EU carbon reform lands as 'cosmetic' tweak: Poland wins billions but ETS structure stays intact

What the Commission proposed

The European Commission unveiled its long-awaited revision of the EU Emissions Trading System (EU ETS) on 17 July 2026, alongside an Electrification Action Plan. The package slows the annual reduction of emission allowances rather than scrapping the system. The linear reduction factor (LRF) will drop from the current 4.3% to 4.4% annually between 2028 and 2030, then to 3.7% from 2031 to 2035, and 1.7% from 2036 to 2040. The endpoint for phasing out allowances shifts from 2039 to 2049. Free allowances for industry, originally set to expire in 2034, will now continue until 2038, though with a new conditionality: 80% of free permits will be granted upfront only to firms with an approved decarbonisation plan, while the remaining 20% will be released after investments are completed.

The emissions trading system is our flagship climate instrument. Twenty years have passed since we first implemented this system in Europe. It works well and is an effective way to show how to invest in a smarter way.

The Commission also proposed that member states allocate at least 50% of ETS auction revenues to decarbonisation investments, up from roughly 5% currently. A new Industrial Decarbonisation Bank would channel 100 billion euro toward green industrial projects, and the Market Stability Reserve would stop cancelling allowances to build a buffer for future scarcity expected around the mid-2030s.

The coalition that forced the review

Ten EU countries (Italy, Poland, Austria, Bulgaria, Croatia, the Czech Republic, Greece, Hungary, Slovakia, and Romania) pressed the Commission to act after the March 2026 European Council, where Prime Minister Donald Tusk said Commission President Ursula von der Leyen had been tasked with preparing a major reform. Their core argument was that EU industrial electricity prices are on average three times higher than those in the United States or China. The EU's share of global industrial output fell from about 22% in 2010 to roughly 14% in 2025, while the United States held steady near 18% over the same period.

Polish government claims success

Climate and Environment Minister Paulina Hennig-Kloska called the proposal "a milestone step in changing the ETS system" and "a huge success for Polish diplomacy and negotiators." Her ministry highlighted several wins: the 10-year extension of the Modernisation Fund through 2040, with Poland poised to become the largest beneficiary, receiving 38.14% of the total pool for 2031–2040. The Czech Republic would be second at 13.02%. A new ETS Investment Booster will provide additional support for hard-to-abate industrial sectors, with a separate pool for lower-income member states. Deputy Minister Krzysztof Bolesta said Poland will push for further LRF reductions, voluntary or cancelled ETS 2, and unconditional free allowances. The ministry expects the regulation to take effect in 2028.

Today we are taking a milestone step in changing the ETS system. For the first time, the European Commission is proposing solutions that ease rather than tighten the system's impact on the economy and citizens.

Critics call it cosmetic tinkering

Former Climate and Environment Minister Anna Łukaszewska-Trzeciakowska dismissed the package as "powdering reality" and "too little, too late." She argued that the root cause of industrial decline is the climate strategy itself, which drives up energy and production costs. She said that as long as the ETS exists in its current form, European competitiveness will continue to erode. PiS candidate for prime minister Przemysław Czarnek posted that Donald Tusk "got played in Brussels," adding: "We do not need a softer ETS. We need to exit the ETS." Former prime minister and MEP Beata Szydło called the policy "murderous for the European economy."

We are treating the symptoms, not the causes. The root cause of the Union's economic problems and the loss of competitiveness in many sectors is the climate strategy, which has led to higher energy prices and production costs through mechanisms like the ETS.

What changes and what does not

Total ETS revenues since 2005 have reached just over 260 billion euro, with over three-quarters flowing to member states. Currently 43% of allowances are free and 57% are auctioned. A separate regulation will cover free allowances for 2026–2030, with retroactive effect to reverse unfavourable rulings from June 2026, adding 6 billion euro worth of free permits. The Commission also proposed injecting 250 million tonnes of fixed national allowances to stimulate the carbon market. Marcin Korolec, former deputy environment minister and head of the Institute for Sustainable Economy, welcomed the Modernisation Fund extension and urged Poland not to waste the opportunity.

Despite the adjustments, the fundamental architecture remains: polluters still pay, allowances still shrink over time, and CBAM border taxes continue. Heavy industry, including steel and cement, will keep losing competitiveness against non-EU rivals, and the conditionality on free allowances introduces new bureaucratic hurdles. The proposal now moves to the Council of the EU and the European Parliament for further negotiation.