European Parliament proposes historic carbon market reform to boost competitiveness and accelerate decarbonization
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The European Union has launched one of the most far-reaching overhauls of its climate policy by presenting a proposal to modernize the EU Emissions Trading System (EU ETS), the bloc's primary economic instrument for carbon pricing. The reform aims to align the mechanism with Europe's new climate target of reducing net greenhouse gas emissions by 90% by 2040, while simultaneously seeking to preserve industrial competitiveness, enhance energy security, and reduce market volatility. The proposal represents a significant evolution of the strategy launched by the "Fit for 55" package, signaling a more pragmatic approach based on economic incentives, technological innovation, and the strengthening of Europe's industrial base.
New ETS combines decarbonization, industrial policy, and energy security
Among the most significant changes is the extension of the EU ETS beyond 2040, accompanied by a gradual adjustment of the emissions cap to meet the new climate targets. The proposal maintains the controlled issuance of carbon allowances, preserves free allocation for strategic industrial sectors beyond 2030, and makes part of this benefit conditional on investments in decarbonization projects within Europe itself. In parallel, it envisages the creation of a European Industrial Decarbonization Bank—with estimated resources of €100 billion—to finance projects involving electrification, low-carbon hydrogen production, carbon capture, utilization, and storage (CCUS), and lower-emission industrial processes. The package also expands the resources of the Innovation Fund to accelerate the development of clean technologies and strengthen European technological leadership.
The proposal also introduces novel mechanisms to increase the economic efficiency of the carbon market. These include the incorporation of permanent carbon removals—such as BioCCS and direct atmospheric CO₂ capture with geological storage—, the future possibility of limited use of high-integrity international credits after 2036, the revision of the Market Stability Reserve (MSR) to reduce excessive carbon price volatility, and the expansion of regulatory coverage to the maritime, international aviation, and municipal waste incineration sectors.
This set of measures highlights a shift in focus: beyond mere emissions reduction, the ETS is now being utilized as an instrument for industrial policy, energy security, and global competitiveness. In many respects, this evolution aligns the European strategy with principles advocated by Brazil—particularly the pursuit of technology neutrality, the valuing of diverse decarbonization pathways, the strengthening of domestic industry, and the use of economic instruments to foster an energy transition that is efficient, resilient, and oriented toward sustainable development.
