OPIS Insights

After the European Commissioner for Climate, Wopke Hoekstra, intervened at the European Parliament on May 4, the European Commission convened a multi-stakeholder roundtable to gather immediate feedback from industry, NGOs and think tanks ahead of a proposal expected to land within weeks. (See video replay.) The meeting’s objective was to consult stakeholders on their needs and to create a common understanding of the review scope.

But it was the Commission itself that made the most consequential interventions of the day. In a striking act of pre-legislative transparency, the Directorate-General for Climate Action (DG CLIMA) Director General, Kurt Vandenberghe, and his colleagues laid out the fundamentals of the forthcoming proposal in considerable detail – a month before its scheduled release. “We have no more secrets,” Vandenberghe told participants as the presentations concluded. The main elements of the revision include:

• Aligning the 2040 climate goal with a lower linear reduction factor (LRF)
• Use of international carbon credits
• Use of permanent carbon removals certified under the EU Carbon Removal Certification Framework (CRCF)
• Market Stability Reserve (MSR) thresholds and fallback benchmarks
• Review the rules for waste, maritime and aviation sectors
• Channeling ETS revenues in a simpler and more efficient way through the Industrial Decarbonization Fund and Innovation Fund
• Addressing carbon leakage risks through free allocation and the Carbon Border Adjustment Mechanism (CBAM)

EU 2040 Climate Goals

Following the adoption of the revised EU Climate Law, which sets the 2040 target at a 90% net reduction, the Emissions Trading System (ETS) cap and its LRF will be recalibrated accordingly – at a somewhat lower annual pace given the extended horizon.

The 2040 framework also permits up to 5% of international credits to count toward the climate goal from 2036 onward, but the Commission was unambiguous: operators will not be able to surrender international credits directly inside the ETS. Any role for such credits will be indirect, channeled through institutional arrangements and subject to strict quality safeguards.

Carbon Removals

Domestic permanent removals, certified under the EU CRCF, are set to play a far more prominent role. Their integration serves a dual purpose — creating additional headroom for hard-to-abate sectors while giving the nascent removal industry the offtake certainty it needs to scale. The Commission stressed this is a complement to mitigation, not a substitute. Three integration models are under consideration: central public purchase of removal credits, with equivalent allowances issued into the system; operator-led procurement and surrender; and a one-in, one-out mechanism that reduces auctions for every removal certificate surrendered, shifting the system from gross to net emissions accounting.

Market Stability Reserve

Beyond the ongoing amendment to avoid the invalidation of unused allowances, the Commission is reviewing the MSR’s core parameters – intake and release rates and activation thresholds – to ensure the mechanism remains calibrated to a tightening market. Two broad approaches are under consideration: adjusted fixed thresholds (650 million – 310 million) and dynamic thresholds (833 million – 400 million).

Non-Permanent Carbon Capture and Utilization (CCU) Products

Currently, only CO2 stored permanently underground exempts operators from surrender obligations. The revision may extend that logic to CO2 embedded in manufactured products — a move designed to incentivize the use of carbon as an industrial feedstock. The accounting debate centers on whether to track emissions at the point of capture (upstream) or when the product eventually degrades (downstream hybrid). The public consultation leaned toward hybrid accounting.

Waste

The Commission is obliged to assess whether municipal waste incineration – and potentially hazardous waste and landfill – should enter the ETS. The public consultation returned a slim majority in favor, though the sector itself pushed back. No decision was announced, but the question remains live, and the Commission emphasized it must be designed in tandem with the ongoing Circular Economy Act review.

ETS Revenues Usage

The ETS has raised around Euro 260 billion since 2013, mostly flowing to national budgets. Member States are already required to spend 100% on climate and energy, but the Commission acknowledged that reporting remains opaque and enforcement weak. A particular concern: only about 5% of national revenues are allocated to industrial decarbonization. The revision will tighten transparency requirements and revisit the list of eligible expenditure purposes.

Free Allocation and Carbon Leakage

The Commission will maintain its three-tier structure – full free allocation for carbon-leakage sectors, partial for district heating, declining allocation for others – while tightening the conditions attached to it. Updated benchmark values were published the day before the roundtable. The Commission is also weighing whether to replace the current 52 product benchmarks with more granular, sector-specific formats.

The deeper problem is structural: after two decades of generous free allocation, many industrial operators have faced an effective carbon price of around Euro 10 per metric ton rather than the headline Euro 70 – far too low to drive investment in clean technology. Existing conditionalities are a step forward but still limited in reach. A temporary decarbonization fund will bridge 2026–2027 while a permanent, trade-law-compatible solution is designed.

Innovation Fund and Industrial Decarbonization Bank

The Innovation Fund has awarded Euro 14.6 billion to 253 projects since 2020, and the latest call drew Euro 18.7 billion in applications – clear evidence of a strong investable pipeline. The Commission will preserve its bottom-up, excellence-based model and simplify its administration.

But the Fund alone is not enough. It targets first-of-kind technologies; what is missing is an instrument to push commercially proven but still costly technologies into widespread deployment. That gap is the rationale for the Industrial Decarbonisation Bank. Its first phase – the ETS Investment Booster – replaces the current slow, competitive grant model with an automatic, entitlement-based mechanism: once quality thresholds are met, support is guaranteed, applications are accepted monthly, and payments are tied to actual emissions reductions delivered. A second phase introduces auction-style competition and contracts for difference to stabilize project revenues over the long term.

Maritime and Aviation

For maritime, the carbon price is working under the ETS for all domestic activity and 50% of international emissions., so to To enable investment in the right direction, the Commission is looking to apply a similar setting to maritime fuels as there is for the aviation sector through allocating emission allowances to companies when they uptake sustainable maritime fuels, electrification and wind. This should simplify and harmonize the systems to monitor and report, as well as strengthen safeguards. The Commission is assessing whether to extend the ETS to specific categories of small vessels, avoiding double payments by ensuring the ETS is aligned with the International Maritime Organization’s measures when applicable.

For aviation, the effectiveness of the International Civil Aviation Organization’s (ICAO’s) global scheme, CORSIA, is being assessed. Elements such as the integrity of the scheme and the participating countries are key open questions that will be reviewed. Whatever the scope of the ETS, the review will also look for fairer coverage, including private jets. The Commission is also weighing stronger support for sustainable aviation fuels (SAF) — both on the demand and production sides — and may introduce incentives for electrification.

Stakeholders

Across companies, trade associations and think tanks, the message was clear: market participants need predictability and stability. Beyond that, other demands shaped the discussion. Industry flagged the lack of infrastructure enabling electrification. Stakeholders urged member states to invest ETS revenues back into industrial decarbonization. Aviation stakeholders called for the reintroduction of free allowances on international routes to correct competitive distortions, asked for clarity on CORSIA implementation, and pressed for stronger incentives on SAF production rather than demand alone.

Looking Ahead

The legislative clock is already running. The Commission’s formal proposal is expected on July 15, with co-decision between the European Parliament and the Council anticipated to run through 2026 and into 2027, and final implementation targeted for 2028.