On 17 July, the European Commission unveiled a targeted overhaul of the EU Emissions Trading System (EU ETS), aiming to boost the bloc’s industrial competitiveness while keeping it on track to meet its 2040 climate goals.

The proposed reforms position the EU ETS as a key investment tool, introducing a new Industrial Decarbonisation Bank and an Investment Booster alongside continued support through the Innovation Fund and the Modernisation Fund to accelerate industrial decarbonisation.

The package also seeks to modernise the EU carbon market by strengthening incentives for companies to invest in low-carbon technologies within Europe. It includes updates to the rules governing free emissions allowances and the Carbon Border Adjustment Mechanism (CBAM), tighter provisions for the aviation and maritime sectors, and a gradual extension of emissions trading to cover municipal waste incineration.

What are the main changes proposed under the review of the EU Emissions Trading System ?
1. Substantially strengthening the support towards decarbonization with a focus on investments , in line with the European Council June 2026 conclusions and the Clean Industrial Deal:

  • Establishing the Industrial Decarbonization Bank (IDB) – to provide €100 billion in funding to industrial decarbonization projects and returning a higher share of EU ETS revenues to sectors covered by the EU ETS. The ETS Investment Booster will kick-start the Bank by rewarding companies that invest early in decarbonization with an estimated €30 billion as phase I of the Industrial Decarbonization Bank.  
  • Maintaining the Innovation Fund as the key tool to bring low carbon innovation to market and enhance the deployment of clean-tech industries.
  • Strengthening the requirements on how Member States spend ETS auction revenues. Member States will be required to spend 50% of their national ETS revenues on investments to decarbonize ETS sectors.

2. Providing relief to industry while guaranteeing a robust EU carbon market , aligned with the 2040 target:

  • Aligning the EU ETS with the Union’s 2040 emission reduction target of -90%, adjusting the EU ETS reduction trajectory from 2031. This change means allowances will continue to be issued into the 2040s. It updates the Linear Reduction Factor (LRF) of 3.7% for 2031 to 2035 and 1.7% for 2036-2040.
  • Considering the use of high-integrity international credits from 2036, as set out under the European Climate Law , by establishing a facility to consider the purchase of such credits to create additional emissions space in the EU ETS up to 2% while maintaining the 90% target.
  • The integration of 250 Mt high-quality permanent domestic carbon removals in ETS will create more breathing space for EU industry (more allowances can be made available) and kickstart the market for removals.
  • The Market Stability Reserve will be made more dynamic, with its parameters adjusted to the shrinking market after 2030. The rate at which it absorbs allowances will drop to 12% from the current 24%, a change that will mean more permits can stay in the market for longer. 
  • Modernizing free allocation by extending benchmark-based allocation beyond 2030, while making continued support conditional on investing in decarbonization in the EU and continuing the possibility support indirect carbon costs
  • Introducing targeted simplification elements to benefit industry and public authorities by reducing administrative compliance costs and enhancing system implementation.

3. Continuing EU solidarity in support of the transition:

Demonstrating continued solidarity through the Modernization Fund using ETS funding to improve energy systems and contribute to industrial decarbonization in lower-income Member States. The proposal includes strong safeguards concerning rule of law to protect the resources of the Modernization Fund.

4. Ensuring a whole-of-economy approach: Accelerating the decarbonization of the maritime and aviation sectors, integrating municipal waste incineration, and providing further support to Sustainable Aviation Fuels:

  • Dedicated direct support to maritime and aviation sectors for the uptake of EU-produced sustainable aviation and maritime fuels, clean technologies and hydrogen
  • Ensuring effective carbon pricing for the EU’s fair share of international aviation emissions through the application of the EU ETS to departing international flights to destinations within 5000 km from EU center and to all incoming and departing flights by business jets. The proposal also continues to implement CORSIA in law for 2027-35 and supports multilateral action by introducing a deduction mechanism for costs incurred under CORSIA, avoiding double carbon pricing.
  • Making the system more effective for the maritime sector by reducing the risk of evasion, extending certain derogations and ensuring a level playing field through the extension of the ETS scope to certain categories of smaller vessels (between 400 and 5 000 gross tonnage). The proposal also introduces simplification measures for shipping companies and supports progress at the International Maritime Organization (IMO) by avoiding double payments by shipping companies.
  • Promoting circular carbon capture and utilization (CCU) , alongside the gradual inclusion of municipal waste incineration in the ETS, supported by appropriate safeguards and investment measures. It also shifts the point at which emissions are accounted for captured CO2 embedded in products and e-fuels, creating an alternative pathway for hard-to-abate industries to decarbonize.

Industry endorses cleaner fuel incentives, presses for improvements

As stated, the World Shipping Council (WSC) supports the proposal, noting that while the shipping industry has invested over €160 billion in vessels capable of using renewable fuels, the high cost of sustainable fuels, currently 100–400% more expensive than conventional fuels, remains a major obstacle.

Liner shipping has already invested over €160 billion in ships that can operate on renewable fuels, but these cleaner ships need cleaner fuels. Closing the price gap is one of the most practical ways to get those fuels into ships’ tanks.

…said Simon Bergulf, Vice President, Environment and Climate at World Shipping Council. 

The WSC also supports reinvesting EU Emissions Trading System (ETS) revenues into maritime decarbonisation, including alternative fuel infrastructure and port electrification, which would help strengthen European ports and advance the EU’s climate goals.

However, the WSC raises concerns about the proposal to expand the list of neighbouring non-EU ports affected by ETS rules based solely on their infrastructure, arguing this could unfairly reduce their competitiveness without addressing emissions.

The organization also calls for a stronger commitment in the final ETS revisions to prevent double carbon payments if a global emissions measure is adopted through the International Maritime Organization (IMO).

Furthermore, European Shipowners|ECSA has also welcomed the decision, noting that it is a step in the right direction, however the proposal fails to sufficiently support energy efficiency projects and the uptake of clean technologies, falling short of supporting the full spectrum of technologies set out in the Commission proposal on the Industrial Accelerator Act.

Today, the Commission has taken a first step to earmark ETS revenues at EU and national level. Support for sustainable fuels is welcome and necessary to make them available at European and global level. In this regard, support for the availability of fuels in third countries is encouraging.

…said  Sotiris Raptis, Secretary General of European Shipowners|ECSA.

What must be improved, according to European Shipowners:

  • More support from ETS revenues: The allocation of 110 million allowances is only a start: it amounts to approximately EUR 10 billion out of the EUR 90 billion that the sector is expected to pay into the system between 2030 and 2040. The full potential of the revenues generated by shipping must be used for the energy transition of the sector.
  • IMO process: The proposal addresses only double payments in relation to a future IMO global agreement. This falls short of what is needed: a strong review clause under which the EU measures are reviewed and withdrawn once a global agreement is adopted at the IMO.