EU softens carbon market reform: slower CO2 cuts, free permits tied to green investments
The European Commission proposed on Friday to slow the annual reduction of CO2 allowances from 2031, while tying free permits to verified green investments and mobilising €100 billion for industrial decarbonisation.
Proposal details
The European Commission proposed on Friday to revise the EU Emissions Trading System (ETS), slowing the pace at which the cap on CO2 allowances shrinks each year. Under current rules, the linear reduction factor is 4.3% until 2027 and 4.4% from 2028. The new plan would lower it to 3.7% between 2031 and 2035, and further to 1.7% from 2036 through 2040. One German report (N-tv) cited a slightly different figure of 3.1% for the first step. The Commission argues the adjusted trajectory still aligns with the legally binding target of cutting net greenhouse gas emissions by 90% by 2040 compared to 1990 levels, and achieving climate neutrality by 2050.
- Current linear reduction factor: 4.3% annually
- Factor rises to 4.4% under existing rules
- Proposed reduction to 3.7%
- Proposed further reduction to 1.7%
Free allowances and investment conditions
Free emission permits for industry, originally set to phase out after 2030, would continue but under stricter conditions. Companies would need to submit verified decarbonisation plans and prove they are reinvesting the value of those permits into clean technologies within the EU. Sectors covered by the Carbon Border Adjustment Mechanism (CBAM) would see free allocation extended until 2038. The proposal also creates an Industrial Decarbonisation Bank, backed by a planned €100 billion, to help energy-intensive sectors such as steel, cement and chemicals switch away from fossil fuels.
Political fault lines
The reform follows months of pressure from member states. Ten countries led by Poland and Italy pushed for relief, warning that high energy costs and competition from China and the United States threaten European industry. Seven others, including Spain, Sweden and the Netherlands, cautioned against penalising companies that had already invested in emissions cuts. Spain's Ecological Transition Minister Sara Aagesen sent a letter urging the Commission to keep the current 4.4% reduction rate until 2035 to provide investor certainty. The proposal now moves to the European Parliament and the Council for negotiations, a process expected to take about a year.
Reactions
EU Climate Commissioner Wopke Hoekstra defended the plan.
This proposal is fully aligned with the Climate Law.
He acknowledged the current system has significant deficiencies, notably that European firms do not compete on a level playing field. Clean Transition Vice-President Teresa Ribera stressed that Europe's competitiveness will be based on clean energy, not imported fossil fuels. Linda Kalcher of the Brussels think tank Strategic Perspectives criticised the proposal.
The ETS proposal is a Trojan horse.
BASF CEO and Cefic president Markus Kamieth warned that Europe cannot afford a system that undermines early movers.
Broader scope and next steps
Beyond the cap adjustment, the reform would expand the ETS to cover municipal waste incineration plants and extend obligations to flights up to 5,000 kilometres and smaller ships. From 2036, companies could offset up to 2% of their emissions using high-quality international carbon credits, provided the projects are supervised by the Commission. Separately, a second emissions trading system (ETS2) for road transport and heating fuels is already scheduled to launch in 2028. The ETS has cut emissions in covered sectors by roughly 50% since its launch in 2005, with Germany recording a 47% drop. A CO2 allowance currently costs about €79 per tonne.
