The European Commission has put forward a proposal to revise the EU's Emissions Trading System (ETS), aiming to alleviate the pressure on companies during the decarbonization process while ensuring the bloc meets its 2040 climate objectives.

The proposed changes, announced by the Commission, include updating the so-called "linear reduction factor," which dictates the annual rate at which the overall cap on EU carbon emissions is lowered. This factor is set to be adjusted to 3.7% for the period 2031-2035 and further to 1.7% for 2036-2040, making the reduction trajectory more gradual. The current factor stands at 4.3%, with a planned increase to 4.4% for 2028-2030.

The proposal also seeks to extend the period during which companies can receive free carbon emission allowances, continuing this support beyond 2030. For industries covered by the EU's Carbon Border Adjustment Mechanism (CBAM), the phase-out of free allowances will be slowed down, with the free allocation system now proposed to last until 2038. CBAM, often referred to as a "carbon border tax," imposes levies on imports such as cement and steel from countries with less stringent carbon emission regulations.

Furthermore, the plan outlines an expansion of the ETS's scope. It aims to refine the emissions trading rules for the aviation and maritime sectors and formally include the waste incineration industry under the system. Additionally, the EU plans to establish an "Industrial Decarbonisation Bank" to manage a fund of 100 billion euros, supporting large-scale industrial decarbonization projects across Europe. The first phase of this initiative is expected to launch before 2030.

The EU Emissions Trading System was launched in 2005. It requires companies to pay for their greenhouse gas emissions, with the revenue used to support the green transition. It is a key policy instrument for the EU to achieve its goal of reducing net greenhouse gas emissions by 90% from 1990 levels by 2040.