Ecobiz.asia — The European Commission has proposed a sweeping overhaul of the European Union Emissions Trading System (EU ETS), easing several key carbon market rules in an effort to bolster industrial competitiveness and accelerate electrification. The package, however, has triggered strong reactions from think tanks, environmental groups and the global aviation sector, which warn it could weaken the bloc’s climate ambitions and undermine international carbon governance.

Announced in Brussels on Friday (July 17, 2026) the proposal would slow the annual pace of emissions reductions under the EU ETS by lowering the Linear Reduction Factor (LRF) from the current 4.4% to 3.7% for 2031–2035 and 1.7% for 2036–2040. It also extends free emission allowances for industries covered by the Carbon Border Adjustment Mechanism (CBAM) until 2038, allows the limited use of high-quality international carbon credits between 2036 and 2040, incorporates permanent carbon removals into the ETS, and establishes a €100 billion Industrial Decarbonisation Bank to support clean industrial investment.

Alongside the ETS reform, the Commission unveiled its Electrification Action Plan, setting an indicative target to raise electricity’s share of final energy demand to 46% by 2040. The Commission estimates the shift could reduce the EU’s annual fossil fuel import bill by €260 billion while strengthening energy security and industrial competitiveness.

European Commissioner for Climate, Net Zero and Clean Growth Wopke Hoekstra said the reform is designed to balance three priorities: climate action, competitiveness and energy independence.

“The EU ETS has proven that carbon pricing works,” Hoekstra said, adding that the proposed changes are intended to transform the carbon market into “a genuine engine for innovation and investment” while supporting the EU’s 2040 climate goals.

European Commission President Ursula von der Leyen said Europe’s best path to reducing dependence on imported fossil fuels is to power its economy with clean electricity produced at home.

She described the package as an investment and energy independence strategy that aims to keep the clean transition on track while easing pressure on European industry.

Despite those ambitions, the proposal received a mixed response.

Berlin-based think tank Agora Energiewende welcomed the Electrification Action Plan, describing it as a strong signal that electrification will become central to Europe’s energy transition. It praised the proposed 46% electrification target and measures to expand heat pumps and clean heating.

However, Agora argued that the ETS reform sends conflicting signals to investors by weakening the EU’s primary carbon pricing mechanism. It warned that slowing the pace of emissions reductions could create an oversupplied carbon market, weaken the carbon price signal and discourage investment in low-carbon technologies.

Julia Metz, Director of Agora Industry, said a robust carbon price remains essential to give industry the confidence to invest in clean technologies at scale. Without that signal, governments may need to rely more heavily on subsidies to drive industrial transformation.

Climate Action Network (CAN) Europe delivered even sharper criticism, accusing the Commission of substantially weakening the EU’s flagship climate policy.

The coalition argued that slowing emissions reductions, extending free pollution permits, allowing international carbon credits and incorporating carbon removals into the ETS would undermine the system’s environmental integrity.

“Every extra tonne of CO₂ allowed under the ETS makes Europe’s climate challenge harder and more expensive,” CAN Europe Director Chiara Martinelli said, describing the proposal as “a gift to polluters” that rewards companies delaying decarbonisation rather than those investing in cleaner production.

CAN also opposed extending free allowances until 2038, saying companies should receive free permits only if they demonstrate genuine investments in industrial decarbonisation. The group further warned that allowing carbon removals into the compliance market risks creating new loopholes that could delay direct emissions reductions.

Concerns also came from the International Civil Aviation Organization (ICAO), which focused on the proposal to expand the scope of the EU ETS to international aviation from 2029.

ICAO warned that applying the EU ETS alongside the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) could result in double charging of carbon emissions for airlines, fragment global aviation decarbonisation efforts and undermine the only internationally agreed market-based mechanism for reducing emissions from international aviation.

The Commission’s proposal will now enter negotiations with the European Parliament and EU member states, setting the stage for what is expected to be an intense debate over how Europe should balance industrial competitiveness with its long-term climate ambitions. ***