EU plans softer ETS and longer free permits

The European Commission is preparing to present a wide-ranging proposal to revise the EU Emissions Trading System (EU ETS) on July 17, 2026. The ETS, which covers power generation, heavy industry and aviation, uses a declining cap on emissions and tradable allowances to put a price on carbon. The forthcoming package targets the pace of emissions cuts, the treatment of free permits and the use of revenues, while also broadening sectoral coverage.

Under the plan described by officials, the annual rate at which the ETS emissions cap falls would be cut to around 3.7% from 2031, compared with the current 4.3%. The decline would be eased further from 2036, implying a slower tightening of the carbon market in the next phase of the system. These adjustments respond to concerns from energy‑intensive industries facing high compliance costs and international competition.

A central element of the proposal is to extend the phase‑out of free carbon permits, which were initially introduced to cushion exposed industries. Instead of ending in 2034, free allowances would continue until the end of 2037. This change would likely delay the full phase‑in of the EU’s carbon border levy to the same date, maintaining overlapping protection for domestic producers for longer.

The reform would also change how free permits are allocated. Firms would receive 80% of their free allowances upfront if they commit to investing in decarbonisation projects located in Europe. The remaining 20% would only be released once those investments are carried out, making access to the full volume of free permits conditional on concrete climate‑related spending.

The Commission intends to tighten rules on how member states spend revenues generated from auctioning carbon allowances. The proposal would require that 50% of ETS revenues be reinvested into domestic industries. Since 2013, the system has raised about €260 billion, highlighting the scale of funding that could be directed toward industrial transformation and climate measures.

Another planned change is to broaden the ETS’s coverage of aviation. The system would be expanded to include emissions from international flights departing Europe to destinations up to 5,000 kilometres away. This would bring a wider set of routes and carriers into the carbon market, increasing the sector’s exposure to the EU carbon price.

The proposed conditions on free permits and the slower tightening of the cap are already generating political debate. Ten EU member states, including Poland and Italy, opposed parts of the plans in discussions this week, focusing their objections on the idea of attaching investment conditions to industries’ free allowances. The package will now face negotiations among governments and in EU institutions before any elements can take effect.

The reforms come as the EU carbon market continues to exert pressure on high‑emitting activities. At the time of reporting, EU carbon permits were trading around €79–80 per metric tonne. The balance between maintaining a strong price signal for decarbonisation and addressing competitiveness concerns is at the core of the Commission’s planned ETS revamp.