The European Union is considering a major overhaul of its system of free carbon dioxide permits for industry as part of a broader reform of the Emissions Trading System (ETS), according to an internal European Commission document. The ETS is the EU’s central climate policy tool, requiring power plants and industrial companies to purchase permits for their emissions.
Three possible scenarios on the table
The Commission is examining three main options for the future of free CO2 allowances. One scenario would eliminate free permits entirely, forcing companies to buy permits for a limited share of emissions that would gradually increase until 2034. Another option would make free permits conditional on companies investing in low-carbon technologies. A third approach would broadly maintain the current system.
Industry pressures and political sensitivity
The reform comes at a politically sensitive moment, as European industries face high energy costs and competition from cheaper imports. Concerns over industrial competitiveness have intensified debates about the carbon market, with some leaders – as Czech Prime Minister Andrej Babis – urging measures to limit carbon prices.
Aligning the ETS with long-term climate targets
A key objective of the redesign is to align the ETS with the EU’s goal of reducing domestic emissions by 85% by 2040. This would require adjusting the current system so that the cap on emissions does not fall to zero by 2039 but instead allows industries to continue emitting while progressively reducing their footprint.
Next steps in the reform process
The European Commission plans to present its proposal for revising the carbon market in the third quarter of the year. Meanwhile, carbon prices remain volatile, with the benchmark EU carbon contract trading at around 80 euros per metric ton, below recent peaks.
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