The European Commission on July 17, 2026, proposed a major change to its main climate tool — the Emissions Trading System, or ETS — that would slow the pace of emissions cuts, extend free pollution permits for certain industries to 2038, and allow companies to buy carbon offsets from outside the EU starting in 2036 (Engadget, Reuters).

The ETS is essentially a cap-and-trade system. The EU sets a ceiling on how much carbon dioxide certain industries are allowed to emit in total, and gives or sells companies permits for their share of that ceiling. Each year, the ceiling drops a little, so total emissions go down over time. Companies that cut emissions faster can sell their leftover permits to companies that still need them.

The Commission said the change was prompted by "increased pressure" on EU industries due to changes in the geopolitical and economic context (Engadget). The proposal comes after weeks of political maneuvering: ten EU countries including Italy and Poland urged the bloc on July 15 to reconsider a new carbon price on fuel, and the European Parliament's largest political group had already circulated a draft document on July 7 seeking to ease the carbon market burden on industry (Reuters, Reuters). The Commission faced competing calls from EU governments over whether to weaken the ETS at all before settling on its July 17 proposal (Reuters).

The key change involves how fast the emissions ceiling shrinks each year. Under the previous plan, the ceiling would have tightened by 4.4 percent per year between 2031 and 2035, putting the covered sectors on track to reach zero emissions by 2039 (Engadget).

The revised proposal cuts that rate to 3.7 percent per year for 2031–2035, then drops it further to 1.7 percent per year after 2036. That post-2036 rate is less than 39 percent of the pace that had been planned. The result: the emissions ceiling shrinks more slowly through the 2030s, and much more slowly in the second half of the decade (Engadget).

Two additional changes give industries more flexibility. Free carbon allowances for sectors covered by the Carbon Border Adjustment Mechanism (CBAM), which is the EU's carbon border tax on certain imported goods, would be extended to 2038 instead of being phased out earlier. And starting in 2036, EU industries would be allowed to buy carbon offsets from outside the EU — essentially paying for emissions reductions elsewhere to count against their own obligations (Engadget).

Alongside the ETS revision, the Commission released an Electrification Action Plan (also referred to as the Energy Action Plan) intended to accelerate the transition from fossil fuels to green energy (Engadget). No further detail on the plan's specific measures was available in the source material.

The revision runs against the backdrop of binding legal commitments. The European Climate Law sets targets of reducing net greenhouse gas emissions by at least 55 percent by 2030 and by 90 percent by 2040, both compared to 1990 levels (European Commission). EU greenhouse gas emissions had decreased by 35 percent between 1990 and 2023 (Eurostat). The aviation sector under the ETS has already been moving in the opposite direction from the new proposal's industrial provisions: free permits for airlines were reduced by 25 percent in 2024 and by 50 percent in 2025, with full auctioning scheduled for 2026 (European Commission).

WWF responded to the proposal by stating it could not see how the EU would reach its legal climate targets under the revised ETS. The organization questioned how the Commission would compensate for the additional emissions allowed under the slower reduction path while still meeting the 2040 target (Engadget, WWF).

The central tension here is the gap between the slower emissions ceiling and the 2040 legal target. A 90 percent net reduction from 1990 levels by 2040, with the cap shrinking at only 1.7 percent annually after 2036, leaves a mathematical gap the Commission has not yet explained how it will close. The offset provision and the electrification plan appear to be the two mechanisms the Commission is counting on, but neither has been detailed enough to know whether they would actually bridge it.

For technology-intensive industries operating in the EU, the proposal offers real near-term relief. Data center operators, semiconductor manufacturers, and heavy industrial consumers of electricity have faced rising carbon costs under the ETS. Extending free allowances to 2038 and allowing international offset purchases lowers the effective carbon price for these sectors. Whether that relief speeds up or slows down investment in cleaner infrastructure is a question the proposal leaves open — the incentives now point in both directions at once, with compliance costs reduced but the EU's longer-term climate deadline unchanged.

This is a proposal, not a final law. It still needs approval from the European Parliament and the Council of the EU, where the political pressures that shaped the Commission's draft will intensify rather than ease. The competing calls from member states in the weeks before the proposal suggest the legislative process will be contested at every stage.