EU emissions trading reform eases pace of cuts while adding price cap and stricter decarbonisation conditions
Brussels unveils a revised EU emissions trading reform that slows the pace of allowance reductions, introduces a price cap mechanism and ties free permits to mandatory decarbonisation plans.
The European Commission on Friday proposed a recalibration of the EU emissions trading reform that would slow the retreat of allowances in the Emissions Trading System (ETS1), introduce a market price ceiling and require firms to invest the value of free permits into decarbonisation projects. The package also broadens ETS1’s scope, adjusts the linear reduction path from 2031 onward and includes measures to support poorer member states and industry transition. The reforms are proposals that must still be approved by the European Parliament and the Council before becoming law.
Commission proposes slower cuts to ETS allowances
The Commission recommends reducing the annual linear reduction factor from previously planned rates to a series of lower cuts after 2030. From 2031 the proposal lowers the reduction rate to about 3.7 percent, with a further step down to roughly 1.7 percent by 2036, extending the emission-reduction trajectory into the mid-2040s. That change follows an adjustment last year which loosened the EU’s 2040 target from a 90 percent to an 85 percent reduction relative to 1990 levels.
These adjustments stretch the timetable for certificate scarcity and are intended to moderate cost pressure on energy-intensive sectors while keeping the overall goal of deep decarbonisation on the table. Industry backers argue the slower pace gives firms more time to deploy green technologies amid current capacity and infrastructure constraints.
New price cap and market-stability reserve changes
The reform introduces a new price-cap mechanism by repurposing the existing Market Stability Reserve (MSR) to act in both directions. Instead of only absorbing surplus allowances to prevent price collapses, the MSR would also release certificates back into the market from a growing buffer when supply becomes tight.
The Commission already halted automatic cancellation of excess allowances in April to build this buffer. The proposed rule would see the threshold for releases decline by four percent each year, creating a controlled supply cushion aimed at limiting extreme price spikes that can destabilise industrial planning.
Free allowances tied to mandatory decarbonisation plans
A central plank of the proposal links the allocation of free allowances to binding investment commitments. Firms would have to present multi-year decarbonisation roadmaps and demonstrate that the monetary equivalent of their free permits is channeled into verified emission-reduction projects.
Under the new approach companies would receive 80 percent of free allocations upfront and the remaining 20 percent after implementing their plans. Firms that relocate production outside the EU would be required to repay the support, a safeguard designed to reduce the risk of carbon leakage.
Scope expansion and recognition of negative emissions
ETS1 would be extended to include emissions from municipal waste combustion, smaller vessels and flights that depart the EU and land in neighboring non-EU countries. At the same time the Commission proposes to formally recognise permanent carbon removal technologies under the system.
Direct air capture with storage (DACCS) and bioenergy with carbon capture and storage (BECCS) would be eligible within ETS1 so that firms permanently removing CO₂ would not need to surrender equivalent allowances. The inclusion is intended to create a market for negative emissions, which policymakers view as a component of long-term climate neutrality strategies.
Funding boosts and support for less wealthy member states
Brussels proposes a series of financial measures to accompany regulatory relief. An “investment booster” equipped with 400 million allowances is intended to mobilise immediate finance, while from 2031 a planned Industry Decarbonisation Bank would target some €100 billion for industrial transitions. Poorer EU members, such as Poland, would gain extended access to the Modernisation Fund.
Member states would also face new expectations: the Commission wants at least half of ETS1 auction revenues to be invested directly in decarbonising industry, a sharp rise from current estimates that only about five percent is spent on industry-focused measures.
Industry response and political divisions in the EU
The package is aimed at easing near-term cost pressures for sectors such as chemicals, cement and steel, where companies invested earlier based on expectations of tighter allowance scarcity. To compensate early movers, the Commission proposes that the top decile of best-performing firms retain free allowances without additional conditions.
Nonetheless the reform has prompted resistance among several member states that fear it dilutes climate ambition. Sweden, Finland, the Netherlands and France have signalled opposition, stressing that weaker allowance cuts risk undermining long-term emissions targets. Final adoption is uncertain: the Commission wants a political decision on benchmarks before the end of the year and aims to conclude the reform in the first quarter of 2027.
The proposals now enter negotiations in the European Parliament and the Council, where amendments remain possible and timelines will be debated. Lawmakers will weigh industrial competitiveness, fiscal allocations and consistency with the EU’s longer-term climate objectives as they consider whether to approve, alter or reject the package.
