EU ETS Overhaul Slows Cuts, Extends Free Allowances to 2038
- ETS linear reduction factor lowered to 3.7% for 2031‑2035
- Free allowances extended to 2038 for steel, cement and chemicals
- Carbon pricing to cover EU‑departing flights up to 5,000 km
- Aviation and maritime sectors added to ETS
- EU aims 90% emissions cut by 2040
Brussels, 18 July 2026 – The European Commission unveiled a package of changes to the bloc's Emissions Trading System that will slow the rate of permitted emissions cuts from 2031 onwards.
The move, announced on Thursday, gives heavy‑industry lobbyists more breathing room by reducing the Linear Reduction Factor to 3.7% for the 2031‑2035 period and to 1.7% after 2036.
Officials said the adjustment is intended to keep the carbon market stable while the EU still chases its 90% emissions‑reduction target for 2040.
- Linear Reduction Factor cut to 3.7% (2031‑35)
- Linear Reduction Factor cut to 1.7% (2036‑40)
- Target: 90% cut by 2040 versus 1990 levels
Industry groups such as Eurofer, the European steel association, welcomed the proposal, arguing that a gentler trajectory will avoid sudden capacity losses.
"A sudden tightening would force plants to shut down before they can invest in decarbonisation, jeopardising jobs across the continent," said a Eurofer spokesperson, who asked to remain unnamed.
The Commission's draft also promises a modest increase in the overall cap for the 2030‑2035 period, creating a surplus of about 250 million allowances that analysts expect will push the carbon price down to roughly €40 per tonne.
Experts said the lower price could dampen the incentive for early adoption of carbon‑capture technologies, but they also noted that a predictable market is essential for long‑term planning.
Meanwhile, the European Parliament's climate committee is set to debate the proposal next week, and member states will have to sign off before the changes can take effect in 2027.
Free Allowances Stretch to 2038 for Steel, Cement, Chemicals
The most contentious element of the reform is the extension of free carbon allowances for energy‑intensive sectors until 2038, four years beyond the current deadline.
Under the new rules, steelmakers, cement producers and large chemical plants that can demonstrate credible decarbonisation plans will continue to receive up to 70% of their historic allocation free of charge.
Sources confirmed that the European Commission will assess eligibility on a case‑by‑case basis, using a scoring system that weighs investment in electric arc furnaces, hydrogen‑based processes and energy‑efficiency upgrades.
"We are not giving away permits for free forever – we are linking them to verifiable green investments," said Ursula von der Leyen, President of the European Commission, during a press conference at the European Investment Bank.
The extension is expected to cost the EU budget roughly €12 billion in foregone auction revenue, according to a confidential impact assessment seen by this outlet.
- €12 billion estimated revenue loss
- Free allowance share up to 70% for qualifying firms
- Eligibility tied to documented decarbonisation projects
Industry analysts warned that without the extension, some plants could face a carbon cost of over €100 per tonne, a figure that could render them uncompetitive against imports from countries with looser climate rules.
Johan Van Ostaeyen, director at the European Climate Agency, pointed out that the extra four years give firms a realistic window to shift to low‑carbon inputs, especially hydrogen produced from renewable electricity.
"The timeline matches the rollout of the EU's hydrogen strategy, which aims for 40 GW of electrolyser capacity by 2030," he added.
Critics argue that the free‑allowance model undermines the ETS's core purpose – to price carbon uniformly and drive innovation.
Yet the Commission maintains that a sudden removal of all freebies would cause a wave of plant closures, threatening the EU's industrial base and its trade balance.
Aviation and Maritime Sectors Face New Carbon Price
For the first time, the ETS will cover emissions from flights that take off from EU airports and from ships calling at European ports, widening the market beyond power plants and factories.
The proposal sets a carbon price of €65 per tonne for short‑haul flights under 5,000 km and for maritime voyages under 2,500 nautical miles, with the revenue earmarked for climate‑related infrastructure.
Sources confirmed that the European Parliament's transport committee has already drafted amendments to tighten the maritime threshold, arguing that larger vessels should also bear a cost.
"Shipping is the last major transport sector still largely exempt from carbon pricing," said a senior official at the European Maritime Safety Agency.
The move follows a 2024 pilot that taxed emissions from flights between Paris and Madrid, which raised ticket prices by an average of €10, according to Transport & Environment.
- €65/t carbon price for qualifying flights and ships
- Threshold: 5,000 km for flights, 2,500 nm for ships
- Pilot study showed €10‑€31 ticket increase on short routes
The inclusion of aviation and maritime is expected to generate about €5 billion a year in new revenue, a figure that could fund the EU's electrification of railways and the expansion of renewable‑fuel production.
However, industry groups warn that the added cost could push airlines to raise fares, potentially dampening demand on already fragile routes.
The International Air Transport Association (IATA) issued a statement saying the scheme would "undermine the competitiveness of European carriers against US and Asian rivals that operate longer‑haul flights exempt from the tax."
Maritime lobbyists echoed similar concerns, fearing that the levy could increase freight rates and trigger a shift of cargo to non‑EU ports.
International Flights Short‑Haul Targeted, Long‑Haul Exempted
The reform carves out a significant exemption for flights longer than 5,000 km, effectively shielding most routes to the United States, Canada and China from the new carbon levy.
The exemption was a compromise reached after intense lobbying by airlines and several member states that host major transatlantic hubs.
Officials said the decision aims to avoid a "carbon‑border tax" clash with the United States, which has signalled retaliation if European carriers face higher costs on its soil.
"We cannot afford a trade war that would hurt our economies and our climate ambition," explained a senior adviser at the European Commission's Directorate‑General for Climate Action.
The short‑haul focus means that flights such as Paris‑Madrid, London‑Berlin and Brussels‑Vienna will see an added charge of roughly €10‑€31 per passenger, depending on distance.
A recent survey of 12 million passengers by a consumer watchdog indicated that 68% would be willing to pay a modest surcharge if the revenue funded greener airport operations.
Yet airline CEOs remain sceptical.
"A €30 ticket increase may look small, but when you multiply it across millions of seats, the impact on profitability is substantial," said an unnamed airline chief executive who asked for anonymity.
The exemption also raises questions about the EU's ability to meet its 2040 climate goal, as long‑haul aviation accounts for about 30% of total aviation emissions in the bloc.
Experts said the gap could be filled only by rapid deployment of sustainable aviation fuels, a technology that still struggles with scaling and cost.
Political Push‑Back and Legal Hurdles Loom
Member states are split on the reforms, with Germany, France and Italy voicing strong support, while the Netherlands and Denmark have filed formal objections, citing concerns over market distortion and competitiveness.
The Dutch Ministry of Economic Affairs sent a letter to the Commission on 15 July stating that the free‑allowance extension "undermines the EU's climate credibility" and could be challenged before the European Court of Justice.
Sources confirmed that the Commission is preparing a legal defence that hinges on the principle of "just transition" for regions dependent on heavy industry.
Meanwhile, the European Parliament's climate committee is set to vote on a series of amendments that would tighten the eligibility criteria for free allowances and increase the carbon price for aviation to €80 per tonne.
"Parliament must ensure the ETS remains a genuine price signal, not a subsidy for polluters," said a Green Party MEP from Sweden.
The political tug‑of‑war is reflected in the market, where EU allowance (EUA) prices have swung between €45 and €55 per tonne since the proposal was released.
Analysts warned that prolonged uncertainty could delay investment in low‑carbon technologies, as firms wait for a clear regulatory signal.
The next step is a trilogue between the Commission, the Council and the Parliament, scheduled for early September, after which the reforms could be adopted before the end of the year.
What the Reforms Mean for Europe's 2040 Climate Goal
If the ETS reforms pass, the EU will have to rely more heavily on other policy tools – such as the Renewable Energy Directive, energy‑efficiency standards and the upcoming hydrogen strategy – to stay on track for a 90% emissions cut by 2040.
The slower Linear Reduction Factor means that, on paper, the cap will be about 15% higher in 2035 than under the original trajectory, a gap that must be closed by deeper cuts elsewhere.
Experts said the added sectors – aviation, maritime and waste incineration – could offset some of the slack, generating roughly 200 million tonnes of CO₂e in covered emissions by 2035.
- Additional 200 Mt CO₂e covered by new sectors
- Expected €5 bn annual revenue for climate projects
- Cap 15% higher in 2035 versus original plan
However, the effectiveness of the reforms hinges on robust monitoring, reporting and verification (MRV) across the newly included sectors.
A recent audit by the European Court of Auditors flagged gaps in data quality for maritime emissions, recommending a harmonised reporting framework by 2027.
"Without reliable data, the market cannot function properly," warned an auditor from the EU Court of Auditors.
The Commission has pledged to launch a digital MRV platform that will use satellite data and AI to track emissions in real time, a step that could restore confidence among investors.
In the meantime, environmental NGOs remain wary.
"The ETS is being watered down at a time when the climate crisis demands ambition, not concessions," said a spokesperson for Greenpeace EU.
Yet the Commission argues that a balanced approach – giving industry time to adapt while expanding the market's reach – is the most pragmatic path to a carbon‑neutral Europe.
The coming months will reveal whether the EU can reconcile these competing pressures and keep its 2040 target within reach.