The European Commission has unveiled a comprehensive review of the EU Emissions Trading System (ETS), proposing significant changes aimed at balancing industrial competitiveness with the EU’s long-term climate objectives. 

Key Proposed Changes 

• Slower Emissions Reduction Pathway: The proposal reduces the annual Linear Reduction Factor (LRF) from the current 4.3–4.4% to 3.7% (2031–2035) and 1.7% from 2036 onwards, easing the pace of emissions cap reductions while remaining aligned with the EU’s 2040 and 2050 climate goals. 

• Extended Free Allowances: Free ETS allowances for sectors covered by the Carbon Border Adjustment Mechanism (CBAM) would be phased out more gradually, with the transition extended until 2038 to provide additional support for energy-intensive industries. 

• Integration of Carbon Removals: The Commission proposes integrating 250 million tonnes of certified permanent domestic carbon removals into the ETS, helping create additional allowance flexibility while stimulating the carbon removal market. 

• Boosting Industrial Decarbonization: The proposal introduces several investment measures, including: 

• Requiring Member States to allocate 50% of national ETS revenues to industrial decarbonization. 

• Establishing a €100 billion Industrial Decarbonisation Bank (IDB) to finance clean technologies. 

• Launching an ETS Investment Booster, providing an estimated €30 billion to reward early decarbonization investments. 

• Making future free allowance allocations conditional on companies investing an amount equivalent to 100% of the value of their free allocations in EU decarbonization projects. 

• Expanded ETS Coverage: The review also proposes extending the ETS to additional aviation routes, smaller maritime vessels, and the waste incineration sector, while increasing support for sustainable aviation fuels, maritime fuels, hydrogen, and other clean technologies. 

What Happens Next? 

The proposals will now be reviewed by the European Parliament and the Council of the European Union, where they will undergo negotiations before any amendments can be formally adopted.