After months of political wrangling, the European Commission today unveiled its long-awaited blueprint for overhauling the bloc’s flagship carbon market, known as Emissions Trading System (ETS).
Given the competing interests at stake, the task was never going to be smooth sailing. Power generators, steelmakers, chemical manufacturers, shipping companies and airlines are all in the firing line. The aim is to future-proof European industry while keeping the bloc on track to cut greenhouse gas emissions 90% by 2040.
For those of us who were in Brussels during the 2021 revision, there’s a sense of déjà vu. Yet, as I wrote yesterday, this reform comes at a very different moment, as economic pressures and political turmoil have amplified industry calls for extending the deadline to clean up their operations.
One thing that hasn't changed, however, is the prodigious complexity of the legislative files. So let’s unpack the proposed changes one by one.
Linear Reduction Factor
In a key concession to the bloc’s ailing industry, the Commission proposed slowing the linear reduction factor (LRF) — the rate at which the overall cap on allowances shrinks each year. The higher the LRF, the faster the cap is reduced, accelerating the pace of decarbonization.
The EU executive proposed bringing the LRF down to 3.7% between 2031 and 2035, and 1.7% from 2036. Crucially, the change would prevent the overall cap on allowances from reaching zero by 2039 — as it would under the current 4.4% LRF.
As expected, the move has drawn immediate criticism from green campaigners, but the Commission defended the new rates as “entirely climate-law-proof.”
“It is simply not the case that you would need to continue with the current LRF in order to reach your target,” Climate Commissioner Wopke Hoekstra told reporters earlier today.
Aviation
Another headline proposal is the expansion of the ETS to cover all departing flights to destinations within a 5,000-kilometre radius. That would significantly broaden the current scope, which applies only to flights within the European Economic Area, while exempting longer-haul routes to destinations such as the U.S. and China.
The change is also expected to boost EU revenues. According to a study by NGO Transport & Environment, airlines avoided an estimated €8.5 billion in emissions costs last year thanks to exemptions and free allowances.
Funding
Over time, the ETS has become something of a piggy bank for member states. In 2025 alone, governments received €24 out of the €43 billion generated by the carbon market. While they were already expected to use the money to support the green transition, the revenues were often diverted to plug holes in national budgets.
Not anymore.
Under the new proposal, member states would be required to spend at least 50% of future ETS revenues on supporting domestic industries — another key concession to Europe's industries.
What we’re writing
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What we’re following
The European Commission today presented a plan to modernize Europe's decades-old electricity grid and accelerate electrification across sectors still heavily reliant on fossil fuels, such as transport and heating. The aim is for electricity to account for 46% of the EU's final energy consumption by 2040, twice the current 23%.
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