Europe’s most effective tool to cut greenhouse gas emissions ‘risks being weakened’

European Commission proposal to overhaul emissions trading system would give companies less demanding pathway to reductions

Europe’s most effective method of cutting dangerous planet-heating gases risks being weakened after the European Commission proposed an overhaul of its flagship carbon market, critics have said.

In a long-awaited review of the European Union emissions trading system (ETS), the European Commission proposed giving companies a less demanding and cheaper pathway to reduce greenhouse gas emissions.

The review of the ETS – widely seen as Europe’s most effective policy for reducing planet-heating emissions – follows deadly wildfires in Spain and extreme heatwaves across the continent. Western Europe endured its hottest June ever, with record-breaking temperatures scientists said would be “virtually impossible” without climate breakdown .

The review was needed to bring the ETS in line with Europe’s target to reduce greenhouse gas emissions by 90% by 2040, on the way to freeing its economy from fossil fuels by the middle of the century.

But the EU executive has also been under pressure from 10 EU member states that argue the ETS contributes to higher energy costs and damages Europe’s competitiveness.

In response to those concerns, some heavy industries will benefit from free pollution permits for longer, while the number of permits in circulation will be reduced more slowly, also giving companies more leeway.

Since 2005, the EU’s biggest polluters have been required to buy permits to pollute, creating an incentive to invest in cleaner energy generation and manufacturing. The ETS, which was later extended to intra-EU aviation and shipping, is credited with reducing planet-heating emissions by 47% by 2023 compared with 2005 levels.

Under the latest proposals, the ETS would be extended to include municipal waste, with the aim of increasing recycling and cutting the amount of rubbish sent for incineration.

The commission also wants to extend the ETS to flights within a 5,000km radius of a central point in Europe, a distance that would affect airlines flying to north Africa and the Middle East but not China or the US, thus avoiding a new conflict with the Trump administration.

The ETS would also apply to private jets for the first time, ending a privilege for the richest passengers long seen as unfair.

The EU climate commissioner, Wopke Hoekstra, told reporters the ETS was “a phenomenal asset” and Europe would have consumed an extra 100bn cubic metres more gas without the scheme, “making us even more vulnerable” to energy market volatility.

But “the great design” had weaknesses, he said, arguing that key European industries faced unfair competition from non-European rivals that use “heavy state subsidies” and “dubious labour conditions” that even a new carbon-border levy did not fully address.

Some companies, Hoekstra said, had opted to move operations abroad, rather than invest in clean production in Europe. “This can no longer stand,” he said.

Michael Bloss, a German Green MEP, accused the commission of giving industries “a licence to pollute for even longer and at a lower cost”.

He said: “Weakening the emissions trading scheme harms companies that create jobs and growth through climate-friendly production. Those who have invested in the industries and the jobs of the future will be penalised.”

Camille Maury, a senior policy officer on industrial decarbonisation at the wildlife conservation charity WWF’s European policy office, said the commission’s proposal “jeopardises a predictable and effective price on pollution that businesses and investors need to invest in clean technologies”.

The ETS worked, Maury said, “because its core elements reinforce one another: a declining cap on emissions, a meaningful price on pollution and revenues that support the clean transition”. She added: “Just like a Jenga tower, when you start removing building blocks, it destabilises the whole structure.”

The commission has been under heavy pressure to weaken the ETS as member states grapple with the latest energy shock triggered by the Iran war, exposing Europe’s dependency on imported fossil fuels.

Earlier this year, Italy led the charge to scrap the ETS and is among 10 member states that recently called for “pragmatic” reforms, claiming the current system will push industries out of Europe.

In response, seven member states – including the Nordic countries, Spain and the Netherlands, the frontrunners in clean power – last week warned against watering down the ETS because it “risks undue pressure” on efforts to cut emissions.

Under the ETS, companies receive free allowances to help them bear costs of removing dirty fossil fuels from their production systems. The latest proposals mean free allowances for polluting sectors such as steel and cement would not be phased out until 2038, rather than 2034 as planned. But companies would only get free allowances if they demonstrate plans to invest in clean production in Europe.

The EU would give 80% of free permits to companies with plans to make clean investments in Europe, with the remaining 20% distributed after money is spent.

Every year the number of permits is reduced to sharpen the incentives to curb pollution. Under the latest reform, the commission plans to slow down the annual reduction in the cap to 3.7% from 2031, then 1.7% from 2036, compared with 4.3% currently.

WWF said slowing the rate of reduction would allow an additional 2bn tonnes of CO2 to be emitted, raising questions about how the EU would meet its 2040 climate target.

The proposal, which also allows for some of the emissions cuts after 2036 to come from “high-quality” credits that fund decarbonisation abroad, was welcomed by industry groups for its change in pace but criticised for not going far enough.

“Some aspects of the proposal already raise concerns,” said Markus Beyrer, the director general of BusinessEurope. “For example, new conditionalities for free allocations risk increasing bureaucratic complexity, and the uncertain role for international carbon credits is unsatisfactory.”

EU officials rejected charges the plans were inconsistent with climate goals. “These numbers are completely climate-law proof,” said Hoekstra, referring to the EU’s legally binding target to reduce greenhouse gas emissions by 90% by 2040. “The big add-on” from the current proposal, he said, was incentives to ensure “way more investments” on European soil: “Otherwise, if we just have the industry ship out everyone loses. The stuff will not be produced cleaner out of Europe.”

The draft law now has to be agreed among the EU’s 27 member states and the European parliament.

Peter Liese, a veteran German lawmaker from the centre-right European People’s party, who will represent the parliament in negotiating the law, welcomed the proposals. “Climate protection that leads to unemployment is not a global role model,” he said. “Investment within the EU is our goal, and this proposal achieves it far more effectively.”

Launched in 2005, the EU’s emissions trading system was the world’s first carbon market, inspiring similar schemes in around 40 jurisdictions including China, New Zealand, California and other US states.

Ottmar Edenhofer, the director and chief economist at the Potsdam Institute for Climate Impact Research, said the extra flexibility in the commission’s proposal “does not alter the EU’s overall climate policy course” and praised it for including permanent removals of carbon dioxide from the atmosphere.

Separately, the European Commission announced a plan to double the rate of electrification of Europe’s economy to 46% by 2040, compared with 23% today.

“We need to replace the black expensive polluting molecules with cheap homegrown electrons,” the EU’s energy commissioner, Dan Jørgensen, said. He also announced a plan to phase out the €97bn EU taxpayers spent subsidising fossil fuels. “It is a little bit like the doctor that tries to help a patient with diabetes by prescribing sugar,” he said. “We want to get rid of that.”