The European Commission has announced that it has presented a proposal to revise the EU Emissions Trading System (ETS) alongside a new Electrification Action Plan aimed at accelerating industrial decarbonization, strengthening Europe’s competitiveness and making the EU the world’s first “electro-powered continent.”
The Commission stated that although around 70 percent of the EU’s electricity is now generated from domestic clean energy sources, the electrification rate of final energy demand has remained at 23 percent over the past decade. It will therefore assess an indicative electrification target of 46 percent by 2040 as part of the post-2030 Energy Union package. Achieving this target could reduce the EU’s annual fossil fuel import bill by €260 billion by 2040 while improving energy security, lowering energy costs and enhancing industrial competitiveness.
Commission President Ursula von der Leyen stated that reducing Europe’s dependence on imported fossil fuels requires accelerating the use of electricity generated from domestic clean energy sources. She added that the proposed measures are intended to lower electricity prices, adapt the EU carbon market to changing global conditions, support industrial decarbonization and strengthen Europe’s energy independence.
Commission proposes changes to ETS framework
As part of the ETS review, the Commission proposed updating the Linear Reduction Factor (LRF) to 3.7 percent for the 2031-35 period and 1.7 percent for 2036-40, creating a more gradual emissions reduction pathway while maintaining alignment with the EU Climate Law. The proposal would also allow the use of up to two percent high-quality international carbon credits during the 2036-40 period to support decarbonization projects abroad and provide additional flexibility as domestic emissions reductions become more difficult.
The Commission also proposed expanding financial support for industrial decarbonization. The Industrial Decarbonisation Bank would receive €100 billion to finance large-scale industrial decarbonization projects across Europe, while an ETS Investment Booster would become available before 2030 as the bank’s first implementation phase. The ETS Innovation Fund would continue supporting the commercialization of innovative low-carbon technologies, and member states would be required to allocate 50 percent of their national ETS revenues to decarbonizing ETS-covered sectors, representing more than €100 billion in investments before 2030.
The proposal would maintain free ETS allowances beyond 2030 while linking them more closely to investments in decarbonization within Europe. It also introduces permanent carbon removals into the ETS to provide additional flexibility for hard-to-abate sectors and support the deployment of carbon removal technologies.
In a separate proposal on ETS benchmarks, the Commission plans to increase free allocation to industry by approximately €6 billion during the 2026-30 period. For sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the phase-out of free allowances would be slowed, with free allocation extended until 2038.
The Commission also proposed reforming the Market Stability Reserve (MSR) to improve market stability, maintain liquidity and reduce excessive carbon price volatility. The proposal complements the Commission’s earlier initiative to stop the automatic cancellation of allowances held in the reserve.
In addition, the revised ETS would strengthen provisions covering the aviation and maritime sectors and extend the system to waste incineration in an effort to create new business opportunities, reduce circumvention risks and align the EU framework with international developments.
Electrification Action Plan targets lower energy costs
Alongside the ETS review, the Commission unveiled its Electrification Action Plan, which seeks to accelerate the adoption of electricity-based technologies across transport, buildings and industry. According to the Commission, battery electric vehicles can reduce operating costs by up to 78 percent compared with conventional vehicles, while replacing gas boilers with heat pumps can lower household heating costs by up to 60 percent on average across the EU.
To accelerate electrification, the Commission proposed measures to narrow the price gap between electricity and fossil fuels by allowing member states to reduce network charges for certain consumer groups and lower taxes for energy-intensive industries. The proposal also aims to ensure electricity is not taxed more heavily than natural gas while promoting the deployment of smart meters to help consumers better manage energy consumption. The Electrification Action Plan also proposes measures to reduce the upfront costs of technologies such as heat pumps, electric vehicles and batteries through instruments including social leasing schemes, ETS financial instruments, the Social Climate Fund, the Industrial Decarbonisation Bank and a Clean Heat Market mechanism.
The Commission further emphasized the need to accelerate electricity grid deployment, noting that although Europe’s grids are among the world’s most reliable, lengthy connection waiting times and insufficient grid utilization continue to hinder electrification. It called for the rapid adoption of the Grids Package proposed last year, while also promoting investment in manufacturing capacity, workforce skills and clean energy technologies to support the broader electrification of the European economy.
EUROFER warns key decarbonization challenges remain unresolved
Following the Commission’s announcement, the European Steel Association (EUROFER) stated that the proposal to revise the EU ETS fails to address several key issues that continue to undermine the business case for industrial decarbonization, despite adjustments to the phase-out of free emission allowances. Axel Eggert, director general of EUROFER, said the central question remains how European steelmakers will gain access to affordable electricity and renewable hydrogen. He stated that companies are still expected to invest billions of euros in low-carbon production technologies without certainty that the necessary electricity and hydrogen infrastructure will be available, that sufficient clean electricity will be supplied, or that energy prices will remain competitive enough to support European steel production and its downstream value chains.
Eggert also argued that the proposed changes to the phase-out of free ETS allowances do not significantly reduce investment uncertainty. He noted that the reduction in free allocation for the steel sector around 2029-30 remains largely unchanged, while the existing benchmark methodology could still result in a substantial reduction in the main steel benchmark in 2031, weakening both carbon leakage protection and incentives for companies investing early in decarbonization. He emphasized that the proposal also fails to introduce the long-awaited structural solution for exports from sectors covered by the CBAM.
In addition, the association warned that the new conditions attached to free allocation would increase administrative requirements and legal uncertainty, particularly where investment decisions depend on factors outside companies’ direct control. Eggert stated that although the EU has set ambitious climate targets, it has yet to deliver the enabling conditions that it has repeatedly promised across all member states. Without those conditions, he argued, the ETS establishes a deadline for decarbonization without providing a credible pathway to achieve it.
He added that the European steel industry has already committed to replacing around 35 percent of its conventional steelmaking capacity with hydrogen-ready facilities by the 2030-32 period. However, expecting the sector to complete the transition by the end of 2033 without the necessary supporting conditions is unrealistic, warning that failure to provide those conditions could result in the loss of a significant share of Europe’s steel industry rather than its successful decarbonization.
