EU Proposes Slower Carbon Cap Cuts to Keep Industry in Europe

The European Commission has proposed overhauling the EU Emissions Trading System (ETS) by slowing the annual decline of pollution permits and extending free allowances for heavy industry until 2038. The changes, introduced as a long-awaited review of the bloc's flagship carbon market, are a direct response to pressure from 10 member states warning that strict climate rules are driving factories abroad amid an energy shock triggered by the Iran war.

Under the current system, the cap on permits falls by 4.3% annually. The new proposal would reduce this pace to 3.7% from 2031 and just 1.7% from 2036. Free allowances for sectors like steel and cement, originally slated for phase-out by 2034, would now persist until 2038, though 80% would be conditional on companies demonstrating planned clean investments within the EU.

For investors and corporate planners, the mechanics signal a softer future trajectory for carbon prices, which have historically driven capital allocation toward green technologies. Camille Maury, a senior policy officer at WWF’s European policy office, warned the proposal “jeopardises a predictable and effective price on pollution that businesses and investors need to invest in clean technologies.” WWF estimates the slower cap reduction would allow an additional 2bn tonnes of CO2 emissions.

Industry groups welcomed the adjusted timeline but voiced concerns over execution. Markus Beyrer, director general of BusinessEurope, warned that new conditionalities for free allocations “risk increasing bureaucratic complexity”, while the proposed use of international carbon credits after 2036 remained “unsatisfactory”. Michael Bloss, a German Green MEP, criticised the move as giving industries “a licence to pollute for even longer and at a lower cost”.

EU Climate Commissioner Wopke Hoekstra defended the overhaul, arguing that subsidised foreign competitors and the threat of offshoring necessitated a revised approach. “If we just have the industry ship out everyone loses,” he said, insisting the draft law remains “completely climate-law proof” regarding the EU’s 2040 target of a 90% emissions reduction. Peter Liese, the lead lawmaker negotiating the file, framed it as a victory for domestic investment: “Climate protection that leads to unemployment is not a global role model.”

While softening rules for heavy industry, the Commission expanded the ETS to municipal waste incineration and private jets. Aviation rules were extended to flights within a 5,000km radius, a distance that avoids direct friction with the US and China. Separately, the EU announced a plan to double the share of electrification in the economy to 46% by 2040 and phase out €97bn in fossil fuel subsidies.