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August 9, 2026

Newsletter

The European Post

Policy • Diplomacy • Strategic Insight

LATEST
New EU Gas Market Rules Take Effect With Consumer SafeguardsDeforestation Regulation Holds Its December Deadline Despite CutsDigital Omnibus Delays Europe’s High-Risk AI Deadline to 2027Europe’s Schools Confront a Widening Basic Skills GapRule of Law Report Finds Progress but Trust Still LagsIRIS2 Gains 66 Satellites as Brussels Signs the Rollout DealNature Restoration Plans Come Due as Member States Race a DeadlineECB Rates Hold at 2.25 Percent as Frankfurt Waits on the DataEU Budget Talks Turn to Cohesion as Ireland Takes OverWildfire Response Stretches Europe’s Emergency Fleet ThinCan Europe’s Quantum Plan Match Its Big Ambitions?Armenia Edges West as Moscow’s Grip Slips AwayEurope Inherits the World’s Aid Bill It Cannot Fully PayAir Passenger Rights Get Their First Overhaul in Two DecadesErasmus Opens a 5 Billion Euro Round for Skills and MobilityCeuta Crisis Pushes the EU Toward Faster Migrant ReturnsBulky Parcels Face a Packaging Crackdown From August 12Can Europe Build Its Drone Wall Before 2030 Arrives?Indonesia’s Trade Deal With Europe Nears Its Final SignatureEurope Leans on Beijing to Keep Climate Talks Alive Before AntalyaNew EU Gas Market Rules Take Effect With Consumer SafeguardsDeforestation Regulation Holds Its December Deadline Despite CutsDigital Omnibus Delays Europe’s High-Risk AI Deadline to 2027Europe’s Schools Confront a Widening Basic Skills GapRule of Law Report Finds Progress but Trust Still LagsIRIS2 Gains 66 Satellites as Brussels Signs the Rollout DealNature Restoration Plans Come Due as Member States Race a DeadlineECB Rates Hold at 2.25 Percent as Frankfurt Waits on the DataEU Budget Talks Turn to Cohesion as Ireland Takes OverWildfire Response Stretches Europe’s Emergency Fleet ThinCan Europe’s Quantum Plan Match Its Big Ambitions?Armenia Edges West as Moscow’s Grip Slips AwayEurope Inherits the World’s Aid Bill It Cannot Fully PayAir Passenger Rights Get Their First Overhaul in Two DecadesErasmus Opens a 5 Billion Euro Round for Skills and MobilityCeuta Crisis Pushes the EU Toward Faster Migrant ReturnsBulky Parcels Face a Packaging Crackdown From August 12Can Europe Build Its Drone Wall Before 2030 Arrives?Indonesia’s Trade Deal With Europe Nears Its Final SignatureEurope Leans on Beijing to Keep Climate Talks Alive Before Antalya

Can a Reformed Carbon Market Carry Europe’s 2040 Goal

Omar Sy
Research Associate, Energy and Climate

Brussels: The European Commission will publish its long-signalled revision of the Emissions Trading System on 15 July, and the proposal now carries far more weight than a routine technical update. Officials have tied the reform to the bloc’s 2040 climate goal, turning the carbon market into the main instrument that must deliver a steeper cut in emissions this decade.

The stakes explain the attention. The Commission wants to lower the linear reduction factor that governs how fast the supply of allowances shrinks each year. A lower factor means fewer permits, higher prices, and a sharper signal for industry to abandon fossil fuels. Analysts at Clean Energy Wire expect co-decision between Parliament and Council to run into 2027, with implementation targeted for 2028.

Why the reduction factor matters

The carbon market already covers power plants, heavy industry and aviation, and from 2027 it will reach road transport and buildings through a second scheme. Each tightening of the cap raises the cost of pollution and rewards cleaner producers. Yet a faster squeeze also pushes energy-intensive firms to threaten relocation, an argument that European steel and chemical lobbies repeat at every review.

The Commission plans to blunt that pressure by channelling ETS revenues through an Industrial Decarbonisation Fund and the existing Innovation Fund. It also wants to fold permanent carbon removals into the system, a novel step that would let verified removal of carbon dioxide offset a share of residual emissions after 2040.

Money is already flowing. On 2 July the Commission and the European Investment Bank released 2.5 billion euros from the Modernisation Fund for 51 energy projects across 11 member states, a reminder that auction income now underpins much of the bloc’s climate spending. A weaker carbon price would drain that pipeline just as governments lean on it harder.

The political fight ahead

Member states disagree over how ambitious the new factor should be. Wealthier northern capitals want a strong signal to attract clean investment, while several central and eastern governments warn about the bills that households and factories will face. The design of the Market Stability Reserve, which absorbs surplus allowances, will decide how volatile prices become during the transition.

Parliament will press its own priorities, including tighter rules for maritime and waste emissions and firmer guarantees that revenue reaches vulnerable consumers. The Social Climate Fund, meant to cushion the road-transport and buildings scheme, sits at the centre of that bargaining. Its size and timing may determine whether the wider reform survives contact with national elections.

Investors are watching the linear reduction factor as closely as any government. Utilities that have already bought forward allowances stand to gain from a tighter cap, while late movers face rising hedging costs. Banks that trade carbon warn that sudden design changes could whip prices around, so the Commission must pair ambition with predictability if it wants the market to price the transition smoothly rather than in panicked jumps.

For all the technical language, the question stays simple. Europe has promised deep cuts by 2040, and it has chosen the carbon market as the vehicle to reach them. The 15 July proposal will reveal whether the Commission trusts that vehicle to carry the load or hedges with softer numbers. The Commission’s climate department insists the tool can do the job, and the coming months will test that confidence against the hard politics of price.

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