The European Commission unveiled a comprehensive reform proposal for the EU’s Emissions Trading System on 17 July, introducing measures designed to balance climate ambitions with business competitiveness. The proposal includes extending free allowances to companies beyond the previously agreed 2034 phase-out date to 2038, contingent upon companies submitting and executing investment plans for decarbonizing their European operations. Beginning in 2031, 80 percent of free allowances would go to companies with approved investment plans, while the remaining 20 percent would be allocated only to those demonstrating successful implementation of their commitments and achieving specified emissions reductions.
The reform also calls for a more gradual approach to reaching zero emissions within the ETS framework. Rather than maintaining the current annual emissions cap reduction rate of 4.4 percent from 2028 onwards, the commission proposes reducing this to 3.7 percent annually between 2031 and 2035, and further to 1.7 percent from 2036 to 2040. According to the proposal, this extended timeline aligns with the EU’s broader climate target of achieving 90 percent emissions reductions below 1990 levels by 2040. The commission contends that maintaining higher reduction rates would be unrealistic and emphasizes that the overall framework remains compatible with achieving net-zero emissions by 2050.
The proposal introduces several sector-specific expansions and modifications. Aviation coverage would expand from 2029 to include flights departing from the European Economic Area and landing in destinations within 5,000 kilometers, alongside emissions from private jets and business aviation. The maritime sector would see the addition of smaller vessels between 400 and 5,000 tonnes, while waste incineration would be gradually incorporated beginning in 2031 with phased allowance requirements increasing from 25 percent to 100 percent by 2034. Additionally, the EU and UK continue negotiations toward linking their separate carbon markets, with potential financial contributions from the UK contingent upon a final agreement.
The proposal has generated substantial controversy. Environmental organizations and climate advocates contend the changes would permit approximately 2 billion additional tonnes of carbon dioxide equivalent emissions, potentially jeopardizing the EU’s climate targets. Carbon Market Watch, World Wildlife Fund, and Climate Action Network Europe have characterized the proposal as significantly weakening the system’s effectiveness. However, supporters including some industry representatives and investment organizations note the proposal provides greater stability and predictability for long-term industrial planning, citing the critical importance of policy certainty for attracting capital to decarbonization efforts.
Member states will now engage in negotiations over the proposal, with Ireland’s recent assumption of the rotating EU presidency indicating a target completion by year-end, though observers note this represents an unusually ambitious timeline for complex climate legislation. The final agreement will require approval from both EU member governments and the European parliament before implementation.
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