Europe is about to find out what remains of the Green Deal.
On Friday, the European Commission will unveil a sweeping overhaul of its flagship carbon market, testing whether it can strike a balance between throwing a lifeline to ailing industries and staying the course on its climate ambitions.
Long considered the cornerstone of the EU’s quest to become climate-neutral by 2050, the Emissions Trading System is designed to push heavy polluters to clean up by putting a price on every ton of carbon they emit. Carbon permits currently trade at around €80 per ton.
“It will be the biggest climate fight of the next year or two,” said Joop Hazenberg, senior programme manager at the Cambridge Institute for Sustainable Leadership. “It will be up to pro-climate forces to work together to defend what remains of the Green Deal.”
The review is meant to align the ETS with the bloc’s target of cutting its greenhouse gas emissions by 90% by 2040. But economic weakness, an energy crisis compounded by the U.S.-Israeli war in Iran and relentless competition from China have amplified calls to grant companies extra time to decarbonize. The overhaul also comes after two years of political backlash against climate policies that has put much of the EU’ s green agenda under pressure.
The reform was always bound to be contentious. It will determine not only the future cost of pollution and the pace at which free carbon allowances are phased out, but also how to ring-fence ETS revenues that have until now flowed directly into national budgets.
Launched in 2005, the Emissions Trading System requires power generators, energy-intensive industries, shipping companies and airlines to pay for the carbon they release into the atmosphere. The scheme caps the total number of emissions permits in circulation and reduces them over time. As permits become scarcer and more expensive, companies are incentivized to reduce energy use or switch to lower-carbon alternatives.
The carbon market battle lines
The battle to shape the future of the carbon market has been underway for months, but it's intensified in recent weeks as both sides have flooded Brussels with op-eds, position papers and joint statements.
The campaign kicked into high gear at February’s Antwerp Industry Summit, where European leaders met industry tycoons ahead of an informal summit on competitiveness.
Industry heavyweights such as Lakshmi Mittal of ArcelorMittal and Markus Kamieth of BASF have repeatedly slammed carbon pricing as an unnecessary burden on manufacturers, calling the system "obsolete" and warning that thousands of jobs are at risk unless Brussels steps in. But defenders counter that the 20-year-old scheme has provided a long-term price signal without which newer, cleaner industries would never have seen the light.
The poster child is the Swedish green steel producer SSAB, whose business model hinges on carbon prices remain high enough to reward cleaner production.
“The ETS is supposed to create winners and losers,” said Domien Vangenechten, who leads the industry transition department at climate think tank E3G. “And the fact that the losers are so loud is, to some extent, a sign that it’s working.”
That divide is now squarely reflected among EU member states. Italy and Austria are leading a push to substantially weaken the carbon market, while Denmark, Finland, Luxembourg, Portugal, Slovenia, Spain, Sweden and the Netherlands argue the ETS is a cornerstone of the bloc’s climate strategy.
Even many on the political right acknowledge the delicate trade-off between easing pressure on struggling businesses and preserving incentives to invest in cleaner industries.
“Tight is right, too tight is broken,” wrote German center-right MEP Peter Liese, who will spearhead the Parliament’s negotiations. “However, frontrunners shouldn't be the victim of the review,” he cautioned.
The countdown to 2039
One of the standout measures to watch on Friday is the emissions-reduction trajectory, known as the linear reduction factor (LRF). The LRF determines how fast the allowances are reduced every year, driving up the cost of polluting as supply shrinks.
The latest ETS revision set the LRF at 4.4% per year from 2028, meaning the cap of allowances would effectively reach zero by 2039 — a scenario that’s now spooking polluting industries.
“The current system, which requires energy and industry sectors to reach near-zero already by 2039, will push industries out of Europe,” warned Bulgaria, Cyprus, Czechia, Estonia, Greece, Hungary, Italy, Poland, Romania and Slovakia in a joint statement, calling an extension of the ETS cap closer to 2050 “necessary.”
For veterans of the ETS, however, the sudden outcry is puzzling. Leon de Graaf, managing partner at Business Advisers on Climate & Competitiveness (BACC), said the implications of the 4.4% linear reduction factor have been clear since the last ETS reform, even if few paid attention at the time.
“Now everyone is fixating on it: ‘Oh my God, 4.4 means net zero by 2039.’ No, this is not new information, it was already known years ago.”
Follow the carbon money
The other thorny issue likely to divide member states is how to spend the billions generated by the carbon market.
Over time, the ETS has become a key revenue generator for EU governments with €43 billion raised in 2025. Half has flowed directly to national capitals, which are expected to invest the money in climate action and the energy transition. The remainder of the pot goes to the Innovation and Modernization Funds — the EU’s main vehicles for scaling low-carbon companies and modernizing energy system in Central and Eastern Europe.
Industries, however, have long complained they don’t benefit from the very revenues they help generate. They want a larger share redirected toward industrial decarbonization — a proposal almost certain to spark a bitter battle with governments reluctant to give up a growing source of public funding.
More than an ETS debate
Experts warn that the politicization of what’s widely considered one of Brussel’s toughest legislative files risks overshadowing the bloc’s competitiveness agenda.
“Do you need to make certain tweaks in order to make sure that the ETS not only works for frontrunners but also [those] industries that might have good intentions but are struggling to make investments and get access to energy? Yes, a hundred percent,” said Vangenechten.
But, he asked, “Will tweaking the ETS solve those constraints? No.”
De Graaf agrees. “Even if you scrap the ETS tomorrow, they [incumbent industries] would still become uncompetitive very soon because they cannot compete with the modern installations that are built around the world.”
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