system will drive industries out of Europe.
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In response, seven member states – including the Nordic countries, Spain, and the Netherlands, which are leaders in clean power – warned last week against weakening the ETS, saying it “risks undue pressure” on efforts to cut emissions.
Under the ETS, companies receive free allowances to help them bear the costs of removing dirty fossil fuels from their production systems. The latest proposals mean that free allowances for polluting sectors like steel and cement would not be phased out until 2038, instead of 2034 as originally planned. However, companies would only get free allowances if they show plans to invest in clean production in Europe.
The EU would give 80% of free permits to companies with plans to make clean investments in Europe, with the remaining 20% distributed after the money is spent.
Every year, the number of permits is reduced to strengthen incentives to curb pollution. Under the latest reform, the commission plans to slow the annual reduction in the cap to 3.7% from 2031, then to 1.7% from 2036, compared to the current 4.3%.
WWF said that slowing the reduction rate would allow an additional 2 billion tonnes of CO2 to be emitted, raising questions about how the EU would meet its 2040 climate target.
The proposal, which also allows some emissions cuts after 2036 to come from “high-quality” credits that fund decarbonisation abroad, was welcomed by industry groups for its change in pace but criticised for not going far enough.
“Some aspects of the proposal already raise concerns,” said Markus Beyrer, the director general of BusinessEurope. “For example, new conditions for free allocations risk increasing bureaucratic complexity, and the uncertain role for international carbon credits is unsatisfactory.”
EU officials rejected claims that the plans were inconsistent with climate goals. “These numbers are completely climate-law proof,” said Hoekstra, referring to the EU’s legally binding target to reduce greenhouse gas emissions by 90% by 2040. He said the “big add-on” from the current proposal was incentives to ensure “way more investments” on European soil: “Otherwise, if we just have the industry ship out, everyone loses. The stuff will not be produced cleaner outside of Europe.”
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The proposals mean that free allowances for polluting sectors would not be phased out until 2038, instead of 2034 as planned. Photograph: Sean Gallup/Getty Images
The draft law now needs to be agreed upon by the EU’s 27 member states and the European Parliament.
Peter Liese, a veteran German lawmaker from the centre-right European People’s Party, who will represent the parliament in negotiating the law, welcomed the proposals. “Climate protection that leads to unemployment is not a global role model,” he said. “Investment within the EU is our goal, and this proposal achieves that.”It works much more effectively.
Launched in 2005, the EU’s emissions trading system was the world’s first carbon market. It has since inspired similar programs in around 40 regions, including China, New Zealand, California, and other US states.
Ottmar Edenhofer, director and chief economist at the Potsdam Institute for Climate Impact Research, said the extra flexibility in the commission’s proposal “does not change the EU’s overall climate policy direction.” He praised the plan for including permanent removal of carbon dioxide from the atmosphere.
Separately, the European Commission announced a plan to double the rate of electrification in Europe’s economy to 46% by 2040, up from 23% today.
“We need to replace the black, expensive, polluting molecules with cheap, homegrown electrons,” said EU Energy Commissioner Dan Jørgensen. He also announced a plan to phase out the €97 billion that EU taxpayers spend each year on fossil fuel subsidies. “It’s a bit like a doctor trying to help a diabetes patient by prescribing sugar,” he said. “We want to get rid of that.”
Frequently Asked Questions
Here is a list of FAQs about the risk of weakening Europes most effective tool for reducing greenhouse gas emissions
BeginnerLevel Questions
1 What is the tool everyone is talking about
Its called the EU Emissions Trading System Its a market where companies must buy permits for every ton of CO2 they emit The goal is to make pollution expensive so companies invest in cleaner energy
2 Why is it considered Europes most effective tool
Because it puts a clear declining cap on total emissions Unlike voluntary targets the cap forces overall pollution down year after year It has already helped cut emissions from power plants and factories by about 37 since 2005
3 How is it being weakened
Several proposals and political pressures could weaken it by giving away free permits to industries longer than planned lowering the price of carbon or delaying the phaseout of free allowances for polluters
4 Why would anyone want to weaken it
Some industries argue it makes them uncompetitive against countries without a carbon price Politicians also worry that high energy costs hurt households and small businesses
5 What happens if the ETS is weakened
Europe would likely fail to meet its climate goals Clean energy investments would slow down and pollution would stay higher for longer
AdvancedLevel Questions
6 What specific changes are being proposed that could weaken the system
Key risks include extending free allowances for heavy industry past 2034 delaying the phaseout of free permits for aviation lowering the Market Stability Reserve and exempting more sectors from the carbon border adjustment mechanism
7 How does free allocation actually undermine the ETS
Free permits mean the dirtiest companies dont pay the full cost of their pollution This reduces the financial incentive to decarbonize and keeps outdated highemission plants running longer It also floods the market keeping carbon prices lower than they should be
8 Does weakening the ETS affect the price of carbon
Yes directly If more free permits are given out or the cap is loosened the
