By: Alessandro Pecorari, Policy & Public Affairs Manager
Aimed at transforming Europe into the world’s first ‘electro-powered continent’, the European Commission has now published its long-awaited review of the EU Emissions Trading System (ETS), alongside a new Electrification Plan. The package will now open formal negotiations between Council and Parliament into one of the most significant climate files, defining the past few years of the EU’s decarbonisation strategy. EU leaders have set an ambitious target for Q1 2027 for a final agreement, with implementation likely staggered across 2027-28.
What’s Changing?
Decelerating emission cuts lies at the core of the Commission’s review: Under the proposed plan, the annual reduction in pollution caps would fall from its present levels – 4.3% – to 3.7% between 2031 and 2035 and 1.7% between 2036 and 2040, ultimately aiming to eliminate the cap around 2046 and 2048. The Commission presents this trajectory as fully consistent with the EU’s 2040 climate goals and the 90% reduction target. The 1.7% figure is itself conditional as it could revert to a steeper 2.7% from 2036 if high-quality international credits prove unavailable at sufficient scale. This safeguard is worth flagging for investors, particularly those modelling long-term supply.
Beyond 2030, free emissions allowances will become conditional on decarbonisation investment: From 2031, 80% of an installation’s free allocation depends on published decarbonisation investment plans, with the remaining 20% released only once emissions reductions are verified. Member States will also be required to direct more of their national ETS revenues toward decarbonising ETS sectors. However, sectors covered by the Carbon Border Adjustment Mechanism will keep free allocation until 2038 – four years later than previously planned.
On the funding side, the Commission points to a substantial increase in support for this investment: on top of the existing €44 billion Innovation Fund for first-of-a-kind clean tech, a new Industrial Decarbonisation Bank would provide €100 billion to support low-carbon deployment in energy-intensive sectors, including a €30 billion ‘ETS Investment Booster’ brought forward to start earlier. The €46 billion Modernisation Fund continues to support industrial decarbonisation in lower-income Member States.
The Market Stability Reserve (MSR) is also set to become more responsive under the plan, halving its intake rate from 24% to 12% from 2028, with thresholds shifting from fixed to dynamic (adjusting c.4% annually) from 2029 to track the shrinking cap. The Commission has framed this as an effort to reduce volatility, however, critics argue the weaker intake, combined with the removal of the permanent-cancellation ‘invalidation clause’, undermines the MSR’s price-support function just as scarcity should be rising.
The ETS scope also widens: international flights arriving from within 5,000km from 2029; smaller vessels down to 400 gross tonnage from 2031, and waste incineration from 2031. The Commission frames this expansion, alongside the extension to permanent domestic carbon removals, as driving the clean transition across the wider economy and levelling the playing field for EU industries. It also expects the reform to channel significantly more funding back to the maritime and aviation sectors to support their decarbonisation, alongside incentives to establish lead markets for sustainable fuels and permanent domestic carbon removals.
What Does This Mean for Investors?
For renewable generation:
A softer carbon price trajectory could weaken the power price support behind merchant revenue assumptions, meaning members with merchant exposure may need to stress-test against the proposed revised cap. However, this should be considered alongside the Electrification Action Plan, which sets an indicative target of 46% electrification of final energy demand by 2040, up from 23% today, with the Commission estimating this could cut the EU’s fossil fuel import bill by up to €260 billion a year. The resulting increase in electricity consumption could support a deeper pipeline of grid, storage and electrification projects seeking private capital.
For gas and LNG infrastructure:
The slower pathway and extended free allocation reduce near-term regulatory and cost risk, supporting utilisation and contracted cash flows. A decelerated pathway and extended free allocations will reduce near-term regulatory and cost support, supporting utilisation and contracted cash flows.
For transport and waste assets:
The aviation, maritime and waste incineration provisions bring new carbon cost exposure for airports, ports and energy-from-waste holdings. A tailored aviation scope, which excludes long-haul routes and the largest source markets could limit the impact on hub traffic.
MEP Peter Liese leads the ETS file for the European Parliament and has argued that the previous ETS trajectory was too tight for industry and citizens; opponents, led by the Parliament’s Greens/EFA group, warn that weakening the system now risks Europe’s competitiveness against faster-moving markets, including China, and undermines investment certainty. A provisional agreement for the revised ETS text between Council and Parliament is targeted for the first quarter of 2027.