With climate ambitions in question, EU reforms carbon market

The European Union on Friday (July 17, 2026) unveils reforms of its carbon market, after fierce wrangling between countries, industry and activists over the pace of the bloc’s climate push.

Brussels has been under intense pressure to overhaul the two-decade-old Emissions Trading System (ETS), as the 27-nation EU seeks to shore up industry while tackling high energy costs.

In the face of the spike in energy prices caused by the U.S.-Iran war and the record heatwaves in Europe, advocates have been pushing for the EU to stick to its ambitious climate goals.

But, caught between the United States and China, momentum has shifted to a more pro-business stance since the start of European Commission chief Ursula von der Leyen’s second mandate in 2024 — prompting a rollback of environmental rules that marked her first term. In a bid to appease countries such as Italy, Poland and the Czech Republic, her executive looks set to grant companies extra wiggle room.

The ETS was already scheduled for review, but the July overhaul has become a political flashpoint pitching those carbon-intensive economies against the system’s defenders such as Spain and the Scandinavian nations.

Separately the EU is also set to present a target for bolstering the use of clean electricity from renewable sources as opposed to fossil fuels by 2040, with electricity still representing only 23% of final energy consumption in the bloc.

Waste and flights?

Since 2005, the EU’s carbon trading system has sought to tackle climate change by curbing pollution from power producers and energy-intensive industries such as steel, cement and chemicals.

The ETS forces heavy polluters to pay for the greenhouse gases they emit, obliging them to buy allowances that are capped in number, sold in auctions and tradable. The price of a tonne of carbon dioxide varies, currently standing at around 80 euros, while the total number of permits shrinks over time to encourage emission cuts. To support the transition, companies receive some free allowances, but these are gradually reduced and were initially due to disappear by 2034.

Now the commission is expected to propose greater flexibility for industry, with conditions. This could mean free allowances being phased out more slowly and extended beyond 2034, provided companies commit to long term decarbonisation.

At member-State level, Brussels will push countries to channel revenues from the ETS into decarbonising industry — an area where performance varies widely. The EU also has to decide whether to extend the scheme to cover the waste sector and international flights departing from the bloc — a move strongly opposed by airlines.

Other sensitive topics are what role it determines carbon capture technology can play in businesses or whether they can acquire carbon credits from programmes outside the EU that would be counted towards their emissions reductions.

‘Backtracking’

Accusing the ETS of pushing up electricity prices and symbolising EU bureaucracy, large segments of European industry — notably Germany’s chemical sector — have turned on the carbon trading scheme and say it needs an overhaul. But not all sectors are in favour of watering it down.

Neil Makaroff, a Specialist in the Ecological Transition at the Strategic Perspectives Think Tank, said, “it is often the sectors that have invested very little” in decarbonisation at the European level that are the most critical of the ETS.

“Conversely, other companies have chosen to invest heavily in Europe in decarbonisation and electrification, in sectors such as steel, cement, and glass,” he said. “For them, backtracking would mean losing their pioneering advantage.”

One collateral victim in the reforms is likely to be “ETS 2” — the planned extension of carbon pricing to road transport and building heating, which has already been pushed back from 2027 to 2028 at the request of countries including Poland and Hungary.