EU proposes slower emissions cap cuts and longer free permits in carbon market overhaul
The European Commission wants to reduce the annual cap on emissions permits at a slower pace and extend free allowances to 2038, responding to industry and member state pressure over competitiveness.
What the proposal changes
The European Commission unveiled plans on Friday to overhaul the EU Emissions Trading System, the bloc's main climate policy tool. The annual rate at which the emissions cap shrinks would fall from the current 4.3% to around 3.7% from 2031, and then to 1.7% from 2036. Free carbon permits, which were due to end in 2034, would be extended until 2038, but with conditions: companies would receive 80% of free allowances upfront only if they publish decarbonisation investment plans, and the remaining 20% after those investments are made. The Commission also wants to require member states to reinvest 50% of their ETS revenue into domestic industries; currently only about 10% of the €260 billion generated since 2013 goes to decarbonisation, according to climate commissioner Wopke Hoekstra. The proposal would also expand the ETS to cover municipal waste incineration, flights within a 5,000 km radius of a central point in Europe (affecting routes to north Africa and the Middle East but not China or the US), and private jets for the first time.
- Annual cap reduction rate of 4.3%
- Rate set to increase to 4.4%
- Rate lowered to 3.7%
- Rate further reduced to 1.7%
- Free permits were to end
- Free permits extended to 2038
Political pressure and reactions
The overhaul responds to intense pressure from industry and at least 10 EU member states, including Italy and Poland, which argue the ETS damages competitiveness and keeps energy prices high. Italy has condemned the system as a de facto tax. Polish climate minister Paulina Hennig-Kloska called the proposal a "huge success for Poland" and said Warsaw would push to weaken the policy further. EU climate commissioner Wopke Hoekstra defended the changes as a "more business-friendly and, may I say so, savvy approach" and insisted they remain fully aligned with the EU's 2040 climate target of a 90% emissions cut. Peter Liese, a leading Christian Democrat in the European Parliament, welcomed the proposal, saying it showed the ETS would not be abolished and would reward those investing in climate neutrality. But Linda Kalcher, executive director of the Brussels-based think tank Strategic Perspectives, said the plan "looks like a gift for companies to delay their emission reductions while in reality this puts them at a competitive disadvantage with Chinese companies that accelerate."
Industry demands more
Industry groups gave a mixed reception. Wolfgang Große Entrup, head of the German chemical industry association VCI, called the proposals "dangerous eyewash" and said climate protection must not lead to deindustrialisation. Thyssenkrupp Steel CEO Marie Jaroni said the reform sent an important signal but urged a suspension of the drastic rise in CO₂ costs until key infrastructure such as affordable green electricity and hydrogen networks is in place. Fertiliser producer SKW Piesteritz demanded an exemption for fertilisers from the ETS, warning of new dependencies. The CDU economic council criticised the conditions attached to free permits as "planned-economy investment steering."
Climate context and next steps
The ETS has driven a 47% reduction in emissions from covered sectors since 2005, and the Commission says the new path still supports the 2040 goal. The proposal comes as Europe experiences extreme heatwaves and wildfires; western Europe recorded its hottest June ever. The plan must now be negotiated by EU countries and the European Parliament, a process expected to take about a year.
