Key Takeaways:
The European Commission proposed slowing its carbon market's cap decline, creating room for roughly 2.4 billion additional emission allowances and extending the timeline for fossil pollution in Europe's core industries by a decade.
The European Commission on Friday proposed relaxing its Emissions Trading System by lowering the annual cap reduction rate to 3.7% from 2031 and 1.7% from 2036, down from the current 4.3%, in a move that creates room for roughly 2.4 billion additional allowances over the system's lifetime, according to an independent analysis by Forbes. The proposal would also halve the rate at which the Market Stability Reserve absorbs surplus allowances to 12% from 24%, keeping more permits available for industry to purchase. The changes, which require approval from EU member states and the European Parliament, represent the most significant overhaul of the world's largest carbon market since its 2005 inception.
"The trajectory is fully in line with the EU's 2040 climate goals," Wopke Hoekstra, the EU's climate commissioner, said in a statement. "Free allocation does not mean free cash — 100% of the free allowances will need to be invested in Europe in decarbonisation."
The Commission's own impact assessment projects the revised trajectory will produce 911 million tonnes more cumulative emissions by 2040 than under current law, while the full lifetime allowance gap reaches approximately 2.4 billion tonnes — equivalent to more than half a year of the entire European Union's emissions. The carbon price currently stands at about 79 euros per tonne, down from peaks above 100 euros in early 2023. Free allowances for heavy industry, originally scheduled to end in 2034, will now continue until 2038, with the phase-in of the Carbon Border Adjustment Mechanism delayed correspondingly. The proposal also integrates 250 million tonnes of permanent domestic carbon removals and allows up to 2% international credits from 2036.
The stakes extend beyond carbon markets to Europe's clean industrial strategy. Green steel projects in northern Sweden, including Stegra's 11 billion euro hydrogen-based plant in Boden and SSAB's new facility in Lulea, were built on the assumption that the ETS cap would tighten on a fixed schedule, making fossil-based steel progressively more expensive until allowances ran out around 2040. Sweden's Prime Minister Ulf Kristersson called the proposal "unfair to Swedish companies that have been at the forefront" of the transition. The Commission countered with a 100 billion euro Industrial Decarbonisation Bank and a 30 billion euro ETS Investment Booster available before 2030, alongside a requirement that member states spend 50% of national ETS revenues on industrial decarbonisation.
Aviation and Maritime Expansion
The proposal extends carbon pricing to new sectors for the first time. International flights departing the EU to destinations within 5,000 kilometers will be covered from 2029, though flights to New York and other long-haul destinations remain exempt — leaving 47% of European aviation outside the carbon market, according to Transport & Environment. Private jets will face carbon pricing on all departures and arrivals. The maritime sector sees the threshold lowered to 400 gross tonnage from 5,000, bringing smaller ships into the system, while municipal waste incineration will be phased in gradually from 2031 to 2034.
What's at Stake
The proposal lands at a moment when Europe's climate credibility faces twin tests. Earlier this month, the EU Council agreed that companies expanding oil and gas production can qualify for a "transition" investment label under the Sustainable Finance Disclosure Regulation, provided a fifth of their spending is green. Together, the two decisions risk unsettling the early movers who bet on Europe's policy promises. Negotiations with member states and the European Parliament begin Monday and are expected to take up to a year, with Sweden, Finland and Spain expected to push for a tighter trajectory.
This article is for informational purposes only and does not constitute investment advice.
