The European Commission has overhauled the EU carbon market, confirming that industrial sectors will be permitted to emit planet-warming gases well into the 2040s. The long-awaited revision of the Emissions Trading System (ETS) significantly slows the pace of mandatory emission reductions and extends the distribution of free carbon allowances to heavy industry.
Released on Friday following an intense night of internal negotiations, the proposal represents a notable watering down of the bloc’s climate ambition. The revised EU climate policy framework seeks a more “business-friendly” approach to carbon pricing. This pivot has already triggered sharp criticism from environmental advocates and member states demanding faster progress toward climate neutrality, setting the stage for a major political fight in the coming months.
Slower Emission Reductions in ETS Revision
Under the new Emissions Trading System (ETS) revision, the speed at which companies must cut their emissions will drop considerably. The Commission achieved this by reducing the Linear Reduction Factor (LRF)—the annual rate at which pollution caps fall. The cap was previously scheduled to reach zero by 2039. Under the revised plan, the LRF will decrease from 4.4 percent to 3.7 percent between 2031 and 2035. After 2036, the reduction rate will drop even further to 1.7 percent annually.
The Commission will also extend the timeline for distributing free carbon allowances. Sectors covered by the carbon border tax will now receive free permits until 2038. While industry groups have long argued that the previous ETS trajectory was unrealistic and financially burdensome, extending these free allowances into the EU carbon market could invite legal challenges at the World Trade Organization from international competitors.
International Credits and Revenue Redistribution
For the first time, starting in 2036, the Commission will allow industries to purchase carbon credits from outside the EU to offset their emissions. This mechanism has the potential to lower the overall carbon price and provide industries with more options if domestic allowances run out. The inclusion of international credits proved to be one of the most contentious points during the overnight talks, according to EU officials.
The proposal also introduces 250 million tons of domestic removal credits, representing carbon dioxide removed from the atmosphere, into the ETS to be auctioned between 2031 and 2040. To stimulate further investment in decarbonization, the framework mandates that at least 50 percent of all ETS revenue be returned to companies within the system to fund green initiatives. This move could prove controversial, as member countries have grown accustomed to relying on the billions in revenue generated from auctioning permits.
The plan also rewards “front-runners”—industrial sites that have already led their sectors in reducing emissions. Under new conditionalities, 80 percent of EU funds will be disbursed after a company submits a decarbonization investment plan, with the remaining 20 percent delivered upon implementation. The top 10 percent of lowest-polluting sites will receive carbon allowances without needing to prove their green credentials. Funding specifics from the multibillion-dollar Industrial Decarbonization Bank were also a major point of debate among senior commissioners.
What Happens Next
The revised EU climate policy now heads to the European Parliament and member countries, where it is expected to face intense scrutiny. Swedish Climate and Environment Minister Romina Pourmokhtari signaled immediate opposition, stating her government will “fight tooth and nail against this weakening of the framework.” She argued the proposal undermines companies that have already invested heavily in climate action.
EU climate chief Wopke Hoekstra defended the changes as “fully in line” with the EU’s climate goals, arguing the ETS revision advances climate action while re-industrializing Europe for a clean economy. As the debate moves to Parliament, lawmakers will also scrutinize the tailored approach for aviation. The review stops short of extending the ETS to all outbound international flights, instead bringing flights landing within 5,000 kilometers into the system from 2029. This strategically excludes flights to China and the U.S. to avoid trade clashes. Additionally, the EU carbon market will gradually expand to cover waste incineration starting in 2031.
— Rachel Greenwood, climate desk, AXO News