The European Commission has unveiled a sweeping overhaul of its flagship Emissions Trading System (ETS), offering heavy industrial polluters more time to cut emissions in exchange for guaranteed domestic investment.
The European Commission says the proposals seek to balance the EU’s ambitious 2040 climate targets with the harsh economic realities facing European manufacturers.
The EU’s ETS scheme is a “cap-and-trade” programme for pollution from heavy industries.
It sets a cap on the maximum amount of greenhouse gases that covered companies are allowed to emit.
Businesses can then buy or trade allowances to offset their emissions.
Simply put, companies that reduce emissions save money, while those that keep polluting have to pay by buying allowances.
But under the new proposals, the incentive to cut emissions will be reduced.
The European Commission plan would see the rate at which the carbon emissions cap falls slowed from 4.3 percent to a “Linear Reduction Factor” of 3.7 percent between 2031 and 2035, dropping further to 1.7 percent from 2036.
The adjustment is intended to provide a more “gradual” trajectory for industry as it approaches the challenging final decade before achieving net zero in 2050.
The phase-out of free carbon permits for sectors protected by the Carbon Border Adjustment Mechanism (CBAM) has been extended until 2038.
European Commissioner for Climate, Wopke Hoekstra, defended the more “business-friendly” stance.
“Free allocation does not mean free cash,” he insisted. “100 percent of the free allowances will need to be invested in Europe in decarbonisation,”
While offering relief to some, the net is widening for others.
The ETS will now gradually integrate municipal waste incineration starting in 2031 and expand its reach in the maritime sector to include smaller vessels.
Aviation also faces tighter controls, with carbon pricing set to apply to all flights departing to destinations within 5,000 km of the EU’s geographic centre and, notably, all incoming and departing business jets.
“We’re turning the ETS truly into an innovation and investment engine to make Europe’s industry fit for a clean future,” said Commissioner Hoekstra.
It is no longer justifiable for a family to pay carbon costs when on a commercial flight whilst private jets remained exempt, he said.
To cushion the transition, the European Commission plans to launch an Industrial Decarbonisation Bank with €100 billion in funding, alongside an “Investment Booster” to frontload support before 2030.
This massive injection of capital is designed to ensure that, despite the slower reduction trajectory, the EU remains “fully in line with the EU’s 2040 climate goals,” according to Hoekstra.
The proposal will need to be debated and approved by the European Parliament and member states, a process expected to take at least a year.
“Reviewing our decarbonisation and competitiveness framework will be vital to achieve our climate targets and to secure the prosperity of our industries,” said Minister for Climate, Energy and the Environment, Darragh O’Brien. “Changes will be difficult but necessary.”
Ireland currently holds the rotating presidency of the Council of the European Union.
Official discussions in the Council on the ETS reforms will start next week, he confirmed.