The European Union is at a crossroads. Rising energy prices, geopolitical instability exacerbated by the conflict in the Middle East and the US-Iran war, and extreme heat waves are forcing Brussels to reconsider its key climate tool – Emissions Trading System (EU ETS). The current historic reform of this system, which aims to achieve climate neutrality by 2050, represents a fundamental political compromise between strict environmental requirements and preserving the competitiveness of European industry in times of global crisis. Under Ursula von der Leyen, the EU's policy approach has shifted slightly towards supporting business, leading to concessions for countries such as Poland and the Czech Republic, while other Nordic countries and Spain insist on strictness. The result is a comprehensive package that changes rules for industry, transport and waste management.

2040 climate targets and the integration of carbon removal

The heart of the new legislation is the alignment of the ETS system with the new climate target for 2040, which means reduction in net greenhouse gas emissions by 90 % compared to 1990. This target brings an immediate adjustment to the so-called linear reduction factor, which reduces the total cap on available allowances each year. A completely new feature is integration of permanent carbon removal (e.g. BioCCS and DACCS technologies) directly into the ETS. The European Commission plans to purchase 250 million units of domestic permanent carbon removal by 2040, creating additional emissions space for sectors where emissions reductions are technologically most difficult. At the same time, the EU is considering using top international credits for the period 2036 to 2040 up to 5 % of 1990 emissions (i.e. 260 million tonnes), which could reduce the pressure on domestic efforts from 90 % to 85 %.

Industrial Decarbonization Bank and Conditional Free Allowances

The biggest changes concern the massive support for European industry under the so-called Clean Industrial Deal. The reform introduces a new institution – Industrial Decarbonization Bank (IDB), which is to gradually allocate up to €100 billion to commercial emissions reduction projects in industry. Its initial phase, called the „ETS Investment Booster“, will allocate up to 400 million allowances by 2030 to support rapid decarbonisation investments through fixed carbon premiums.

The free allocation of emission allowances, which serves to protect companies from the risk of moving production abroad (carbon leakage), will be maintained. The Union will even slow down the abolition of free allowances for some sectors until 2038. However, companies will not automatically keep these allowances. From 2031, full allocation will be strictly conditional on the development of „"EU Decarbonisation Investment Plan"“. Companies will receive 80 % allowances immediately after submitting a plan, but the remaining 20 % will be credited by the EU only after the successful physical implementation of the investments and the achievement of significant emission reductions directly on European soil. If the company moves its production capacity outside the EU, it will be obliged to return the obtained allowances.

Fundamental changes in transportation: Aviation and shipping

The transport sector is facing a significantly stricter regime. In aviation, from 2029 extend the scope of the ETS to all flights departing from EU airports, whereby the Union will fully pay its share of international emissions, with the exception of specific international agreements. The current blanket exemption for smaller business flights will be abolished, allowing even luxury private jets to contribute to climate protection. In addition, the system will allocate up to 110 million allowances to cover the price difference when introducing more expensive sustainable aviation fuels (SAF) and support for electrification. A complete and innovative innovation is the creation of a space of 3 million allowances to combat the non-carbon impacts of aviation, specifically to financially support airlines that will avoid the formation of warming contrails with their flight paths.

In maritime transport, the scope of the system will also be extended to smaller vessels over 400 gross tons (previously the limit was 5,000 tonnes). The EU is also taking a strong stance against circumvention: nearby non-EU ports used by ships for transhipment purposes only to circumvent ETS payments will lose their port of call status. A new Sustainable Marine Fuels Support Mechanism (SMAP) is also being introduced, which will provide the shipping industry with funding for innovation and clean propulsion.

Waste incineration and the new era of carbon capture (CCU)

One of the most controversial points of the reform, against which there was considerable opposition, is inclusion of municipal waste in the EU ETS. While hazardous waste incinerators will remain excluded from the market, conventional large municipal waste incinerators will be gradually integrated into the system between 2031 and 2034. From 2034, they will surrender allowances for 100 % of their verified emissions. However, Member States will be given the option of a temporary opt-out until 2035 if they introduce an adequate national carbon tax and meet strict European targets for recycling and landfill reduction.

A fundamental shift occurs when carbon capture and utilization (CCU).

If the captured carbon is used industrially in products from which it is later released (such as synthetic e-fuels), the accounting for emissions will shift from the point of production to the distributor or final consumer. By doing so, the EU will eliminate double taxation and significantly support industries that capture and recycle carbon into new products.

Funds and market stability

To stabilise the shrinking allowance market, the EU will adjust the parameters of its Market Stability Reserves (MSR). From 2029, its limits will be reduced by 4 % annually to reflect the gradual withdrawal of allowances from circulation and to avoid extreme price shocks for European companies. An indirect victim of the political pressures of these changes is the parallel "ETS 2" system targeting buildings and road transport, the implementation of which is being postponed from 2027 to 2028 at the request of Poland and Hungary.

Despite the concessions, the reform introduces stricter rules for drawing national funds from auctions. Member States must use at least 50% of the % revenues for clearly defined priority areas such as clean technologies, grid expansion and decarbonisation. Any investments that would reinforce the EU's long-term dependence on fossil fuels are completely prohibited.

The current revision of the EU ETS shows a new pragmatism in Europe. On the one hand, it responds to the concerns of heavy industry and the threat of losing competitiveness with massive subsidies and reliefs, but on the other hand, it extends the obligation to pay for emissions to landfills, transport and smaller ships. The EU is sending a clear message: decarbonisation is changing from a purely ecological vision to a necessary condition for saving Europe's long-term economic and technological strength in the world. JRi&CO2AI