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Following the European Commission's proposal for the reform of the Emissions Trading System (EU ETS) will make it harder for the EU to reach its climate targets, said researchers and environmental organisations from Germany. The German government welcomed the proposals, while industry groups criticised requirements to invest in decarbonisation projects in order to keep receiving free emissions allowances.
The European Commission's eagerly awaited proposals for a reform of the EU's carbon market (EU ETS) triggered a wide range of reactions from stakeholders in Germany. The government praised the changes, which would largely amount to weakening the ETS, while most climate activists said the changes would slow emission reductions, and industry groups lamented the reform didn't go far enough.
“The proposals confirm that emissions trading remains at the heart of European climate policy and is the most important market-based driver of investment in climate-friendly technologies,” German environment minister Carsten Schneider said. “Not every industry can move towards climate neutrality at the same pace. Energy-intensive sectors, in particular, face enormous technological and economic challenges.”
The reform of the European Union Emissions Trading System (EU ETS) is one of the most important climate policy decisions of this decade. The EU must update its main tool for cutting greenhouse gas emissions to prepare for the years after 2030, but faces pressure from businesses and some governments to ease the burden on struggling industries. Think tank E3G said the reform is “a key test of whether Europe can strengthen the investment case for cleaner industry while maintaining a credible and politically durable climate framework.”
Schneider welcomed the proposed “ETS Investment Booster”, which would kick-start a new Industrial Decarbonisation Bank (IDB) by rewarding companies that invest early in decarbonisation with an estimated 30 billion euros. He also praised additional “flexibilities” for industry – such as an expansion of free emissions allowances, and the inclusion of a share of international carbon credits and permanent carbon removals in the system.
The EU ETS is considered the union’s main climate policy tool. It sets an overall cap on greenhouse gas emissions from power generation, energy-intensive industry, and parts of aviation and maritime transport, which together account for about 40 percent of the EU's total emissions. Companies must surrender one allowance for every tonne of CO2 they emit, while the cap falls over time to drive emissions down and encourage investment in cleaner technologies.
The ETS reform is one element of a wider reform package needed to make the EU’s climate and energy transition rules fit for the years after 2030, which includes renewables and efficiency laws, as well as national climate targets for sectors not covered by the ETS.
What has the European Commission proposed?
At the core of the proposal which the European Commission presented on 17 July is a slower reduction in the emissions cap after 2030. Instead of maintaining the current annual Linear Reduction Factor (LRF) of 4.4 percent, the Commission proposes lowering it to 3.7 percent between 2031 and 2035, and to 1.7 percent from 2036 to 2040. Officials argue this would make the transition "more manageable and gradual" while still delivering an estimated 85-87 percent emissions reduction between 2005 and 2040.
The proposal also introduces several new so-called “flexibility” mechanisms. For the first time, permanent domestic carbon removals would be integrated into the ETS, with up to 250 million tonnes of certified removals gradually entering the system between 2031 and 2040. In addition, the Commission would allow up to 260 million high-integrity international carbon credits to be used in the ETS after 2035, provided strict quality criteria are met.
To support industrial decarbonisation, the Commission proposed creating an Industrial Decarbonisation Bank, initially backed by an Investment Booster financed through 400 million ETS allowances. The mechanism is intended to mobilise up to €100 billion for clean industrial investment. At the same time, free ETS allowances for energy-intensive industries would become conditional on companies publishing and implementing decarbonisation investment plans.
The proposal also extends free allocations for sectors covered by the Carbon Border Adjustment Mechanism (CBAM), delaying the complete phase-out of free allowances from 2034 to 2038.
Alongside the ETS revision, the Commission proposes changes to the Market Stability Reserve (MSR), the mechanism designed to balance allowance supply. The MSR would become more responsive to a shrinking market, with the intake rate halved from 24 percent to 12 percent and new rules introduced to release allowances more gradually if supply tightens.
The package also expands the ETS to additional sectors. It proposes gradually including municipal waste incineration from around 2031, extending shipping coverage to smaller vessels from 2029, broadening aviation coverage to certain international flights within 5,000 kilometres of the EU from 2029, and maintaining support for sustainable aviation and maritime fuels.
Weakening ETS makes it more difficult to reach EU climate targets – researchers and NGOs
The proposed changes to the system would not change the EU’s overall climate policy course and would provide clarity on the contribution of emissions trading towards reaching the 2040 climate target, said Ottmar Edenhofer, director of the Potsdam Institute for Climate Impact Research (PIK). Edenhofer especially welcomed the integration of permanent carbon removals in the system, saying that this for the first time created “a credible and long-term investment framework for carbon removal technologies in Europe.”
However, other researchers as well as environmental NGOs warned about the reform’s negative effects on Europe’s greenhouse gas emissions.
The EU would face a very tough struggle reaching its 2040 climate targets, if the reform is enacted as the Commission has proposed, said Jakob Graichen, researcher at Öko-Institut. “The European Commission’s proposal goes too far,” he said. “Taken as a whole, it will lead to a new surplus of allowances rather than setting out a reliable path to decarbonisation.” The institute assessed the proposals in a policy brief, arguing that the changes would result in allowance supply substantially exceeding projected demand, which would weaken the carbon-price signal.
NGO Germanwatch agreed that the reform would make it harder for the EU to reach its climate targets. “The Commission appears to have yielded to pressure from parts of industry on key issues,” said Lutz Weischer, head of the group’s Berlin office. The reform would make it “significantly more difficult to achieve the EU’s climate targets” and “jeopardises Europe’s international credibility,” he said, adding that the Commission was doing the EU’s forward-looking sectors a disservice, as the reform would “reward inaction in the transition.”
Reform proposals insufficient – industry
Chemicals industry association VCI called the proposals “inadequate cosmetic corrections,” which were insufficient to avert deindustrialisation, and said that it would make it difficult for companies to invest in the transition. “The European Commission’s plans are a dangerous smokescreen and risk turning industrial restructuring into a brutal dismantling of industry,” managing director Wolfgang Große Entrup said. He welcomed the extension of free allowances for certain industries, but criticised the requirement to invest in decarbonisation. He also called for an earlier start of slowing down the pace of emissions reduction than the envisioned 2031.
German industry association BDI’s deputy managing director Holger Lösch criticised several elements of the reform, such as the expansion of the ETS to flights to non-EU destinations. He said that overall, the proposal would not provide sufficient conditions for investment in Europe’s industrial transformation, and needed to be adapted to strengthen competitiveness. He criticised the decarbonisation investment requirements as “counterproductive,” and called for supporting policies to enable companies in the transition. “Many companies want to decarbonise but are unable to do so because they lack access to affordable green electricity, green hydrogen or the necessary infrastructure,” he said. “As long as this remains the case, a rising CO₂ price will only drive up costs rather than spur investment in decarbonisation.”
The Association of German Chambers of Commerce and Industry (DIHK) said that the reform proposal could make the ETS more international, innovative and cost-efficient. Extending the supply of new emissions allowances beyond 2039 is “overdue,” as it said the current trajectory to phase them out is too steep. DIHK president Peter Adrian also welcomed plans for certain industries to receive free allowances for longer than currently planned, but criticised the requirement for companies to invest in decarbonisation projects in Europe to receive their full allocation. “Requirements concerning, for example, the location and quality of investments, as well as repayment risks, risk becoming far removed from practical reality,” he said.
Electrification target “not necessary” – energy industry
The Commission also presented its “Electrification Action Plan” to accelerate the switch to electricity across energy-using sectors, such as buildings, transport and industry. Almost three quarters of EU electricity is generated from domestic renewables (48% in 2024) and nuclear (23%), but the electrification rate of energy demand has stalled at 23 percent over the past decade, said the Commission. It proposed an electrification target of 46 percent by 2040, which would be assessed over the coming months as part of the energy rules reform for the years after 2030.
Energy industry association BDEW said that such a target is not necessary, and that what is actually needed is the right framework conditions and measures, as well as an “ambitious renewable energy target.” New targets “inevitably bring with them discussions about targets and red tape, which cost time and resources but do not transform a single process,” said BDEW head Kerstin Andreae.
Electrification has taken centre stage in international climate negotiations too, as part of efforts to fulfil the Paris Climate Agreement. The co-hosts of the upcoming UN climate change conference COP31 – Turkey and Australia – have proposed a target to increase the share of electricity in final energy consumption globally to 35 percent by 2035, from around 20 percent today. The German government, as well as many businesses has also emphasised electrification as crucial for a resilient future.
Author: Julian Wettengel
This article was originally published on Clean Energy Wire under the Creative Commons BY NC ND licence. Read the original article.
