The European Commission opened high-level consultations on overhauling the EU Emissions Trading System on May 12, seeking to balance industrial competitiveness with climate goals as it prepares legislative proposals for July that will reshape the bloc’s carbon market in the coming years.
“Climate policy has become industrial and security policy,” Kurt Vandenberghe, director-general at the European Commission’s DG CLIMA, said at the opening of the session. He emphasized the need to make the ETS “more of an innovation and investment engine” while ensuring decarbonization proceeds in a “gradual, orderly manner” amid current geopolitical challenges.
The roundtable at EU headquarters in Brussels brings together industry representatives, civil society groups, and policymakers to discuss how the bloc’s flagship carbon market can drive decarbonization while supporting European manufacturers facing mounting cost pressures and global competition. The consultation follows guidance from the European Council in March and comes as the Commission prepares to align the ETS with the EU’s 2040 climate targets.
Review timeline
Beatriz Yordi, director for carbon markets and clean mobility at DG CLIMA, outlined the review timeline, saying the Commission aims to present proposals in July with parliamentary consideration through the first quarter of 2027. Implementation of core decisions would begin in 2028, she said.
“The ETS will not disappear,” Yordi said, stressing the system must provide “a stable, predictable long-term signal for decarbonization” while driving industrial competitiveness. She said the review would examine the pace and scale of carbon removals and include updates to the Market Stability Reserve and benchmark values through implementing acts.
Europe’s flagship carbon market is buckling under political pressure as a growing chorus of EU leaders question whether climate policy is crushing heavy industry. The backlash has sent carbon prices tumbling nearly Eur30/mtCO2e ($35.24/mtCO2e) from their mid-January peak near Eur93/mtCO2e.
Platts, part of S&P Global Energy, assessed EU Allowances for December 2026 at a three-month high of Eur77.24/mtCO2e on May 11, recovering from an 11-month low of Eur63.64/mtCO2e hit on March 19 amid the political storm.
Free allocation debate
A key focus of the discussions centered on the future of free allowance allocations, which have been a cornerstone of the ETS since its 2005 launch. Heiko Kunst, head of the unit for implementation and policy support at DG CLIMA, said more than 20 billion allowances have been allocated for free since the system began, mostly to energy-intensive industries.
For the 2021-2025 period, free allowances covered around 85% of verified emissions from these sectors, Kunst said. However, “this has not led to expected investments in decarbonization,” he added, signaling potential changes ahead.
The review will assess how existing experience with conditionalities can help unlock the investment potential of free allocation alongside its carbon leakage protection role, Kunst said. The Commission on May 11 proposed updated benchmark values for 2026-2030 that would continue covering about 75% of industrial emissions on average, down from current levels.
The discussions highlighted tensions between maintaining carbon price signals and protecting energy-intensive industries. An ArcelorMittal representative warned of a “structural squeeze” on the steel sector from escalating ETS costs, calling for targeted relief measures and the channeling of ETS revenues back to affected industries.
“ETS costs escalation” is creating pressure on electrical steel and other products, the company official said, urging that free allocations for steel benchmarks be maintained in 2026 and that new benchmarks preserve current support levels.
The EU ETS, which caps emissions from power plants and industrial facilities, has been credited with driving significant reductions in greenhouse gas emissions since its launch in 2005, but critics argue it needs to be adjusted to prevent carbon leakage and preserve industrial capacity within the bloc.
Aviation emissions
During the event, Polona Gregorin, head of unit for air, rail, water and intermodal policy at DG CLIMA, confirmed the Commission is considering extending the EU ETS beyond intra-EU flights to cover extra-European routes, particularly departures to international destinations outside the bloc.
Since 2012, aircraft operators in the European Economic Area have been required to monitor, report and verify their CO2 emissions and surrender allowances against those emissions. Airlines currently purchase allowances for carbon emissions under the bloc’s ETS only for intra-regional flights.
The potential expansion comes as the airline industry grapples with rising costs from higher energy prices due to the US-Iran war, even as the EU has long weighed extending carbon costs to international flights beyond the region.
Author: Eklavya Gupte
