Key facts
- The European Commission has revised the EU's Emissions Trading System (ETS).
- The linear reduction factor (LRF) will decrease from 4.4% to 3.7% between 2031-2035, and then 1.7% annually after 2036.
- Free carbon allowances will be extended to sectors covered by the carbon border tax until 2038.
- From 2036, industry can purchase carbon credits from outside the EU to offset emissions.
- 250 million tons of domestic removal credits will be auctioned between 2031 and 2040.
- At least 50% of ETS revenue must be returned to ETS sector companies for decarbonization measures.
- The ETS will be extended to cover waste incineration from 2031.
- Flights landing within 5000 km will be included in the ETS from 2029.
The European Commission has confirmed a significant overhaul of the EU's Emissions Trading System (ETS), allowing industry to continue emitting greenhouse gases well into the 2040s and providing more free pollution permits for an extended period. This revision, finalized after internal divisions, represents a watering down of previous ambitions and is expected to face opposition in the European Parliament and among member states.
The speed at which companies must reduce emissions will be slower, achieved by lowering the linear reduction factor (LRF). The LRF will decrease from 4.4% to 3.7% annually between 2031 and 2035, and then at a gentler rate of 1.7% annually after 2036, extending pollution allowances into the 2040s.
Furthermore, free carbon allowances will be granted for several years longer, with sectors covered by the carbon border tax receiving them until 2038. For the first time, starting in 2036, industry will have the option to purchase carbon credits from outside the EU to offset emissions, potentially lowering the carbon price. The proposal also introduces 250 million tons of domestic removal credits into the ETS for auctioning between 2031 and 2040.
EU climate chief Wopke Hoekstra described the changes as a more "business-friendly" approach that advances climate action and fosters innovation, while insisting the EU has not abandoned its climate goals. The proposal mandates that at least 50% of all ETS revenue be returned to ETS sector companies to fund decarbonization measures, a move that could be contentious given member states' reliance on auction revenue.
Regarding aviation, the ETS will not fully cover all international outbound flights but will adopt a "tailored solution," including flights landing within 5000 km from 2029, to avoid clashes with major powers like China and the U.S. The ETS will also gradually extend to cover waste incineration starting in 2031.