EU to Slow CO2 Reductions and Expand Free Permits in Carbon Market Reform
Overview of Proposed Reforms to the EU Emissions Trading System (ETS)
Background: The EU ETS and Its Role in Climate Policy
BRUSSELS, July 8 (Reuters) – According to a European Commission official, the EU may extend the period during which industries can emit CO2 and increase the allocation of free carbon permits as part of a planned flexibility overhaul of its emissions trading system.
• The EU ETS serves as the primary EU climate policy, requiring power plants, industrial facilities, shipping companies, and airlines to purchase emission permits for each ton of CO2 released, thereby creating a financial incentive to reduce pollution.
Details of the Upcoming ETS Overhaul
• The revision seeks to align the ETS with the bloc’s recently adopted goal of reducing overall EU emissions by 90 % by 2040, while addressing concerns from certain member states that the scheme could undermine the competitiveness of European industry.
• The Commission plans to propose an overhaul of the ETS on July 17.
• The Commission intends to extend the ETS, allowing companies to continue emitting beyond the current 2039 cutoff, thereby entering the 2040s, according to the official, who requested anonymity as the proposals remain tentative.
• The proposal also foresees granting additional free CO2 permits to industry, thereby lowering their ETS costs, contingent on their investment in European decarbonisation initiatives, the official noted.
• It also contemplates extending the provision of free emission permits to sectors covered by the EU’s carbon border adjustment mechanism, a practice that the Commission had previously indicated would need to cease once the levy is fully implemented in 2034.
• It will also suggest accelerated adjustments to the allocation framework that determines the number of free permits granted to industries based on their heat output and fuel consumption.
• This approach could provide an additional €6 billion (approximately $6.85 billion) in free permits to affected firms, the official indicated.
Adjustment of the Linear Reduction Factor
• Additional changes propose a reduction in the “linear reduction factor,” which governs the annual rate at which ETS participants must cut emissions; the current rate of 4.3 % per year may be lowered.
Enhanced Investment Obligations for Member States
• The proposal also mandates that national governments allocate a larger share of ETS revenue toward investments in high‑emitting industries that bear carbon costs, the official said.
Future Steps and Ongoing Discussions
• These proposals are under development within the European Commission and may yet be modified. Upon publication, they will require negotiation and approval by both the European Parliament and the member states, a process expected to span several months.
• A key unresolved issue is the integration timeline and methodology for international carbon offset credits into the ETS, the official added.
• Brussels also intends to extend a fund that channels ETS revenues to assist poorer EU member states in transitioning to clean energy—a priority for countries such as Poland.
