Commission Caves to Industrial Laggards, Weakening EU Carbon Market

The European Commission today tabled its revision of the EU Emissions Trading System (ETS), the cornerstone of Europe’s climate policy that is designed to make polluters pay and drive industrial decarbonisation.

European Environmental Bureau

Rather than reinforcing this critical investment signal at a time of fossil fuel volatility, the proposal weakens key provisions, rewarding polluters while undermining businesses investing in fossil-free production, the EEB warned.

The European Environmental Bureau (EEB) is Europe's largest network of environmental civil society organisations. 

The ETS has cut emissions from covered sectors by around 50% since its introduction but is only now beginning to drive meaningful industrial transformation.

Today’s proposal risks weakening the very mechanism that is starting to shift markets, introducing new flexibilities that reduce the pressure on high emitters and weaken incentives for industry to move towards cleaner processes. 

Duncan Woods, Senior Policy Officer for Industrial Decarbonisation, said: 

"The ETS is not just about making polluters pay. It is Europe’s engine for industrial renewal. At a time when the global race for clean industry is accelerating, weakening the carbon market means weakening Europe’s competitive edge. Instead of backing the companies leading that transition, the Commission has bent over backwards to accommodate industrial laggards that have long used the ETS as a scapegoat for decades of underinvestment. A weaker carbon price penalises investment in fossil-free production and risks locking Europe into 19th-century industrial processes while prolonging our dependence on fossil fuel imports.” 

 Among the most concerning changes are: 

• A weaker emissions cap, with the proposed Linear Reduction Factor (LRF) reduced from the previously envisaged 4.4% to 3.7% for 2031-2035 and just 1.7% for 2036-2040, allowing hundreds of millions of tonnes of additional emissions from ETS sectors.  
• More free allowances for industrial emitters until 2038, slowing the phase-in of the Carbon Border Adjustment Mechanism (CBAM), an instrument specifically designed to discourage emission-intensive imports. 
• Weak conditionality for additional free allocation, allowing companies to continue receiving a de facto subsidy for emissions without making meaningful investments in industrial decarbonisation. 
• International credits through the backdoor, passing the buck to reduce emissions outside of Europe. These credits for overseas emissions reductions, which often lack environmental integrity, would be "indirectly” integrated into the ETS from 2036 under the Commission’s proposal. 
• Risk of chronic oversupply, as well as scrapping the invalidation clause, the Commission has indicated the intake rate of the Market Stability Reserve (MSR) will be slashed from 24% to 12%, reducing the rate at which excess allowances are removed from the market.

In the buildup to this proposal, we have seen a clear split between progressive industry who are investing in low-carbon solutions and laggards who wish to maintain the status quo and avoid climate accountability. Unfortunately, the Commission has bowed to pressure from the latter by weakening the ambition of the ETS in several key areas. 

The proposal also creates broader challenges for the EU’s climate targets. Any additional emissions allowed under the ETS will need to be offset by deeper cuts elsewhere in the economy, shifting the burden away from heavy industry and onto sectors that have a more direct impact on households and citizens. 

At the same time, the EEB welcomed proposals to broaden the scope of the ETS to include international aviation and waste incineration. Bringing waste incineration into the EU carbon market is a long-overdue step towards cutting emissions from the sector and supporting Europe’s transition towards a circular economy.

The Commission’s proposal will now enter negotiations with the European Parliament and Member States.