Q&A: What the EU’s carbon market review means for climate a…

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<p>The European Commission has put forward new plans to cut emissions under the EU carbon market more slowly, from 2031…</p> <p>The post <a href="https://www.carbonbrief.org/qa-what-the-eus-carbon-market-review-means-for-climate-action">Q&A: What the EU’s carbon market review means for climate action</a> appeared first on <a href="https://www.carbonbrief.org">Carbon Brief</a>.</p>

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<p class="wp-block-paragraph">The European Commission has put forward new plans to cut emissions under the EU carbon market more slowly, from 2031 onwards. </p>

<p class="wp-block-paragraph">On 17 July, the commission presented its long-awaited <a href="https://climate.ec.europa.eu/document/download/c0b4ca8e-0e12-4b4e-9976-98c0b4224410_en">proposal</a> for reform of the EU’s <a href="https://www.carbonbrief.org/qa-will-reformed-eu-emissions-trading-system-raise-carbon-prices/">Emissions Trading System</a> (ETS). </p>

<p class="wp-block-paragraph">It recommended a number of changes, including giving companies free allowances to cover their emissions for longer than previously planned, conditional on climate investment plans. </p>

<p class="wp-block-paragraph">The proposal would result in around 2bn tonnes of extra emissions from sectors that are part of the trading system, say <a href="https://www.wwf.eu/?21178341/pr-ets-revision-july-2026">WWF</a> and <a href="https://www.forbes.com/sites/we-dont-have-time/2026/07/19/eu-changes-carbon-market-rules-24-billion-tonnes-of-co2-at-stake/">other</a> <a href="https://www.linkedin.com/pulse/proposed-ets-upgrade-first-assessment-benjamin-g%C3%B6rlach-5esmf/">analysts</a>.  </p>

<p class="wp-block-paragraph">This means other sectors would need to pick up the slack in order for the EU to stick to its climate goals overall. </p>

<p class="wp-block-paragraph">The plan offers a more business-friendly and “savvy” approach, argued EU climate commissioner Wopke Hoekstra in a press conference.</p>

<p class="wp-block-paragraph">In this Q&A, Carbon Brief outlines the details of the new ETS proposal – which is subject to negotiation with member states – and explores what it could mean for climate action. </p>

<div class="article-summary__content">
<p></p>
<ul class="wp-block-list"></p>
<li><a href="#1" rel="nofollow">What is the EU Emissions Trading System?</a></li>
<p> </p>
<li><a href="#2" rel="nofollow">What did companies and countries want from the ETS review?</a></li>
<p> </p>
<li><a href="#3" rel="nofollow">What is in the new proposal from the European Commission?</a></li>
<p> </p>
<li><a href="#4" rel="nofollow">Free allowances extended</a></li>
<p> </p>
<li><a href="#5" rel="nofollow">Slowing path to reach zero emissions by a decade</a></li>
<p> </p>
<li><a href="#6" rel="nofollow">Aviation</a></li>
<p> </p>
<li><a href="#7" rel="nofollow">Auction money</a></li>
<p> </p>
<li><a href="#8" rel="nofollow">CO2 removals</a></li>
<p> </p>
<li><a href="#9" rel="nofollow">International credits</a></li>
<p> </p>
<li><a href="#10" rel="nofollow">Other sectors extended</a></li>
<p> </p>
<li><a href="#11" rel="nofollow">Market stability reserve review</a></li>
<p> </p>
<li><a href="#12" rel="nofollow">UK-EU ties</a></li>
<p> </p>
<li><a href="#13" rel="nofollow">What could the changes mean for greenhouse gas emissions?</a></li>
<p> </p>
<li><a href="#14" rel="nofollow">How was the proposal received?</a></li>
<p> </p>
<li><a href="#15" rel="nofollow">What is ‘ETS2’?</a></li>
<p> </p>
<li><a href="#16" rel="nofollow">What happens next?</a></li>
<p></ul>
<p></p>
</div>

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<li class="article-contents__item article-contents__item--level-2">
<a href="#what-is-the-eu-emissions-trading-system">
<span>What is the EU Emissions Trading System? </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-2">
<a href="#what-did-companies-and-countries-want-from-the-ets-review">
<span>What did companies and countries want from the ETS review?</span> </a>
</li>
<li class="article-contents__item article-contents__item--level-2">
<a href="#what-is-in-the-new-proposal-from-the-european-commission">
<span>What is in the new proposal from the European Commission?</span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#free-allowances-extended">
<span>Free allowances extended </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#slowing-path-to-reach-zero-emissions-by-a-decade">
<span>Slowing path to reach zero emissions by a decade</span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#aviation">
<span>Aviation </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#auction-money">
<span>Auction money </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#co2-removals">
<span>CO2 removals </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#international-credits">
<span>International credits </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#other-sectors-extended">
<span>Other sectors extended </span> </a>
</li>
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<a href="#market-stability-reserve-review">
<span>Market stability reserve review </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-3">
<a href="#uk-eu-ties">
<span>UK-EU ties</span> </a>
</li>
<li class="article-contents__item article-contents__item--level-2">
<a href="#what-could-the-changes-mean-for-greenhouse-gas-emissions">
<span>What could the changes mean for greenhouse gas emissions? </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-2">
<a href="#how-was-the-proposal-received">
<span>How was the proposal received? </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-2">
<a href="#what-is-ets2">
<span>What is ‘ETS2’? </span> </a>
</li>
<li class="article-contents__item article-contents__item--level-2">
<a href="#what-happens-next">
<span>What happens next? </span> </a>
</li>
</ul>
</div>

</div>

<h2 class="wp-block-heading" id="what-is-the-eu-emissions-trading-system">What is the EU Emissions Trading System? </h2>

<p class="wp-block-paragraph">The EU ETS is a carbon market, which puts a price on the greenhouse gas emissions of companies in power generation, industry, aviation and other sectors.  </p>

<p class="wp-block-paragraph">It covers everything from electricity generation to steel production, as well as flights within the EU and a handful of other European countries. </p>

<p class="wp-block-paragraph">Emissions in these sectors have halved since the ETS launched in 2005, according to the <a href="https://climate.ec.europa.eu/news-other-reads/news/eu-emissions-trading-system-sustains-downward-trend-covered-emissions-2026-04-10_en">European Commission</a>. </p>

<p class="wp-block-paragraph">A European parliament briefing describes the system as a “<a href="https://www.europarl.europa.eu/RegData/etudes/BRIE/2026/782615/EPRS_BRI(2026)782615_EN.pdf">cornerstone</a>” of EU climate policy, covering around <a href="https://climate.ec.europa.eu/document/download/ddc1b1de-652b-49ed-8f15-d9fa8badd39f_en?filename=com_2025_735_en.pdf">40%</a> of the bloc’s overall emissions. </p>

<p class="wp-block-paragraph">It applies to emissions in all 27 EU countries alongside Iceland, Liechtenstein, Norway and electricity generation in Northern Ireland. (The UK established its own <a href="https://www.gov.uk/government/publications/uk-emissions-trading-scheme-uk-ets-policy-overview/uk-emissions-trading-scheme-uk-ets-a-policy-overview">ETS</a> after Brexit.)</p>

<p class="wp-block-paragraph">The ETS operates as a “<a href="https://unfccc.int/policy/cap-and-trade-programme">cap and trade</a>” system, which puts a limit on the amount of carbon dioxide equivalent (CO2e) that can be emitted within the sectors it covers. </p>

<p class="wp-block-paragraph">The “cap” on emissions gradually decreases each year until, eventually, they are expected to reach zero. </p>

<p class="wp-block-paragraph">The currency of trade within the system is “allowances”. One allowance is equal to one tonne of CO2-equivalent emissions. </p>

<p class="wp-block-paragraph">At present, around <a href="https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets/auctioning-allowances_en">57%</a> of these allowances are bought by companies in auctions. The EU generated around <a href="https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets/how-do-member-states-use-ets-revenues_en">€43bn</a> in revenue from these auctions in 2025.</p>

<p class="wp-block-paragraph">The remaining 43% of allowances are given to companies for free, to cover some or all of their emissions. </p>

<p class="wp-block-paragraph">This is intended to prevent “<a href="https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets/free-allocation/carbon-leakage_en">carbon leakage</a>” – the idea that companies operating in countries with strict climate policies will relocate to countries with looser rules.  </p>

<p class="wp-block-paragraph">The amount of free allowances varies by sector, depending on factors including the level of competition with overseas firms that do not face a carbon price. </p>

<h2 class="wp-block-heading" id="what-did-companies-and-countries-want-from-the-ets-review">What did companies and countries want from the ETS review?</h2>

<p class="wp-block-paragraph">Countries and companies have been divided on how they wanted the ETS to evolve. </p>

<p class="wp-block-paragraph">Some pushed for more ambition to help meet European climate goals. Others called for it to be rolled back, amid rising costs for businesses. </p>

<p class="wp-block-paragraph">In March, 10 countries including Italy, Hungary and Poland wrote a letter to the commission calling the ETS an “existential risk” for key industrial sectors, reported <a href="https://www.euronews.com/my-europe/2026/03/18/ten-eu-countries-revolt-over-carbon-rules-threatening-industry-ahead-of-key-summit">Euronews</a>. </p>

<p class="wp-block-paragraph"><a href="https://www.politico.eu/article/italy-calls-for-ets-suspension-pending-overhaul/">Italy</a> had earlier even called for the system to be suspended outright. </p>

<p class="wp-block-paragraph"><a href="https://carbon-pulse.com/494338/">France</a> and other countries favoured introducing a slower descent towards bringing the emissions cap to zero by 2039. </p>

<p class="wp-block-paragraph">Some steel and chemical companies also <a href="https://www.politico.eu/article/steel-and-chemicals-giants-demand-freeze-to-eus-flagship-climate-policy/">criticised</a> the cost burden of the ETS. </p>

<p class="wp-block-paragraph"><a href="https://www.eurelectric.org/wp-content/uploads/2026/06/2026-05-26-Presidency-Letter-on-EU-ETS.pdf">Other</a> <a href="https://windeurope.org/data/products/windeurope-position-on-the-eu-ets/?_cldee=BZlhNuJTUGyP6oNEQQRBnUiyH_5PmRsnJiU0p6blVTCz9EZeLsmlXI3zR3n_0vzX&recipientid=contact-0397c558a85ee8118141e0071b6e1791-92e57f35ab9f43f0aad077ae5a1d928f&esid=fc07099b-b876-f111-ab0e-70a8a56236b5">organisations</a> focused on calls for stability and predictability in the system. </p>

<p class="wp-block-paragraph">In recent weeks, Spain, the Netherlands and five other countries called on the commission to “resist gutting” the ETS in its review, said <a href="https://www.eenews.net/articles/spain-netherlands-5-other-countries-issue-plea-to-protect-ets/">E&E News</a>. They said the ETS should be strengthened to “ensure long-term investment predictability and regulatory stability”. </p>

<p class="wp-block-paragraph">Weakening the system could “undermine investment signals and leave Europe more exposed to fossil-fuel shocks”, said a March 2026 <a href="https://www.e3g.org/publications/facts-over-fiction-why-the-eu-ets-is-key-for-a-competitive-secure-europe/">briefing</a> from climate thinktank <a href="https://www.e3g.org/">E3G</a>.</p>

<p class="wp-block-paragraph">Another <a href="https://www.e3g.org/publications/eu-ets-revision-what-is-at-stake-for-europe/">E3G</a> briefing said the “risk” is that politicians weaken the system as a short-term economic fix, “undermining one of the EU’s main tools for delivering on its industrial transformation ambitions”. </p>

<p class="wp-block-paragraph">Dozens of investment organisations <a href="https://www.iigcc.org/hubfs/2026%20resources/2026-06-10%20EU%20ETS%20Investor%20Statement.pdf">called</a> on EU countries to facilitate a “robust and predictable” ETS. They said that “policy stability is the cheapest investment stimulus available to the EU”. </p>

<p class="wp-block-paragraph">In its list of priorities for ETS reform, the NGO <a href="https://carbonmarketwatch.org/wp-content/uploads/2026/05/CMW_DontMessWithTheETS_2026_Report_v003_digital_final-FINAL.pdf?_gl=1*y0dngr*_up*MQ..*_ga*MTY2NDAyMTk3MC4xNzgzNTg1ODM2*_ga_6CXHVZGKHY*czE3ODM1ODU4MzQkbzEkZzAkdDE3ODM1ODU4MzQkajYwJGwwJGgw">Carbon Market Watch</a> said that “now is not the time to backslide” on its aims and terms. </p>

<h2 class="wp-block-heading" id="what-is-in-the-new-proposal-from-the-european-commission">What is in the new proposal from the European Commission?</h2>

<p class="wp-block-paragraph">The commission’s <a href="https://climate.ec.europa.eu/document/download/c0b4ca8e-0e12-4b4e-9976-98c0b4224410_en">proposal</a> outlines a number of changes to the ETS, to bring it in line with the EU’s <a href="https://www.carbonbrief.org/qa-european-commissions-proposal-to-cut-eu-emissions-90-by-2040/">climate goal</a> to cut emissions to 90% below 1990 levels by 2040. </p>

<p class="wp-block-paragraph">The review will “bring relief to industry”, the commission <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_26_1596">says</a>, while also continuing the ETS’ “essential” role in climate action. </p>

<p class="wp-block-paragraph">However, others are more sceptical about the impacts it could have on climate action. </p>

<p class="wp-block-paragraph">Below, Carbon Brief details the main aspects of the proposal. </p>

<h3 class="wp-block-heading" id="free-allowances-extended">Free allowances extended </h3>

<p class="wp-block-paragraph">The European Commission proposes to extend free allowances beyond a previously agreed date. </p>

<p class="wp-block-paragraph">Free allocations were <a href="https://www.cleanenergywire.org/news/eu-commission-propose-free-emissions-allowances-industry-beyond-current-cut-period-media-report">due</a> to reduce from this year and be fully removed by 2034. </p>

<p class="wp-block-paragraph">However, the commission has proposed to extend this to 2038, on the condition that companies receiving free allowances set out how they will invest in decarbonising their EU operations. </p>

<p class="wp-block-paragraph">It proposes that from 2031 onwards, 80% of free allowances in the system would be given to companies that have submitted plans for investment in EU decarbonisation. </p>

<p class="wp-block-paragraph">The remaining 20% of free allowances would only be allocated to those that can prove they followed through with planned investments and achieved the emissions reductions they had previously outlined. </p>

<p class="wp-block-paragraph">This move is a “step in the right direction”, says <a href="https://epico.org/en/about-us/our-team/kirsten-scholl">Dr Kirsten Scholl</a>, the director for EU affairs at thinktank <a href="https://epico.org/en/">Epico</a>, but it must not “impose excessive administrative burdens”.</p>

<p class="wp-block-paragraph">The EU’s <a href="https://www.carbonbrief.org/qa-can-carbon-border-adjustment-mechanisms-help-tackle-climate-change/">carbon border adjustment mechanism</a> (CBAM) was designed to replace the existing system of free allowances in the ETS. </p>

<p class="wp-block-paragraph">It is a tax applied to certain imported goods, based on the amount of CO2 emissions released during their production. It began to be phased in at the start of 2026. </p>

<p class="wp-block-paragraph">As a result, free allocation is being gradually <a href="https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets/free-allocation/allocation-industrial-installations_en">phased out</a> from 2026-38.</p>

<p class="wp-block-paragraph">However, the commission has proposed that 15% of free allocations due to be removed  because of CBAM should be reintroduced from 2028, to “reduce the speed at which CBAM is phased-in and mitigate the remaining carbon leakage risk”. </p>

<p class="wp-block-paragraph">The commission says that preventing carbon leakage “remains a crucial element” of the ETS.</p>

<p class="wp-block-paragraph">Pushing back the phase-out of free allowances and the full implementation of CBAM “risks squandering the EU’s credibility with investors and trading partners alike”, says <a href="https://bellona.org/employee/francesco-lombardi-stocchetti">Francesco Lombardi Stocchetti</a>, a policy advisor on sustainable economy at the <a href="https://bellona.org/">Bellona Foundation</a>, an environmental NGO. </p>

<p class="wp-block-paragraph">“Europe cannot lead the clean industrial transition just by moving the goalposts,” he adds in a statement.</p>

<h3 class="wp-block-heading" id="slowing-path-to-reach-zero-emissions-by-a-decade">Slowing path to reach zero emissions by a decade</h3>

<p class="wp-block-paragraph">The commission has proposed to cut emissions in the ETS more slowly from 2031 onwards.</p>

<p class="wp-block-paragraph">This could mean new allowances are able to enter the scheme into the 2040s, instead of ending in 2039 as previously planned. </p>

<p class="wp-block-paragraph">But the planned changes are still “aligned” with the EU’s 2040 climate target and net-zero requirement by 2050, <a href="https://ec.europa.eu/commission/presscorner/detail/en/qanda_26_1598">says</a> the commission. </p>

<p class="wp-block-paragraph">The overall ETS cap on emissions was reduced by 1.7% each year up to 2020 and then by 2.2% annually since 2021. </p>

<p class="wp-block-paragraph">It is then agreed to drop by 4.3% over 2024-27 and 4.4% from 2028 onwards. </p>

<p class="wp-block-paragraph">Maintaining similar rates after 2030 would not be “realistic”, says the commission’s proposal. </p>

<p class="wp-block-paragraph">Instead, it suggests that the cap should fall by 3.7% per year over 2031-35 and by just 1.7% annually over 2036-40. The chart below outlines how this would look.</p>

<figure class="wp-block-image size-full"><img alt="Different trajectories for allowances in the EU Emissions Trading System over 2030-50, in MtCO2e." class="wp-image-78985" height="633" src="https://www.carbonbrief.org/wp-content/uploads/2026/07/Emissions_would_drop_more_slowly_in_the_EU_carbon_market_under_new_proposals_3.png" width="975" /><figcaption class="wp-element-caption">Different trajectories for allowances in the EU Emissions Trading System over 2030-50, in MtCO2e. Source: Oeko-Institut analysis.</figcaption></figure>

<p class="wp-block-paragraph">This will make the path to zero emissions within the ETS “more gradual and aligned with domestic climate ambition level”, <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_26_1596">claims</a> the commission. </p>

<p class="wp-block-paragraph">But <a href="https://www.wwf.eu/?21178341/pr-ets-revision-july-2026">WWF</a> says that the proposal would allow an extra 2bn tonnes of CO2e to be emitted. (See: <a href="#13" rel="nofollow">What could the changes mean for greenhouse gas emissions?</a>) </p>

<h3 class="wp-block-heading" id="aviation">Aviation </h3>

<p class="wp-block-paragraph">The commission has proposed plans to incorporate more airline emissions into the ETS. </p>

<p class="wp-block-paragraph">The plan outlines that, from 2029, all flights departing from the <a href="https://www.gov.uk/eu-eea">European Economic Area</a> (EU, Iceland, Liechtenstein and Norway) and landing in other countries within 5,000km of a point in central Europe should be added to the ETS.</p>

<p class="wp-block-paragraph">This distance means that the changes would not apply to flights landing in China or the US. (Both the US and China have <a href="https://www.transportenvironment.org/articles/china-joins-us-airlines-pressuring-eu-aviation-permits">opposed</a> the expansion of ETS coverage for flights.)</p>

<p class="wp-block-paragraph">The commission also proposes including emissions from private jets and other “business flights” in the ETS. </p>

<p class="wp-block-paragraph">It notes that aviation currently accounts for 14% of EU transport emissions. This is expected to skyrocket to around 90% by 2050, given it is more difficult to decarbonise than other modes of transport. </p>

<p class="wp-block-paragraph">Some aviation emissions have been included in the ETS since 2012. This included emissions from air travel within the EEA and flights departing from Switzerland and the UK.</p>

<p class="wp-block-paragraph">The airline industry did not respond favourably to reports of plans to expand beyond this scope. </p>

<p class="wp-block-paragraph">On 8 June, the biggest airlines in Europe <a href="https://www.reuters.com/business/environment/airline-ceos-warn-eu-plan-expand-carbon-costs-will-raise-fares-2026-06-08/">urged</a> commission president Ursula von der Leyen not to extend the ETS to cover international flights, saying that it would raise ticket prices. </p>

<p class="wp-block-paragraph">A <a href="https://carbonmarketwatch.org/2026/06/22/expanding-eu-carbon-market-for-aviation-would-barely-affect-ticket-prices-study-finds-but-would-raise-billions-for-climate-action/">study</a> commissioned by <a href="https://carbonmarketwatch.org/">Carbon Market Watch</a> found that the ETS encompassing all flights departing from the EEA, not just those within it, would result in a “very small impact on ticket prices and passenger demand”.  </p>

<h3 class="wp-block-heading" id="auction-money">Auction money </h3>

<p class="wp-block-paragraph">Under the proposed changes, EU countries would need to funnel half of the money they receive from ETS auctions towards decarbonising sectors covered by the system. </p>

<p class="wp-block-paragraph">This would amount to more than €100bn in investment for decarbonisation before 2030, says the commission. </p>

<p class="wp-block-paragraph">Around three-quarters of the money generated by the ETS has been allocated to EU countries since 2013, the proposal notes.</p>

<p class="wp-block-paragraph">Since 2023, countries have been required to spend all of this money on climate and energy-related activities – at least on paper. </p>

<p class="wp-block-paragraph">But the proposal says the “transparency and effectiveness” of this mechanism has been “insufficient”. </p>

<p class="wp-block-paragraph">Currently, only around 5% of the ETS money “directly supports industrial decarbonisation in sectors such as steel, chemicals and fertilisers”, it adds. </p>

<p class="wp-block-paragraph">Going forward, the proposal says that 50% should be put towards actions aiding clean-energy plans, industrial decarbonisation and improved waste management, as some examples. </p>

<p class="wp-block-paragraph">A <a href="https://institutmontaigne.org/en/expressions/eu-ets-also-cornerstone-europes-emerging-industrial-policy">briefing</a> by thinktank <a href="https://institutmontaigne.org/en">Institut Montaigne</a> noted that the money generated within the system for EU countries to help finance the energy transition should be “at the heart” of ETS discussions, amid <a href="https://www.reuters.com/business/eu-leaders-clash-over-blocs-next-7-year-budget-seek-new-revenue-sources-2026-06-19/">budget</a> constraints in many EU countries at the moment. </p>

<h3 class="wp-block-heading" id="co2-removals">CO2 removals </h3>

<p class="wp-block-paragraph">The commission has proposed integrating permanent carbon removals into the ETS to “give additional flexibility” for certain sectors that struggle to decarbonise. This action was previously <a href="https://www.carbonbrief.org/qa-european-commissions-proposal-to-cut-eu-emissions-90-by-2040/">agreed</a> within the terms of the EU’s 2040 climate target.</p>

<p class="wp-block-paragraph">“Permanent” removals refer to direct air capture with carbon storage and similar measures, rather than temporary removals such as planting trees. </p>

<p class="wp-block-paragraph">The removals would be integrated into the system by increasing the allowance cap by an amount equivalent to the number of removals purchased. </p>

<p class="wp-block-paragraph">This will set up “additional emission space” for <a href="https://energyblog.ethz.ch/which-emissions-are-really-hard-to-abate/">hard-to-abate</a> sectors and also support the “scale-up of the carbon removals industry”, outlines the proposal. </p>

<p class="wp-block-paragraph">It also proposes that certain companies, such as shipping and aircraft operators, could compensate for their emissions with their own certified carbon removals. </p>

<p class="wp-block-paragraph">These emissions would not be permitted to “go beyond zero”, adds the proposal.</p>

<p class="wp-block-paragraph"><a href="https://caneurope.org/about/staff/">Sven Harmeling</a>, the head of climate at <a href="https://caneurope.org/">Climate Action Network (CAN) Europe</a>, says that adding carbon removals “would weaken the ETS impact, undermine the carbon price and create new loopholes for polluters instead of accelerating the transition away from fossil fuels”. </p>

<p class="wp-block-paragraph">The proposal “fails to ensure that only high-integrity removal technologies would be considered”, he adds in a statement. </p>

<p class="wp-block-paragraph">However, the director of the <a href="https://www.pik-potsdam.de/en">Potsdam Institute for Climate Impact Research</a>, <a href="https://www.pik-potsdam.de/members/edenh/homepage">Prof Ottmar Edenhofer</a>, describes the move as “an important step”, saying: </p>

<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="wp-block-paragraph">“For the first time, it creates a credible and long-term investment framework for carbon-removal technologies in Europe.”</p>

<h3 class="wp-block-heading" id="international-credits">International credits </h3>

<p class="wp-block-paragraph">The commission proposes that firms covered by the ETS could make use of “high-integrity” credits bought on the global carbon market from 2036 onwards. </p>

<p class="wp-block-paragraph">This relates to the EU’s 2040 climate target, in which up to <a href="https://climate.ec.europa.eu/eu-action/climate-strategies-targets/2040-climate-target_en">5%</a> of the 90% reduction in GHGs can come from global carbon credits. </p>

<p class="wp-block-paragraph"><a href="https://eu.bellona.org/employee/amelie-laurent/">Amélie Laurent</a>, a policy advisor in carbon accounting at the Bellona Foundation, says in a statement that these credits “should be in a strategic last resort reserve, not an excuse to avoid doing our homework”. </p>

<p class="wp-block-paragraph"><a href="https://www.ieta.org/team/aurora-daprile-team">Aurora D’Aprile</a>, the EU policy director at the <a href="https://www.ieta.org/">International Emissions Trading Association</a>, notes in a <a href="https://www.ieta.org/news/eu-ets-review-proposal-ietas-initial-comments">statement</a>: </p>

<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="wp-block-paragraph">“For international credits, early preparation on governance and procurement and greater certainty around a pilot from 2031, will be essential to establish a credible demand signal.” </p>

<h3 class="wp-block-heading" id="other-sectors-extended">Other sectors extended </h3>

<p class="wp-block-paragraph">The commission has outlined plans to expand the inclusion of the maritime sector in the ETS. </p>

<p class="wp-block-paragraph">Maritime accounts for around 4% of the EU’s total emissions. The new proposals for the sector include adding certain small ships of 400-5,000 tonnes to the system.</p>

<p class="wp-block-paragraph">The proposal also outlines plans to incorporate more waste incineration into the ETS on a gradual basis from 2031. </p>

<p class="wp-block-paragraph">Since 2024, some waste-burning companies have been required to monitor and report their emissions under the ETS. But they did not have to purchase credits. </p>

<p class="wp-block-paragraph">Now, the commission proposes introducing the sector on a gradual basis. </p>

<p class="wp-block-paragraph">Under the proposals, companies would require allowances for 25% of their emissions in 2031, 50% in 2032, 75% in 2033 and 100% from 2034 onwards. </p>

<h3 class="wp-block-heading" id="market-stability-reserve-review">Market stability reserve review </h3>

<p class="wp-block-paragraph">The <a href="https://www.carbonbrief.org/qa-will-reformed-eu-emissions-trading-system-raise-carbon-prices/#msreserve">market stability reserve</a> was added to the ETS in 2019 to help stabilise the flow of allowances. </p>

<p class="wp-block-paragraph">It acts like an overflow container holding extra allowances. If the number of allowances in the market falls below a certain threshold, more are brought out from the reserve to balance things out. </p>

<p class="wp-block-paragraph">Equally, if the market is flooded with too many allowances, depressing prices, then some are removed and put into the reserve. </p>

<p class="wp-block-paragraph">The commission has proposed a reform of the reserve, including changing the upper and lower limits for when allowances are released or removed. </p>

<p class="wp-block-paragraph">It wants to reduce the rate at which allowances are withdrawn from auctions when they exceed a certain threshold from 24% to 12% from 2028. </p>

<p class="wp-block-paragraph">This means that the permits would be able to stay in the market for longer. </p>

<p class="wp-block-paragraph">As shown in the chart below, the price of carbon in the EU increased <a href="https://www.nature.com/articles/s41560-024-01505-x">tenfold</a> over 2017-2021, exceeding €80 (£68) per tonne of CO2.  </p>

<figure class="wp-block-image size-large"><img alt="Carbon price in the EU ETS over 2012-26, in € per tonne of CO2. Credit: Carbon Brief, based on data from Energy Instrat and EEX" class="wp-image-78752" height="570" src="https://www.carbonbrief.org/wp-content/uploads/2026/07/EU_carbon_prices_increased_tenfold_between_2017_and_2021-1024x570.png" width="1024" /><figcaption class="wp-element-caption">Carbon price in the EU ETS over 2012-26, in € per tonne of CO2. Credit: Carbon Brief, based on data from Energy Instrat and EEX </figcaption></figure>

<p class="wp-block-paragraph">Nevertheless, the commission proposal says the reserve was “effective in mitigating price shocks” on the ETS caused by the Covid-19 pandemic and the surge in energy prices after <a href="https://www.carbonbrief.org/qa-what-does-russias-invasion-of-ukraine-mean-for-energy-and-climate-change/">Russia invaded Ukraine</a> in 2021. </p>

<p class="wp-block-paragraph">The EU and UK have <a href="https://www.reuters.com/sustainability/eu-uk-start-carbon-market-negotiations-next-week-2026-01-14/">agreed</a> in principle to link their carbon markets, but the commission’s proposal says negotiations are still “under progress”.</p>

<p class="wp-block-paragraph">It adds that the commission “foresees” future financial contributions from the UK to the EU’s ETS, if a final agreement is reached. </p>

<p class="wp-block-paragraph">Many companies have <a href="https://carbon-pulse.com/517598/">called</a> for the systems to be linked. In June, dozens of carbon-capture organisations and industry groups signed a <a href="https://www.ccsassociation.org/resources/ccsa-open-letter-on-the-linkage-of-eu-and-uk-ets/">letter</a> calling for greater certainty on EU-UK links to ensure cross-border carbon-capture and storage projects are covered, for example. </p>

<p class="wp-block-paragraph">Switzerland’s ETS has been <a href="https://www.consilium.europa.eu/en/press/press-releases/2019/12/09/linking-of-switzerland-to-the-eu-emissions-trading-system-entry-into-force-on-1-january-2020/">linked</a> to the EU since 2020. </p>

<h2 class="wp-block-heading" id="what-could-the-changes-mean-for-greenhouse-gas-emissions">What could the changes mean for greenhouse gas emissions? </h2>

<p class="wp-block-paragraph">The European Commission <a href="https://climate.ec.europa.eu/eu-action/carbon-markets/about-eu-ets_en">says</a> the ETS plays a “crucial role” in meeting its climate targets “cost-effectively”.</p>

<p class="wp-block-paragraph">Emissions in the sectors included in the ETS have halved since its launch in 2005, according to the <a href="https://climate.ec.europa.eu/news-other-reads/news/eu-emissions-trading-system-sustains-downward-trend-covered-emissions-2026-04-10_en">European Commission</a>. </p>

<p class="wp-block-paragraph">(Roughly three-quarters of this reduction has come from the power sector, according to Carbon Brief analysis of <a href="https://ets.bruegel.org/overview/emissions/decomposition?yearsRange=2005-2025">data compiled</a> by the thinktank <a href="https://www.bruegel.org/node/19">Bruegel</a>.)</p>

<p class="wp-block-paragraph">As highlighted in the chart below, the EU’s overall GHG emissions have dropped by 40% since 1990. </p>

<figure class="wp-block-image size-large"><img alt="Greenhouse gas emissions in the EU over 1990-2025 (solid line) and projections out to 2050 (dotted line). The red dots indicate climate targets for 2020, 2030, 2040 and 2050. Credit: Carbon Brief, based on data from the European Environment Agency" class="wp-image-78751" height="605" src="https://www.carbonbrief.org/wp-content/uploads/2026/07/EU_greenhouse_gas_emissions_have_dropped_by_40__since_1990-1024x605.png" width="1024" /><figcaption class="wp-element-caption">Greenhouse gas emissions in the EU over 1990-2025 (solid line) and projections out to 2050 (dotted line). The red dots indicate climate targets for 2020, 2030, 2040 and 2050. Credit: Carbon Brief, based on data from the European Environment Agency</figcaption></figure>

<p class="wp-block-paragraph">Climate commissioner Hoekstra told a press briefing that the proposal is “fully aligned” with the EU’s target to cut GHGs to 90% below 1990 levels by 2040. He called the plan “completely climate-law proof”.</p>

<p class="wp-block-paragraph">He also noted that no other EU policy has contributed to reducing emissions on the scale of the ETS, describing it as a “phenomenal asset”. </p>

<p class="wp-block-paragraph">But campaigners and experts are concerned that the proposed changes could slow decarbonisation and put the EU’s climate goals at risk. </p>

<p class="wp-block-paragraph"><a href="https://carbonmarketwatch.org/2026/07/17/commission-waters-down-flagship-climate-policy-to-appease-big-polluters/">Carbon Market Watch</a> says the plans would “severely weaken” the ETS and “risk undermining the achievement of the EU’s 2040 and 2050 climate targets”. </p>

<p class="wp-block-paragraph">The proposals “would represent a major setback for EU climate ambition, weakening incentives to cut emissions, extending reliance on fossil fuels and putting the 2040 climate target at risk”, says a statement from <a href="https://www.wwf.eu/?21178341/pr-ets-revision-july-2026">WWF</a>. </p>

<p class="wp-block-paragraph">WWF estimates that 2bn extra tonnes of CO2 would be emitted if the proposals were approved in the EU. </p>

<p class="wp-block-paragraph">This is similar to analysis by Ingmar Rentzhog, chief executive of the <a href="https://app.wedonthavetime.org/">We Don’t Have Time</a> platform and published in <a href="https://www.forbes.com/sites/we-dont-have-time/2026/07/19/eu-changes-carbon-market-rules-24-billion-tonnes-of-co2-at-stake/">Forbes</a>, which puts the figure at around 2.4bn tonnes by 2050. A figure of 2.4bn tonnes is also given in <a href="https://www.linkedin.com/pulse/proposed-ets-upgrade-first-assessment-benjamin-g%C3%B6rlach-5esmf/">analysis</a> by <a href="https://www.agora-energiewende.org/about-us/team/benjamin-goerlach">Benjamin Görlach</a>, the EU climate economics and finance lead at thinktank <a href="https://www.agora-energiewende.org/">Agora Energiewende</a>.</p>

<p class="wp-block-paragraph"><a href="https://www.europarl.europa.eu/meps/en/197449/MICHAEL_BLOSS/home">Michael Bloss</a>, a German member of the European parliament (MEP) for the European Greens, <a href="https://bsky.app/profile/michabloss.bsky.social/post/3mqu23bde6k2f">says</a> the plans would release around 1.4bn tonnes of extra CO2 [likely due to considering a shorter time period]. He describes the proposal as “climate vandalism”. </p>

<p class="wp-block-paragraph"><a href="https://caneurope.org/about/staff/">Chiara Martinelli</a>, the director of CAN Europe, says:</p>

<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="wp-block-paragraph">“Every extra tonne of CO2 allowed under the ETS makes Europe’s climate challenge harder and more expensive. Weakening the ETS now is a gift to polluters that have prioritised shareholder payouts instead of investing in cleaner production.”</p>

<h2 class="wp-block-heading" id="how-was-the-proposal-received">How was the proposal received? </h2>

<p class="wp-block-paragraph">The European Commission’s new ETS proposal has been met with a mixed response. </p>

<p class="wp-block-paragraph">Scholl from Epico says the proposal has “important flexibilities that can help address competitiveness challenges and provide greater certainty for industrial investment”. But she adds in a statement: </p>

<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="wp-block-paragraph">“Concerns remain about whether the proposed changes preserve the long-term investment signal of the ETS and sufficiently recognise companies that have already committed to ambitious decarbonisation pathways.”</p>
</blockquote>

<p class="wp-block-paragraph">Edenhofer from the Potsdam Institute for Climate Impact Research adds that the proposals provide “clarity on the contribution that emissions trading is intended to make towards the 2040 climate target”. </p>

<p class="wp-block-paragraph"><a href="https://www.e3g.org/people/elisa-giannelli/">Elisa Giannelli</a>, a programme lead at E3G, says in a statement: </p>

<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="wp-block-paragraph">“Today’s proposal might please some, but it risks increasing both the long-term cost and the time needed to deliver the EU’s growth strategy.”</p>
</blockquote>

<p class="wp-block-paragraph"><a href="https://www.e3g.org/people/pepe-escrig/">Pepe Escrig</a>, a senior researcher, also at E3G, adds that the commission held onto some of the ETS’ “essential foundation”, but “yielded to political pressure to weaken it as a quick fix to broader challenges”. </p>

<p class="wp-block-paragraph">This has left the plan “pull[ing] in two directions: strengthening support for industrial investment while weakening parts of the framework meant to drive it”, says Escrig. </p>

<p class="wp-block-paragraph"><a href="https://eu.bellona.org/employee/andrea-spignoli/">Andrea Spignoli</a>, the policy manager of sustainable markets at Bellona Europa, says the proposal risks “weakening green investments”.</p>

<p class="wp-block-paragraph">It also means “more efforts will be needed in other sectors…which come with their own political and economic challenges”, says Agora’s Görlach on <a href="https://www.linkedin.com/pulse/proposed-ets-upgrade-first-assessment-benjamin-g%C3%B6rlach-5esmf/">LinkedIn</a>. </p>

<p class="wp-block-paragraph"><a href="https://caneurope.org/about/staff/">Greg Van Elsen</a>, a senior industrial policy coordinator at CAN Europe, says in a statement:</p>

<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
<p class="wp-block-paragraph">“Free pollution permits were never meant to become a permanent subsidy. Extending them until 2038 rewards delay instead of industrial decarbonisation.”</p>
</blockquote>

<p class="wp-block-paragraph">Lobby groups also had mixed reactions to different aspects of the proposal. </p>

<p class="wp-block-paragraph">The <a href="https://www.iata.org/en/pressroom/2026-releases/07-17-statement-eu-commission-revision-emissions-trading-system/">International Air Transport Association</a> says it is “deeply frustrated” with the proposal. </p>

<p class="wp-block-paragraph">The organisation’s director general, <a href="https://www.iata.org/en/pressroom/dg-biography/">Willie Walsh</a>, claims the consequences will be “harmful”, “sowing acrimony over extraterritoriality, slowing global decarbonisation and sapping European competitiveness”. </p>

<p class="wp-block-paragraph"><a href="https://windeurope.org/news/europes-plan-to-double-down-on-electricity-will-require-a-more-robust-ets/">WindEurope</a> says the proposal risks “slowing decarbonisation and failing to channel billions in ETS revenues to industrial electrification”. </p>

<p class="wp-block-paragraph"><a href="https://www.businesseurope.eu/">BusinessEurope</a>’s director general, <a href="https://www.businesseurope.eu/team-member/markus-j-beyrer/">Markus J Beyrer</a>, <a href="https://www.businesseurope.eu/publications/ets-revision-key-issues-addressed-but-overall-impact-raises-concerns/">says</a> some aspects “raise concerns”. For example, he says the “new conditionalities for free allocations risk increasing bureaucratic complexity and the uncertain role for international carbon credits”. </p>

<p class="wp-block-paragraph">ETS2 is a separate emissions trading system to the main ETS. It is due to take effect in 2028 and is not affected by the current ETS review or resultant proposals. </p>

<p class="wp-block-paragraph">It will operate under a similar system as the existing ETS, covering emissions from transport, buildings and smaller industries in other sectors.</p>

<p class="wp-block-paragraph">One key difference, however, is that ETS2 will not provide any allowances for free. They will all be auctioned and bought by companies. </p>

<p class="wp-block-paragraph">On 15 July, 10 countries, including Italy and Poland, had <a href="https://www.reuters.com/business/energy/ten-countries-urge-eu-rethink-new-carbon-price-fuel-2026-07-15/">urged</a> the commission to also reconsider the ETS2 during this review. They were unsuccessful. </p>

<p class="wp-block-paragraph">Similar to the original ETS, the <a href="https://climate.ec.europa.eu/eu-action/carbon-markets/ets2-buildings-road-transport-and-additional-sectors_en">commission</a> believes the carbon price under the new ETS2 system will “provide a market incentive for investments in building renovations and low-emissions mobility”. </p>

<p class="wp-block-paragraph">However, in June, member-state governments and the European parliament agreed on a number of “<a href="https://climate.ec.europa.eu/news-other-reads/news/commission-welcomes-agreement-key-safeguards-new-emissions-trading-system-buildings-and-road-2026-06-11_en">safeguards</a>” to support price stability. </p>

<p class="wp-block-paragraph">For example, if allowance costs under the ETS2 exceed €45 per tonne of CO2, they <a href="https://www.consilium.europa.eu/en/press/press-releases/2026/06/11/ets2-market-stability-reserve-council-and-parliament-reach-provisional-agreement/">agreed</a> that 40m allowances will be put into the system from a reserve to normalise the supply – double the amount previously agreed.  </p>

<p class="wp-block-paragraph">A <a href="https://www.eea.europa.eu/en/analysis/publications/emissions-reduction-from-transport-in-europe-how-the-ets2-will-help-this-sector-meet-its-climate-targets">European Environment Agency</a> briefing said the ETS2 will “affect fuel prices and mobility costs” and that money will be syphoned into a social climate fund to “support vulnerable households and investments”. </p>

<h2 class="wp-block-heading" id="what-happens-next">What happens next? </h2>

<p class="wp-block-paragraph">EU countries will now negotiate over the terms of the commission’s proposal before it goes to a vote in the European parliament.</p>

<p class="wp-block-paragraph">Ireland, which recently took over the six-monthly rotating presidency of the Council of the EU, has stated that it wants the ETS proposals to be signed off by the <a href="https://carbon-pulse.com/526699/">end of this year</a>. </p>

<p class="wp-block-paragraph">A previous <a href="https://data.consilium.europa.eu/doc/document/ST-8473-2026-INIT/en/pdf">document</a> from the council, which represents member-state governments, outlined a target to agree a deal by the first quarter of 2027.</p>

<p class="wp-block-paragraph"><a href="https://www.cleanenergywire.org/factsheets/qa-what-will-future-eu-emissions-trading-look">Clean Energy Wire</a> says that this would be an “unusually ambitious timetable for one of the bloc’s most technically complex pieces of climate legislation”. </p>

<p class="wp-block-paragraph"><a href="https://www.politico.eu/article/ireland-prepares-eu-presidency-play-dealmaker-climate-change-fight-of-the-year/">Politico</a> notes that “months of arguing” is likely to occur.</p>

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<p>The post <a href="https://www.carbonbrief.org/qa-what-the-eus-carbon-market-review-means-for-climate-action">Q&A: What the EU’s carbon market review means for climate action</a> appeared first on <a href="https://www.carbonbrief.org">Carbon Brief</a>.</p>

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