The European Union has proposed an overhaul of its carbon trading scheme, easing the pace of emissions cuts for companies amid mounting pressure on industry across the bloc.
The EU Emissions Trading System (ETS) works as a cap-and-trade scheme: Companies in sectors such as energy, heavy industry, and aviation must buy tradable permits, called allowances, to cover their greenhouse gas emissions.
Firms that emit more than they’ve covered face a penalty of 100 euros ($114) per excess ton.
The European Commission proposed on July 17 a more gradual path to emissions cuts than previously planned.
It said the rate at which the EU shrinks the total number of available allowances each year would ease to 3.7 percent annually from 2031 to 2035, then to 1.7 percent from 2036 to 2040.
Under its previous benchmark, the EU had planned to cut its carbon allowances by 4.4 percent a year starting in 2028.
The proposal would also allow companies to use up to 2 percent of high-quality international carbon credits between 2036 and 2040.
The commission said the credits would finance emissions reduction projects outside the EU while giving European industry “breathing space” during the most difficult years of the transition.
Reform Push
The reform follows a push from a dozen EU countries.
Last month, a Polish-led coalition sent a joint letter to Brussels calling for the Modernisation Fund, which helps poorer member states upgrade their energy systems, to be extended and strengthened once its current funding period ends in 2030.
Bulgaria, Croatia, Czechia, Estonia, Greece, Hungary, Latvia, Lithuania, Romania, Slovakia, and Slovenia joined the call.
Poland, the fund’s largest beneficiary, said it has drawn more than 53.5 billion zloty ($14 billion) from it since 2020 to insulate homes, replace heating systems, and expand its power grid.
The commission’s new proposal confirms the fund will continue supporting those countries’ energy transitions.
New Investment
The commission also announced a major funding package to encourage corporate investment in cleaner production rather than delay decarbonization.
The proposal would create an Industrial Decarbonisation Bank with 100 billion euros ($114.2 billion) in funding to support industrial projects across Europe.
Before 2030, the commission plans to launch an ETS Investment Booster as the first phase of the bank.
The EU Innovation Fund would continue financing first-of-a-kind clean technology projects, while member states would be required to reinvest at least half of their national ETS revenues into emissions-reduction projects covered by the carbon market.
Taken together, those measures would provide more than 100 billion euros ($114.2 billion) in investments before 2030, EU officials said.
The commission also proposed slowing the phase-out of free allowances for sectors covered by the Carbon Border Adjustment Mechanism, extending the transition until 2038.
Separate benchmark reforms would increase free allocations to industry by about 6 billion euros ($6.8 billion) between 2026 and 2030.
Electrifying Homes, Factories
Alongside the ETS overhaul, the commission also unveiled an Electrification Action Plan to shift Europe from fossil fuels to clean electricity by 2040.
EU officials said that wider electrification could lower energy bills while reducing dependence on imported fossil fuels.
The commission acknowledged that electricity often costs about three times as much as natural gas in Europe and that consumers still face long waits for grid connections.
To address those barriers, the proposal would allow member states to reduce electricity network charges for some consumers and lower taxes for energy-intensive industries.
The commission also wants electricity to avoid being taxed more heavily than natural gas.
