The European Commission on 17 July 2026 tabled a targeted revision of the EU Emissions Trading System (ETS) that would slow the pace of emission cuts for businesses, extend free allowances by four years, and integrate permanent carbon removals into the carbon market. The proposal, filed as COM(2026) 616 final under procedure 2026/0212 (COD), represents the most substantial recalibration of the bloc's flagship climate instrument since the ETS was introduced in 2005 BBC.

At the core of the revision is a slowdown in the annual rate at which the ETS emissions cap declines. The Commission proposes reducing the cap reduction rate to approximately 3.7% from 2031, and further to 1.7% from 2036, down from the current 4.3% BBC. Free emission permits, which were scheduled to be phased out by 2034 and replaced by the Carbon Border Adjustment Mechanism for certain sectors, would instead continue until 2038 for industries that commit to investing in decarbonisation BBC.

Under the proposed framework, companies with decarbonisation investment plans would receive 80% of their free permits up front, with the remaining 20% released once those investments are delivered BBC. The Commission also announced a separate proposal on benchmarks to run alongside the ETS revision European Commission.

The revision integrates permanent carbon removals into the ETS framework, a structural shift that opens the carbon market to engineered removal technologies European Commission. Beginning in 2036, the EU would purchase international carbon offset credits to cover 2% of the emissions reductions required by ETS-covered sectors Reuters. The ETS currently covers power plants, factories, airlines, and shipping companies Reuters.

The Commission stated that the ETS is already helping Europe cut emissions by 50% in the sectors it covers, and that the proposed changes align with the EU's goal of reducing carbon emissions by 90% by 2040 compared with 1990 levels European Commission BBC. The stated objective of the revision is to ensure the ETS continues to support economy-wide carbon neutrality by 2050 European Commission.

EU climate commissioner Wopke Hoekstra described the approach as "more business-friendly" and "savvy" BBC. The political reception across member states has been divided along predictable lines. Italy has condemned the ETS as a de facto tax that has helped keep energy prices artificially high BBC. Polish climate minister Paulina Hennig-Kloska called the softening of the ETS stance a "huge success for Poland" and said Poland would push to weaken the policy further BBC. German Green MEP Michael Bloss said the ETS plans would result in "gigantic climate pollution" and that the next generation would have a worse quality of life BBC. Days before the proposal was unveiled, ten EU countries urged the Commission to rethink a new carbon price on fuel Reuters.

The proposal requires approval from EU member states and the European Parliament, a process the Commission acknowledges could take a year BBC.

The broader context here is a tension running through European climate governance between the bloc's legally binding emissions targets and the industrial and political pressure generated by the costs of meeting them. The original ETS framework, strengthened under the Fit for 55 package, was designed to force rapid decarbonisation through a steadily tightening cap and the scheduled replacement of free allowances with CBAM. This revision loosens both levers. Extending free permits to 2038 delays the point at which carbon-intensive industries face the full price signal the ETS was designed to deliver, while slowing the cap reduction rate directly reduces the annual emissions savings the system enforces.

The counterweight the Commission offers is the conditional structure: free permits are tied to verifiable decarbonisation investment plans, and the staggered 80/20 disbursement mechanism creates an enforcement hook. Whether that conditionality compensates for the weakened cap trajectory is the central question the European Parliament and Council will now debate. The integration of carbon removals and the limited use of international offsets add further complexity, potentially lowering the effective carbon price for covered sectors while broadening the toolkit for compliance.

For industries covered by the ETS, the immediate effect is regulatory breathing room. For climate policy watchers, the proposal signals that the Commission is willing to adjust the pace of the ETS in response to member-state pressure and competitiveness concerns, even while maintaining the headline 2040 and 2050 targets. The legislative fight ahead will test whether that compromise holds, or whether the council and parliament push the text in opposite directions.