EU proposes softer carbon market rules for companies

The European Union proposed easing its carbon trading scheme for companies as it set out reforms to one of its main climate policies under pressure to support industry.

The proposed overhaul of the Emissions Trading System, or ETS, follows disputes among EU countries, industry groups and activists over the speed of the bloc's climate policy. The concessions put forward by Brussels must still be approved by all 27 member states and EU lawmakers.

Under the proposal, European industry would be able to continue emitting carbon for longer and at lower cost than previously planned. Companies that commit to investing in decarbonisation would still be able to receive free carbon allowances until 2038, instead of 2034.

EU climate commissioner Wopke Hoekstra said the bloc was taking what he called a more business-friendly and savvy approach, while saying the EU was keeping its overall climate ambitions.

From 2036, manufacturers would also be allowed to buy international carbon credits by funding decarbonisation projects outside the EU, with those credits counting toward their emissions reductions.

The ETS has operated since 2005 and is aimed at limiting pollution from power producers and energy-intensive industries including steel, cement and chemicals. It requires heavy polluters to pay for greenhouse gases by buying allowances, which are capped in number, auctioned and tradable.

The system was already due for review. The July overhaul has divided countries including Italy, Poland and the Czech Republic, which wanted the system softened, from supporters of the current system including Spain and Scandinavian countries.

Supporters of stronger climate action have argued that the EU should maintain its goals despite higher energy prices linked in the source to the US-Iran war and record heatwaves in Europe. The source also said EU policy has moved in a more pro-business direction since the start of European Commission chief Ursula von der Leyen's second mandate in 2024.

In a separate step, Brussels set out a target to increase the use of clean electricity from renewable sources by 2040. It wants renewable electricity to make up 46 percent of final energy consumption in the bloc, about twice the current level.

The Commission is also pressing countries to direct ETS revenues toward decarbonising industry, an area where the source said performance varies widely.

Flights and waste were among the sensitive issues in the reform. For flights outside Europe, the Commission proposed a staggered approach. Flights outside Europe would be covered by the ETS if they are under 5,000 kilometres. The source gave Frankfurt-to-Dubai and Frankfurt-to-Istanbul as examples of flights that would be covered, while Frankfurt-to-Tokyo would not. All private jet flights would also be included.

Brussels also wants to gradually bring the waste sector into the carbon market. Member states could receive an exemption until 2035 if they meet recycling targets or already have an equivalent national tax.

The reforms also appear likely to affect ETS 2, the planned extension of carbon pricing to road transport and building heating. That measure has already been delayed from 2027 to 2028 at the request of countries including Poland and Hungary.