EU proposes slower emissions cuts to keep heavy industry onshore
The European Commission has proposed weakening its flagship carbon market to prevent industrial offshoring, raising doubts over the bloc’s 2040 climate targets.
The European Commission has proposed overhauling the EU Emissions Trading System, offering heavy industries cheaper and longer pathways to cut pollution. The plan would slow the annual reduction in available carbon permits and extend free allowances for sectors like steel and cement until 2038, rather than the previously planned 2034 phase-out.
For markets and investors, the proposal undermines the predictable carbon pricing that has driven clean technology investment since 2005. Camille Maury of WWF warned the changes "jeopardises a predictable and effective price on pollution", noting that slowing the cap’s decline could allow an extra 2bn tonnes of CO2 emissions and threaten the EU’s legally binding target to cut greenhouse gases by 90% by 2040.
The revised rules link free permits directly to companies demonstrating plans for clean production in Europe. Firms would receive 80% of free allowances upfront, with the remaining 20% distributed only after investments are spent. The annual reduction in the emissions cap would fall to 3.7% from 2031, and further to 1.7% from 2036, down from the current 4.3% rate.
EU climate commissioner Wopke Hoekstra framed the flexibility as a necessary defence against rivals using "heavy state subsidies" and "dubious labour conditions". The move follows intense lobbying from 10 member states, led by Italy, which argued that the ETS drives up energy costs and pushes manufacturers abroad amid a fossil fuel shock triggered by the Iran war. "If we just have the industry ship out everyone loses," Hoekstra said.
Industry groups offered cautious support but warned of new red tape. Markus Beyrer of BusinessEurope said conditionalities for free allocations risked "increasing bureaucratic complexity". Green lawmakers criticised the concessions, with German MEP Michael Bloss accusing the commission of giving industries "a licence to pollute for even longer and at a lower cost" at the expense of climate-friendly companies.
Alongside the main market changes, the Commission proposed expanding the ETS to municipal waste to boost recycling and applying it to private jets. Aviation rules would cover flights within a 5,000km radius, avoiding a direct confrontation with the Trump administration over US routes. Separately, the EU announced a push to double the economy’s electrification rate to 46% by 2040 and phase out €97bn in fossil fuel subsidies.
