The European Commission has proposed a significant overhaul of the European Union's flagship carbon market, slowing the pace at which businesses must cut greenhouse gas emissions in a move that has drawn sharp criticism from climate advocates while offering cautious relief to industry groups.

The EU's Emissions Trading System (ETS), launched in 2005 as the world's first carbon market, works by requiring Europe's biggest industrial polluters and power producers to purchase a permit for every tonne of carbon dioxide they emit — creating a financial incentive to invest in cleaner technologies. The scheme is credited with reducing emissions in covered sectors by roughly 47–51% since its introduction. Under the proposed reforms, heavy industries such as steel, cement and chemicals would be able to obtain free emissions allowances until 2038, four years later than the previously planned 2034 deadline. The annual rate at which the total cap on permits is reduced would also be slowed — from the current 4.3% per year to 3.7% from 2031, and further to 1.7% from 2036. Environmental groups estimate this would allow an additional two billion tonnes of CO₂ to be emitted. A new condition, however, would tie 80% of free allowances to companies presenting concrete decarbonisation investment plans, with the remaining 20% released only after those investments are made.

The overhaul follows months of intense lobbying, particularly from the chemicals industry, and pressure from ten EU member states — led by Italy and Poland — who have argued the ETS inflates energy costs and undermines European competitiveness. EU Climate Commissioner Wopke Hoekstra, a Dutch politician, defended the proposals as a