The European Commission on Friday proposed slowing the annual reduction of the EU’s carbon emissions cap, sending benchmark carbon prices down 0.77 percent to €78.58 per tonne. The linear reduction factor would fall from 4.4 percent to 3.7 percent between 2031 and 2035, then to 1.7 percent from 2036, stretching the trajectory towards the bloc’s 2040 climate target. Free emission allowances for steel, cement and chemicals would be extended to 2038, four years beyond the current 2034 phase-out date, provided companies commit to investing the equivalent value in decarbonisation on European soil.

The reform, presented alongside an electrification action plan, is the Commission’s response to months of pressure from member states and energy-intensive industries warning of plant closures and competitive disadvantage. Under the revised rules, 80 percent of free permits would be granted upfront to firms with board-approved decarbonisation plans, with the remaining 20 percent released after investments are verified. Brussels also proposed that half of all national ETS auction revenues—which have totalled €260 billion since 2013—be channelled back into industrial decarbonisation, a sharp increase from the current estimated 5 percent.

Viewed from Stockholm and Helsinki, the proposal undermines the predictability that underpinned multi-billion-euro investments in green steel. Swedish Prime Minister Ulf Kristersson called the changes “unfair to Swedish companies that have led the transition,” while SSAB and Stegra, which are building hydrogen-based steel plants in northern Sweden, warned that a slower carbon price rise weakens their business case against fossil-based competitors. In Rome and Warsaw, however, the package was seen as insufficient. Italy, Poland and eight other states had demanded deeper relief, arguing the ETS functions as a de facto tax that inflates energy costs. Confindustria dismissed the measures as having “only marginal short-term effects,” and Polish climate minister Paulina Hennig-Kloska signalled Warsaw would push for further concessions during negotiations.

Environmental groups and Green lawmakers condemned the proposal as a retreat from climate ambition. German MEP Michael Bloss described it as a “licence to pollute longer and at lower cost,” while the European Environmental Bureau said the Commission had “caved to laggard companies.” The Commission insisted the 90 percent net emissions reduction target for 2040 remains achievable, with Climate Commissioner Wopke Hoekstra calling the approach “more business-friendly and savvy.” The proposal also expands the ETS to cover municipal waste incineration, smaller ships, and international flights departing the EU for destinations up to 5,000 kilometres away.

The legislative package now moves to the European Parliament and the Council for negotiations expected to last at least a year. A formal review clause is set for 1 January 2033, when the availability and quality of international carbon credits entering the system from 2036 will be assessed. The outcome will test whether the EU can reconcile its industrial competitiveness agenda with the legal architecture of its flagship climate instrument.