The European Commission has proposed a major revision to the EU Emissions Trading System (ETS 1), planning to maintain free allocation of emission allowances beyond 2030 while conditioning them on mandatory decarbonization investments. According to the Commission, this reform aims to balance industrial competitiveness with climate goals, though it faces an uncertain path through the European Parliament and Council.
Linking Free Allowances to Industrial Decarbonization
Under the new proposal, companies will no longer receive free emission allowances as a default. Instead, the European Commission intends to grant a large majority of these allowances upfront only if firms submit concrete plans for decarbonization investments within Europe. The remaining portion will be released only after those investments are verified as completed. This shift marks a transition from unconditional support to a performance-based model, designed to ensure that heavy industry remains part of the EU’s climate transition rather than relocating abroad.
Did you know? The “polluter pays” principle serves as the foundation for the ETS. Companies must surrender one emission allowance for every ton of CO2 they emit, creating a financial incentive to lower carbon footprints.
Adjusting Benchmarks for Energy-Intensive Sectors
The Commission is also refining the “benchmark” system, which determines how many free allowances a specific factory or plant receives. This issue has been a point of contention for member states like the Czech Republic, which argued that previous tightening schedules were too aggressive. The new proposal retains the benchmark structure but slows the tightening pace for heat and fuel benchmarks. It also formally accounts for the electrification of production processes, a move intended to provide relief to the chemical industry and refineries without abandoning the system’s core architecture.
Slower Emission Strop Reductions Through 2040
The reform significantly alters the timeline for reducing the overall supply of allowances. Current rules would have exhausted the supply of allowances around 2039. The Commission’s revised plan slows the annual reduction of the emission cap: it will decrease at a specific annual rate between 2031 and 2035, and at a further reduced rate from 2036 onwards. According to EU Climate Commissioner Wopke Hoekstra, this adjustment ensures the system remains a “motor of innovation” while maintaining energy security and industrial competitiveness.
Differing Perspectives Among Member States
The proposal is set to trigger months of negotiations between EU member states. Countries such as the Czech Republic, Italy, and Poland have pushed for a more industry-friendly approach, fearing that high carbon costs could cripple their domestic manufacturing sectors. Conversely, Nordic nations and Spain have consistently opposed any weakening of the Union’s climate ambitions.
Czech Minister of Industry and Trade Karel Havlíček stated that while the proposal is a positive development, the government remains committed to seeking even more robust protections for energy-intensive industries. Meanwhile, Europarliamentarian Danuše Nerudová (STAN) noted that the European People’s Party (EPP) is already advocating for further relaxation of the rules, citing the difficulty heavy industry and aviation face in meeting the original, more rigid decarbonization timelines.
Future Expansion: The Role of ETS 2
While ETS 1 focuses on heavy industry, aviation, and power generation, the EU is preparing for the launch of ETS 2 in 2028. This secondary system will extend carbon pricing to road transport and building heating. To mitigate the social impact on low-income households, the Commission plans to implement a social-climate fund, ensuring that the transition to greener energy does not disproportionately burden vulnerable citizens.
Frequently Asked Questions
What is the “polluter pays” principle?
It is the core mechanism of the EU ETS, requiring industrial plants and airlines to purchase and surrender an emission allowance for every ton of CO2 they emit into the atmosphere.
Will free emission allowances be cancelled?
No. The Commission plans to keep them but will make them conditional on companies presenting and executing verified plans to invest in decarbonization technologies.
How does this affect the Czech Republic?
As a country with a significant industrial base, the Czech Republic benefits from the “solidarity” principle. The proposal includes provisions for the modernization fund, which allocates a specific volume of emission allowances to former Eastern Bloc nations, Portugal, and Greece to assist in their energy transition.
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