EU Commission slows ETS cap reduction to 1.7% after 2036 and extends free CO2 allowances to 2038

The European Commission tabled a revision of the Emissions Trading System (ETS) on 17 July 2026, proposing to ease the pace at which the overall emission cap shrinks after 2030 and to prolong free allowances for sectors covered by the carbon border adjustment mechanism (CBAM) until 2038. The plan immediately split opinion: industry-aligned MEPs from Italy’s ruling coalition said it did not go far enough, while the Greens warned it would gut the EU’s main climate tool.

What the proposal changes

Under current rules, the linear reduction factor that lowers the ETS cap each year stands at 4.4%. The Commission now wants to set it at 3.7% for the 2031–2035 period and at 1.7% from 2036 onward. A safeguard clause mandates a review on 1 January 2033, focusing on the availability and quality of international credits that could be used from 2036. Commissioner Wopke Hoekstra stressed that the numbers remain “fully in line with the ambition set by the European climate law” and compatible with the 90% reduction target. He added that the ETS sectors, which account for roughly 40% of total emissions, would not be asked to do more or less than before.

Free allowances for CBAM industries, originally set to shrink in step with the import levy’s rollout, would now disappear only in 2038. The Commission also wants member states to reinvest at least 50% of their national ETS auction revenues into the sectors that bear the carbon cost; currently only 5% of those revenues directly finance industrial emission cuts, according to Brussels estimates.

Industry and centre-right pushback

Italian MEPs from the governing majority were quick to voice disappointment. Nicola Procaccini, co-chair of the ECR group, called the proposal “a first step but not sufficient” and demanded more emission permits to avoid market tension and contain business costs. He linked the demand to a letter sent by Italy and nine other member states urging a bolder ETS overhaul.

The Commission must do more on both the ETS allowances front, increasing the availability of emission permits to avoid market tensions and contain business costs, and on the ETS benchmark.

Letizia Moratti of Forza Italia (EPP) said she was “deeply disappointed” and echoed Confindustria president Emanuele Orsini’s concerns. She argued the reform should have tackled CO2 market speculation and energy costs more aggressively.

It is a revision that is too weak, which does not address the distortions of the ETS system and continues to offload onto European businesses costs that their international competitors do not bear.

Green lawmakers see a licence to pollute

The Greens/EFA group issued a statement linking the revision to the roughly 10,000 deaths caused by recent heatwaves. Shadow rapporteur Michael Bloss accused the Commission of giving industry “a licence to pollute even longer and at a lower cost.” The group noted that the proposal would increase the number of free CO2 allowances, undermining the market incentive to invest in renewables. The one element the Greens welcomed was the extension of the ETS to private jets, ending an exemption that allowed their owners to escape the carbon charge paid by passengers on intra-European flights.

Anyone undermining climate protection during this scorching summer has missed the signs of the times. Our children will pay the price, with compromises on their quality of life, health and freedom.

The Commission’s dual narrative

Vice-President Stéphane Séjourné framed the package as a balance between decarbonisation and reindustrialisation. He highlighted the acceleration of the European Decarbonisation Bank to mobilise €100 billion for industrial investment, the 50% revenue-recycling rule, and more realistic technological benchmarks for free allocation. “What is taken from industry must return to industry,” he wrote on LinkedIn.

Europe has two objectives: decarbonise and reindustrialise. To do that, we must reform the European carbon market and turn it into a real investment engine for our industry.

Electrification plan sets 2040 target

Alongside the ETS revision, the Commission adopted an action plan for electrification. It sets an indicative target of 46% electrification of final energy consumption by 2040, up from 23% today. Measures include narrowing the electricity-to-gas price ratio to a maximum of 2.5 for households and 2 for industry by 2030, a new framework allowing member states to cut VAT on electric vehicles, heat pumps and home batteries, and a recommendation on zero-emission vehicle incentives by the end of the year. Commission President Ursula von der Leyen called it a plan “to make Europe the first continent in the world powered by electricity.”