The much-anticipated revision of the greenhouse gas Emissions Trading System (EU ETS or ‘ETS’) will be presented by the European Commission on Friday 17 July, the same day as its ‘Energy’ package, containing an action plan for electrification and a proposal on network charges.
This revision of the ETS system comes at a time when this decarbonisation financing instrument (see EUROPE 13901/5) is being criticised by a number of Member States and companies (see EUROPE 13883/6), but is also supported by a large number of countries, economic sectors and environmental organisations (see EUROPE 13827/2).
Climate targets and enabling conditions. The European Commission’s Directorate-General for Climate Action must therefore strike a balance between: - ensuring sufficient regulatory predictability so as not to discourage investment in decarbonisation; - and preserving climate ambition while offering regulatory and financial conditions allowing sectors covered by the ETS to contribute to the binding European emissions reduction targets (55% in 2030 compared with 1990, 90% in 2040 and climate neutrality in 2050).
A fundamental instrument of climate action. At present, greenhouse gas emissions from around 10,000 installations in the energy and industry sectors (chemicals, steel, etc.) are covered by the ETS system, as are those of operators in the aviation sector (only for intra-European flights) and the maritime sector (only since 2024). An ‘ETS2’ is also due to enter into force in 2028 to cover the buildings and road transport sectors. The 17 July revision does not concern the ‘ETS2’.
Since its introduction in 2005, the ETS has enabled a 50% reduction in greenhouse gas emissions in the sectors covered by it, according to figures used by the Commission.
Free allowances. The ETS provides for the granting of free emission allowances to certain sectors at risk of carbon leakage, that is to say a relocation of their production abroad because of the European carbon price. EU carbon allowances have traded this year at an average of between €77 and €79 per tonne of CO2.
Free allowances still accounted for more than 40% of total allocations in 2020, according to the European Court of Auditors. The best-performing installations receive 100% free allowances, unlike the least efficient ones, and the benchmarks change every five years.
According to figures used by the Commission, the ETS has generated €260 billion since 2013, while €250 billion has been allocated to industrial operators free of charge.
This allocation of free allowances was initially due to decrease gradually each year through a linear reduction factor (LRF), meaning an annual emissions cap, until these derogations are completely phased out in 2034. Between 2028 and 2030, this cap is expected to be reduced by 4.4%.
According to a senior European Union official, in its revision the Commission is expected “to continue with free allowances, but on condition of investing in the decarbonisation of the European economy”. The LRF could be 3% to 4.4% until 2035, according to this source. The Commission is said to be considering changing the rules so that there would still be free allowances in the 2040s.
The European institution is also said to be considering allocating around €4 billion in additional free allowances (that is, 50 million additional free allowances) to companies covered by the ETS between 2026 and 2030 (see EUROPE 13866/6, 13889/17). For the 2,000 installations subject to benchmark fallbacks, an additional €6 billion in free allowances could be made available by the Commission.
Market Stability Reserve. In the past, the Market Stability Reserve of the ETS was used to absorb surpluses of emission allowances. With the gradual reduction in emissions, the Commission expects to have to use the Market Stability Reserve to manage the shortage of carbon allowances. According to the senior EU official, this could result in allowances being reinjected into the market in the event of a sudden increase in the carbon price or a risk of price volatility. A first change to the Market Stability Reserve took place in April 2026 (see EUROPE 13841/1).
Use of ETS revenues. At present, around “75% of the system’s revenues are devoted to achieving climate and energy objectives”, according to the senior official. Yet only 5% of those revenues are used for industrial decarbonisation, or even 10% if compensation for indirect costs is included, he estimated.
As part of this revision, the Commission is seeking to ensure that revenues from the ETS system are better redirected towards investment in the sectors covered by it.
Links between the ETS and the CBAM. The business sectors covered by the EU Carbon Border Adjustment Mechanism (CBAM), such as cement, steel, fertilisers and electricity, have expressed concerns about the risks of carbon leakage.
For these sectors, an extension of the transition period, and therefore of the gradual removal of free allowances, is being considered by the Commission, again according to this senior official. It should follow the same timetable as the ETS, if the principle that these two mechanisms are complementary is to be believed.
CORSIA or ETS – aviation’s dilemma. Aviation operators have called for the ETS not to be extended to extra-EEA flights, as was initially planned, because they fear for the competitiveness of European aviation (see EUROPE 13883/6). The Commission is therefore said to be considering that extra-EEA flights should instead be covered by the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), a less ambitious but also less costly programme (between €16 and €20 per tonne of CO2).
The decision could depend on the attitude of China and the United States towards this voluntary international system, which will become mandatory from 2027, in order to protect European operators from unfair competition.
International carbon credits purchased by the Commission. The European Commission is said to be considering purchasing carbon credits on international markets starting in 2036, according to the senior EU official. This is a suggestion notably put forward by the German delegation of the EPP group a few days ago (see EUROPE 13899/12).
However, according to this source, the integration of international credits (permitted under Article 6 of the Paris Agreement) into the ETS is ruled out by the Commission. This means that installations covered by the ETS could not choose to buy international carbon credits, which are often less costly, in order not to pay for their carbon emissions.
Lastly, it should be possible to integrate carbon capture and storage (CCS) into the ETS. This means that, in order to avoid paying for their CO2 emissions, companies could make use of these atmospheric carbon removal technologies to offset their emissions. (Original version in French by Nadège Delépine)