EU reforms carbon market under pressure from industry

The European Union announced on Friday, July 17, 2026, that it would revise its long-standing Emissions Trading System (ETS), a cornerstone of its climate policy, amid growing pressure from industrial sectors within the bloc. The reform proposal, unveiled in Brussels, aims to ease the burden on businesses by extending the period during which companies can retain free carbon allowances and allowing the use of international carbon credits starting in 2036. These changes come after months of intense negotiations among member states, industry representatives, and environmental groups, reflecting a broader shift in the EU’s approach to balancing economic growth with climate action. The ETS, established in 2005, requires large emitters, such as power plants and factories, to purchase permits for each ton of CO₂ they release. These permits are auctioned, limited in number, and can be traded, creating a financial incentive for firms to reduce emissions. However, the system has faced criticism for being too rigid and costly for certain industries, particularly in countries like Italy and Poland, where energy-intensive sectors form a key part of the economy. In response, the European Commission has introduced several concessions designed to appease these concerns while maintaining the overarching goal of reducing greenhouse gas emissions. One of the key changes involves extending the timeframe during which companies can receive free carbon allowances. Previously, these allowances were available until 2034, but the new proposal allows them to be retained until 2038, provided companies commit to decarbonization initiatives. This extension is intended to provide greater flexibility for businesses transitioning to cleaner technologies. Additionally, starting in 2036, companies will be permitted to offset emissions by purchasing international carbon credits, which support decarbonization projects outside the EU. This measure is meant to encourage investment in global green infrastructure while still contributing to the EU’s emission reduction targets. The reform has sparked debate, especially regarding the inclusion of non-European flights and the waste sector in the ETS. Airlines have lobbied against expanding the scope of the system, arguing that it could increase costs and disrupt operations. As a result, the European Commission has proposed a phased approach, requiring only flights shorter than 5,000 kilometers to be included in the ETS. For instance, flights from Frankfurt to Dubai or Istanbul would be covered, but those to Tokyo would not. Private jets are also now subject to the system, marking a significant expansion in the regulatory reach of the ETS. At the same time, the EU is pushing member states to allocate revenue generated through the ETS towards decarbonizing industry, a move that has met mixed responses. While some countries have shown willingness to invest in green technology, others have expressed concern over the potential impact on local industries. The Commission has also outlined plans to gradually incorporate the waste sector into the ETS, offering exemptions to member states that meet specific recycling or taxation criteria. The timing of the reforms coincides with heightened geopolitical tensions and rising energy prices, driven by the ongoing conflict between the U.S. and Iran and severe heatwaves across Europe. These factors have intensified calls for a more pragmatic approach to climate policy, leading to a noticeable shift in the tone of the European Commission’s strategy under President Ursula von der Leyen’s second mandate. While the EU continues to emphasize its commitment to achieving a 46 percent share of clean electricity in final energy consumption by 2040, the recent reforms suggest a more balanced approach that takes into account both environmental and economic considerations.