On 17 July 2026, the European Commission proposed the most significant overhaul of the EU Emissions Trading System (ETS) since the carbon market launched in 2005. The revision would slow the pace of emission cuts for businesses, extend free pollution permits by four years, and bring permanent carbon removal technologies into the market for the first time BBC.

To understand the stakes, it helps to know how the ETS works. Think of it as a cap-and-trade system: the EU sets a ceiling on total emissions from covered sectors, and companies must hold a permit for every tonne of carbon they emit. That cap shrinks each year, squeezing emissions down. Companies that cut faster can sell spare permits; those that lag must buy more. The sectors covered include power plants, factories, airlines, and shipping companies Reuters.

At the heart of the revision is a slowdown in how fast that cap shrinks. The current annual reduction rate is 4.3%. The Commission proposes cutting it to roughly 3.7% from 2031, and then to 1.7% from 2036 BBC.

Free permits were supposed to be phased out by 2034 and replaced by the Carbon Border Adjustment Mechanism (CBAM) — a system that charges importers for the carbon embedded in goods entering the EU. Under the new proposal, free permits would instead continue until 2038 for industries that commit to investing in decarbonisation BBC. Companies with approved investment plans would receive 80% of their free permits up front, with the remaining 20% released once those investments are actually delivered BBC. The Commission also published a separate proposal on performance benchmarks to accompany the ETS revision European Commission.

The revision also integrates permanent carbon removals into the ETS framework, a structural change that opens the carbon market to engineered removal technologies European Commission. Starting in 2036, the EU would purchase international carbon offset credits to cover 2% of the emissions reductions required by ETS-covered sectors Reuters.

The Commission says the ETS has already helped cut emissions by 50% in the sectors it covers, and that the proposed changes are consistent with the EU's goal of reducing carbon emissions by 90% by 2040 compared with 1990 levels European Commission BBC. The stated aim of the revision is to keep the ETS supporting economy-wide carbon neutrality by 2050 European Commission.

EU climate commissioner Wopke Hoekstra called the approach "more business-friendly" and "savvy" BBC. Political reactions have split along predictable lines. Italy condemned the ETS as a de facto tax that keeps energy prices artificially high BBC. Polish climate minister Paulina Hennig-Kloska called the softening a "huge success for Poland" and said Poland would push to weaken the policy further BBC. German Green MEP Michael Bloss said the plans would result in "gigantic climate pollution" and leave the next generation worse off BBC. Days before the proposal was unveiled, ten EU countries urged the Commission to rethink a new carbon price on fuel Reuters.

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

The broader context here is a tension at the heart of European climate policy: the gap between the bloc's legally binding emissions targets and the real-world costs of meeting them. The original ETS, strengthened under the Fit for 55 package, was designed to drive 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 moment when carbon-intensive industries face the full carbon price the ETS was built to deliver. Slowing the cap reduction rate directly lowers the annual emissions savings the system enforces.

The counterweight the Commission offers is conditionality: free permits are tied to verifiable decarbonisation investment plans, and the 80/20 disbursement schedule creates an enforcement mechanism. Whether that conditionality makes up for the weakened cap trajectory is the central question the Parliament and Council will now debate. The addition of carbon removals and the limited use of international offsets add another layer, potentially lowering the effective carbon price for covered sectors while broadening the tools companies can use to comply.

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 keeping the headline 2040 and 2050 targets intact. The legislative fight ahead will test whether that compromise holds, or whether the Council and Parliament pull the text in opposite directions.