The European Commission has unveiled a controversial revision of its flagship climate policy, the Emissions Trading System (ETS), which critics argue could slow the pace of greenhouse gas reductions across the continent. Since its launch in 2005, the ETS has generated over €270 billion in revenue, funding innovation, industrial decarbonisation, and energy modernisation. It has helped cut emissions by 50 percent in covered sectors. But on 17 July, the Commission argued that the "geopolitical and economic context" has shifted, putting European industry under "increased pressure." As a result, it proposes relaxing rules to give businesses more time to reduce their carbon output.
How the ETS Works and What's Changing
The ETS requires power plants and industrial facilities across the EU to purchase a permit for every tonne of CO₂ they emit, creating a financial incentive to shift to cleaner technologies. Companies can trade permits, and some receive them free of charge to stay competitive against foreign firms that do not face carbon costs. The total number of permits is capped annually to ensure emissions decline.
Under the new proposals, free permits would be extended until 2038, instead of being phased out in 2034 as previously planned. The original schedule would have replaced free allowances with a carbon border adjustment mechanism on imports. The Commission also proposes offering 80 percent of free permits upfront to companies with approved decarbonisation plans, with the remaining 20 percent delivered only after investments are made.
"The EU ETS has proven that carbon pricing works," said Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth. "It has cut emissions, strengthened Europe’s energy security and mobilised investment across our economy. This proposal brings together three key goals: climate action, competitiveness, and independence."
Critics Call It a 'Trojan Horse'
Climate experts have reacted sharply. Linda Kalcker, executive director of the pan-European think tank Strategic Perspectives, described the reform as a "Trojan horse." She said: "It looks like a gift for companies to delay their emission reductions while in reality this puts them at a competitive disadvantage with Chinese companies that accelerate. One more time, political pressure trumps economic and market realities." Kalcker warned that reaching the EU's 2040 target—a 90 percent reduction in net greenhouse gas emissions compared to 1990 levels—could become "unnecessarily expensive" and risk undermining innovation investments.
Chiara Martinelli, director of Climate Action Network (CAN) Europe, argued that every extra tonne of CO₂ allowed under the ETS makes Europe's climate challenge "harder and more expensive." She added: "Weakening the ETS now is a gift to polluters that have prioritised shareholder payouts instead of investing in cleaner production at the expense of citizens, future generations and those companies which already invested in climate-friendly solutions."
The NGO Mission Possible Partnership (MPP) criticised the conditionality, saying it is "the wrong way around" and should be more closely tied to real investments rather than approved plans. The debate echoes concerns raised in earlier calls by the European People's Party to extend free permits for heavy industry.
Aviation: A Half-Hearted Step
One notable change is the inclusion of carbon pricing on flights departing the EU for the first time. However, the measure will not take effect until 2029 and applies only to flights within a 5,000-kilometre radius. A flight from Paris to Dubai would be covered, but one from Paris to New York would not. Transport & Environment (T&E) calculates that 47 percent of European aviation remains exempt from carbon pricing, calling the move a "first step" at best. If all departing flights were included, the EU could have raised an estimated €4.2 billion in additional revenue.
"Due to industry pressure, only a proportion of journeys will be covered and the longest, most polluting flights will remain exempt," said Diane Vitry of T&E. "This must only be a starting point. The ball is now in the member states’ court. They must, at the very least, support this commitment while pushing to gradually expand the coverage before the next review. Aviation must pay for all its emissions, just like any other sector of the economy."
The Commission's proposal also touches on maritime shipping, encouraging investment in green e-fuels and battery-powered vessels. But the overall direction has left many wondering whether the EU is backtracking on its climate leadership. As member states and the European Parliament begin negotiations, the outcome will determine whether the ETS remains a driver of decarbonisation or becomes a brake on it. For more on related developments, see our coverage of the aviation carbon market expansion and Portugal's call for a pause on allowance cuts.
