On July 17, 2026, the European Commission proposed a sweeping overhaul of the EU Emissions Trading System — the bloc's flagship tool for cutting greenhouse gas emissions. The plan gives companies a cheaper, less demanding pathway to reduce emissions while extending the system's reach into new sectors. The proposal, presented under the Clean Industrial Deal and tied to the Electrification Action Plan, was accompanied by a Q&A document and a competitiveness-focused press release (European Commission).

The ETS has operated since 2005. It works on a cap-and-trade principle: the EU sets a cap on total emissions, distributes or sells pollution permits to companies, and gradually lowers the cap over time. Companies that cut emissions can sell spare permits; those that pollute more must buy extra. The system is credited with reducing emissions by 47% by 2023 compared with 2005 levels. The Commission said the review was needed to align the ETS with the EU's target to reduce greenhouse gas emissions by 90% by 2040 (The Guardian).

Pressure for reform came from within the bloc. Ten EU member states argued that the ETS drives up energy costs and damages Europe's competitiveness. EU climate commissioner Wopke Hoekstra said key European industries faced "unfair competition from non-European rivals using heavy state subsidies and dubious labour conditions." Under the proposal, some heavy industries will receive free pollution permits for longer, and the number of permits in circulation will be reduced more slowly than currently planned (The Guardian).

The scope of the system would expand in parallel. The proposal would extend the ETS to cover municipal waste, aiming to increase recycling and reduce incineration. The Commission also wants to bring flights within a 5,000km radius of a central point in Europe under the ETS, capturing airlines flying to North Africa and the Middle East but excluding routes to China or the United States. Private jets would be brought under the system for the first time (The Guardian).

The Commission separately proposed updated ETS benchmark values for the 2026–2030 period, documented in a press release published on May 10, 2026 (European Commission). On June 11, 2026, the Commission also welcomed a political agreement strengthening the Market Stability Reserve — a mechanism that adjusts the supply of permits to keep carbon prices stable — for the new ETS covering buildings and road transport (European Commission). According to the Commission, revenues generated by the EU ETS are reinvested to support Europe's clean transition and strengthen industrial competitiveness (European Commission).

The dual logic is straightforward: ease the carbon-cost burden on energy-intensive industries facing subsidized foreign competition, while broadening the system's perimeter to capture emissions sources currently outside its reach. Free allocation extensions and a slower pace of permit reduction lower near-term compliance costs for heavy industry. Extending coverage to municipal waste incineration and aviation, including private jets, pulls additional sectors into the cap-and-trade architecture.

The broader question is whether these loosening and broadening measures balance each other out, or whether the net effect weakens the system's overall drive to cut emissions. The answer depends on the trajectory of the cap itself — how fast total permitted emissions decline over time.

The reaction was immediate. German Green MEP Michael Bloss accused the European Commission of giving industries "a licence to pollute for longer and at a lower cost" (The Guardian). That framing captures the core tension: a system designed to make pollution progressively more expensive is being asked to also serve as a competitiveness shield for industries facing external pressures that have nothing to do with carbon costs.

The proposal now enters the ordinary legislative procedure. The European Parliament and Council will each develop their positions, and the trilogue negotiations that follow will determine whether the easing of industrial obligations survives in its proposed form, or whether Parliament's environmental committees push back toward a more stringent trajectory. The 90%-by-2040 target provides the analytical anchor: any final text will be assessed against whether the combined effect of extended free allocation, slower permit reduction, and new sectoral inclusions keeps the EU on a credible pathway to that goal.

One thread to watch is the interaction between this proposal and the ETS for buildings and road transport, known as ETS 2, which is still being built out. The June 11 Market Stability Reserve agreement addressed safeguards for that new system. If the main ETS loosens industrial compliance while ETS 2 tightens on households and road transport, the political distribution of carbon costs across sectors and consumer groups will shift in ways that may prove more contentious than the headline numbers suggest.