The EU carbon market will become less stringent under a European Commission proposal intended to give heavy industry more time to adopt cleaner technologies. Finland, Sweden and Denmark have opposed the change, arguing that it could penalise countries and companies that have already invested in cutting emissions.
The Commission presented its revision of the EU Emissions Trading System, or EU ETS, on 17 July. The system covers power generation, energy-intensive industries, aviation and maritime transport, requiring companies to surrender an allowance for every tonne of greenhouse gases they emit.
Companies can reduce their own emissions or purchase allowances from the market. As the total number of available allowances falls, pollution becomes progressively more expensive and low-carbon investment more competitive.
How the EU carbon market would change
Under the proposal, the EU would slow the rate at which the emissions cap declines after 2030.
The annual reduction rate would fall from about 4.4% until 2030 to 3.7% from 2031, before slowing further to 1.7% from 2036. Under the current rules, allowances were expected to become unavailable around 2039 as the cap approached zero.
The Commission instead wants the EU ETS to continue beyond that date. It argues that some sectors, including cement production, are unlikely to eliminate all their emissions by the end of the next decade, even when using the best available technologies.
Free allowances for energy-intensive industries would also remain available for longer. The existing framework was designed to phase out much of this support by 2034 as the EU’s Carbon Border Adjustment Mechanism, known as CBAM, takes effect. The revised proposal would extend parts of the free allocation system until 2038.
However, the Commission wants to link most free allowances more closely to investment. Companies would have to prepare decarbonisation plans to receive 80% of their allocation, while the remaining share would depend on whether the planned investments are implemented.
The EU ETS would also expand to cover additional activities, including smaller ships, waste incineration and some international flights.
Finland, Sweden and Denmark opposed weaker rules
The proposed easing follows pressure from several European governments and industrial groups concerned about energy prices, international competition and the cost of decarbonisation.
Finland, Sweden and Denmark have taken the opposite position. Together with Luxembourg, the Netherlands, Portugal and Spain, they warned before the Commission’s announcement that weakening the carbon market would create uncertainty and disadvantage companies that had acted early.
The Nordic countries have relatively low-carbon electricity systems and several industrial projects based on electrification, renewable energy and green hydrogen. A strong and predictable carbon price improves the commercial position of these investments compared with older production processes powered by fossil fuels.
Sweden’s government said before the review that the ETS should remain “ambitious, stable and predictable”. It argued that Swedish companies had already invested billions of euros on the assumption that the cost of emitting carbon would continue to increase.
Finland has raised similar concerns. The country is developing low-emission technologies in sectors including steel, chemicals, energy and forestry, while Finnish companies have invested in electrified manufacturing and fossil-free production.
Denmark has also supported maintaining the existing level of ambition, presenting the carbon market as an instrument for reducing Europe’s dependence on imported fossil fuels as well as its greenhouse gas emissions.
Critics say early investments could be penalised
Juha Aromaa, deputy country director of Greenpeace Nordic in Finland, told Finnish public broadcaster Yle that the proposal would be unfair to countries where industries are already moving towards low-emission technology.
According to Aromaa, companies that remain dependent on older technologies would receive additional time, weakening the incentive to modernise production. He argued that reducing the effectiveness of the EU’s main carbon-pricing mechanism could deepen the climate crisis.
Recent heatwaves in central Europe should have reinforced the need for stronger climate measures rather than looser rules, he said.
The Confederation of Finnish Industries (Elinkeinoelämän keskusliitto, EK) offered a more favourable assessment. Its senior adviser Kati Ruohomäki said the proposal would not remove companies’ incentives to invest in the green transition.
Ruohomäki argued that extending the system beyond 2039 could be reasonable because difficult residual emissions are expected to remain in industries such as cement manufacturing. She described the Commission’s approach as broadly balanced and compatible with the EU’s proposed 90% net emissions reduction target for 2040.
A dispute over European competitiveness
The disagreement reflects two competing definitions of competitiveness.
Governments seeking more flexible rules argue that high carbon prices could accelerate factory closures or push production outside Europe. Extending free allowances and slowing the reduction of the emissions cap could give companies more time to finance expensive industrial transformations.
The Nordic position is that predictable and demanding rules reward innovation. Weakening the carbon price after companies have committed capital to cleaner production could reduce the value of those investments and favour competitors that delayed their transition.
The Commission says its proposal preserves the EU’s climate objectives while recognising the practical difficulties faced by energy-intensive sectors. It also wants member states to direct a larger share of the revenues generated by allowance auctions towards industrial decarbonisation.
The proposed revision must now be negotiated by EU governments and the European Parliament. Finland, Sweden and Denmark are likely to push for changes that maintain a stronger carbon-price signal, while several central and eastern European governments are expected to demand further concessions.
The negotiations will determine not only the speed of emissions reductions after 2030, but also whether Europe’s early movers in low-carbon industry receive an economic advantage from their investments.
