EU Proposes Sweeping Carbon Market Reforms Amid Climate Crisis

The European Commission proposed sweeping reforms to the EU Emissions Trading System (ETS), aiming to reshape Europe's climate policies amid record-breaking heatwaves and wildfires. The changes include extending free pollution permits for heavy industries until 2038—four years longer than previously planned—and slowing the rate at which companies must cut emissions.

The overhaul follows extreme weather events across Europe, with Western Europe experiencing its hottest June ever. Scientists have stated that such record-breaking temperatures would be 'virtually impossible' without climate breakdown. The EU aims to reduce greenhouse gas emissions by 90% by 2040 and eliminate fossil fuels from its economy by mid-century.

Critics argue the proposed changes risk weakening Europe's most effective tool for cutting greenhouse gas emissions. The 'linear reduction factor,' which determines how quickly companies must cut emissions, will be lowered to 3.7% in 2031 and 1.7% in 2036 from the current rate of 4.3%. Additionally, the 'market stability reserve' will halve its rate of adding or removing permits to 12%, giving industries more leeway to emit CO₂.

The Commission also plans to buy international carbon offset credits to cover 2% of the emissions reductions required by ETS sectors from 2036. Meanwhile, Italy plans to use the European Union's so-called 'escape clause' from the bloc's budget rules to fund measures aimed at softening energy costs in 2027 and 2028, according to a statement from Prime Minister Giorgia Meloni's office.

In a meeting between Meloni and senior coalition figures, there was broad agreement on using the EU's flexibility to help families and businesses cope with rising energy bills over the next two years. This move suggests Italy is preparing to drop efforts to bring its budget deficit below the key 3% of GDP ceiling and exit the EU's ongoing excessive deficit procedure.

The European Commission also unveiled an Electrification Action Plan aimed at increasing electricity's share of final energy consumption from around 23% today to 46% by 2040, with an interim reference target of 32% by 2030. The strategy seeks to accelerate the electrification of transport, buildings, and industry while tackling Europe's biggest energy paradox: electricity is often more expensive than the fossil fuels policymakers want consumers and businesses to abandon.

The Commission argues that turning Europe into the world's first 'electro-continent' would dramatically reduce fossil fuel consumption and cut the bloc's energy import bill by as much as €260 billion ($297 billion) a year by 2040. However, Europe still runs overwhelmingly on fossil fuels, with oil, gas, and coal accounting for more than 60% of the EU's overall energy mix.

The scale of investment required is daunting. The Commission recently estimated that upgrading and expanding Europe's ageing transmission and distribution networks will require around €1.2 trillion of investment by 2040. Programmes designed to encourage electrification in transport, industry, and buildings will likely necessitate tens of billions more.