EU to ease ETS to give industry more time

The revision may affect your expected emissions costs, available free allowances and investment planning. The plans appear to give industry more scope, while maintaining the need to become more sustainable. The Commission is linking additional flexibility to conditions and to more targeted financing for industrial sustainability.

It is therefore advisable to consider both the short-term cost structure of your CO₂ emissions and available courses of action, as well as the opportunities. It is important to identify the most cost-effective route to decarbonisation. In any event, map out the following:

• what is the current industrial CO₂ emissions level for each process;

• whether investments in electrification, efficiency, CO₂ capture and storage or other reduction technologies become more attractive as a result of the proposals (and, in time, the final measures);

• which data, plans or investment commitments may be required to become or remain eligible for free allowances, support or improved benchmarking;

• how many emission allowances your organisation will need under the various scenarios in the periods before and after 2030;

• what are the cost scenarios (and potential proceeds) for the free allowances allocated, the allowances to be purchased and the allowances that can be sold?

Please note that the proposals are not yet final and that the definitive measures still need to be negotiated.

How does the EU ETS work?

The EU ETS sets a cap on the total CO₂ emissions of the sectors covered by the system. This cap corresponds to a maximum number of emission allowances, with one allowance representing one tonne of emissions. The allowances, known as EUAs, are tradable. Allowances that are auctioned. The auctioning generates revenue for the EU and Member States. Because of the cap and the fixed percentage by which the remaining quantity of allowances decreases (known as the linear reduction factor or LRF) the total number of available allowances falls each year. Increasing scarcity encourages investment in CO₂-efficient alternatives.

The CBAM, which is not covered by this review, ensures that the CO₂ emissions released during the production of certain products from outside the EU are also priced.

Businesses

Businesses covered by the system must surrender allowances for their emissions. Certain industries receive some of their allowances free of charge. Free allowances limit operating costs for fossil energy-intensive sectors within the EU ETS. This helps these businesses remain competitive with companies outside the EU that do not bear CO₂ costs.

Revision

The European Commission’s revision proposals focus on European competitiveness and the impact of high energy prices in the period after 2030.

Main proposals for the ETS revision:

Free allowances available for longer: the free allocation for companies will continue beyond 2030 and will be more closely linked to investments in decarbonising Europe's economy.  

Slower phasing out of allowances: the linear reduction factor (LRF) will be 3.7 percent for 2031-2035 and 1.7 percent for 2036-2040, making the trajectory more gradual and more in line with the domestic climate ambition level.  

Targeted spending of ETS revenues: member States will have to spend 50 percent of their national ETS revenues on investments to make ETS sectors CO₂-free.  

Industrial Decarbonisation Bank: The IDB will receive EUR 100 billion in funding to decarbonise industry across Europe on a massive scale, with the ETS Investment Booster for 2030 being launched as the first phase of the IDB 

Benchmark adaptation: a separate proposal on benchmarks aims to increase the free allocation to industry worth EUR 6 billion for the period 2026-2030. For sectors covered by the CBAM, the reduction in free allocation will be delayed and the phase-out will be extended until 2038. 

Permanent carbon removal: integration of permanent carbon removals into the EU ETS. This aims to provide additional flexibility to the hard-to-abate sectors while supporting the scale-up of these technologies. 

International carbon credits: international carbon credits can be used up to a maximum of 2 percent in the period 2036-2040. This will make it possible to finance decarbonisation projects outside the EU and provide more scope for action in the period 2036-2040, when emission reductions in Europe will become more challenging.

Aviation, maritime transport and waste incineration: the proposal strengthens the EU ETS for aviation and maritime transport and adds further forms of waste incineration.

• Incineration of municipal waste: it is proposed to extend the current scope of the EU ETS for waste incineration so that it covers all installations for the incineration and co-incineration of non- hazardous waste.
• Aviation: the proposal aims to apply the EU ETS appropriately to flights departing for the Union’s direct neighbours.

A larger reserve for price stability: the Commission proposes reforming the Market Stability Reserve (MSR) to further strengthen market stability and investment predictability, maintain liquidity and reduce excessive price volatility. This complements the Commission’s April proposal to end the automatic cancellation of allowances in this reserve.

In addition to the ETS revision, the Commission is presenting an action plan to accelerate the electrification of the European economy. Although this is a separate initiative, there is a clear substantive link with the revision of the ETS. The ETS increases the cost of fossil emissions, while the electrification plan is intended to reduce barriers to switching to electricity. 

The Electrification Action Plan consists of several proposals to narrow the price gap between the cost of electricity and fossil energy and aims to encourage the use of cleaner, electricity-based technologies such as heat pumps, electric vehicles and batteries across Europe.

Energy taxation

The Commission notes that electricity is taxed more heavily than gas in many Member States, which may make electrification less attractive. The Commission is therefore introducing various initiatives to narrow the cost gap between electricity and gas. For example, the Commission proposes that Member States should adopt, as a principle, that the rate for electricity should not be higher than the rate for gas.

Energy taxes are largely designed at national level. A European initiative therefore does not automatically lead to changes in Dutch energy tax.   

VAT, car taxes and tax depreciation for sustainability technologies

In April, the Commission had already made suggestions for Member States, such as a 6% VAT rate for heat pumps, solar panels and solar boilers. This was part of the AccelerateEU approach. Member States are now again encouraged to make use of the options already included in the VAT Directive to support electrification. This can be done by applying reduced VAT rates to electrification technologies, such as heat pumps, solar panels and home batteries, and by offering lower registration taxes for electric vehicles, shorter depreciation periods or tax incentives for business battery electric vehicles (BEVs).

As part of the Circular VAT initiative, announced in the Clean Industrial Deal, the European Commission will present an EU framework enabling Member States to promote the electrification of company car fleets.

Timeline

The publication of the Commission proposal for the ETS revision on 17 July 2026 marks the start of the European legislative process. On 23 and 24 July, environment ministers are expected to exchange views on the proposal for the first time. From September, substantive consideration will begin in the European Parliament, and various Council configurations will discuss the implications for climate, industry and competitiveness.

In November and December 2026, negotiations on the ETS revision and the broader climate framework for the period after 2030 will continue. Meetings of the European Council and the Environment Council may help shape the position of the Member States. The European Parliament is expected to adopt its negotiating position in early 2027. The Parliament, the Council and the Commission will then negotiate the final legislation in trilogues.

As regards the Electrification Action Plan, the aim is to reach agreement in the first half of 2027.