European Commission proposes reforms to emissions trading – flexibilities for industry, more stable rules for markets

On 17 July 2026, the European Commission gave a proposal on the reform of the Emissions Trading Directive. The Commission will reform emissions trading to promote the implementation of the 2040 climate target and ensure predictable regulation in the emissions trading sector.

Three highlights in the Commission’s proposal:

• The proposal is a key element of the implementation of the 2040 climate target. The aim is to reduce net emissions by 90 per cent by 2040, compared to 1990. 
• The Commission aims to increase flexibilities in the emissions trading sector to ensure that the climate targets will be achieved while, at the same time, the competitiveness of industry is strengthened. The aim is also to promote clean investments.
• The proposal includes more flexibilities for industry than at present, and tries to find a balance in the situation with conflicting pressures related to geopolitics, competitiveness and climate change. There is the risk that the steering impact of emissions trading will be weaker if the total numbers of emission allowances are reduced more slowly than now. 

The Commission aims for predictability in the long term and a steady progress of emission reductions in industry. The proposal also includes the use of international carbon credits and linking carbon capture into the system.

“Emissions trading is the cornerstone of the EU’s climate policy. It must stay consistent to ensure that companies will continue to invest in clean solutions. Finnish companies have been among the forerunners in this and, as a country with close to zero-emission electricity production, Finland benefits a great deal from emissions trading,” Minister of Climate and the Environment Sari Multala says.

Emission factor would decrease and international carbon credits would increase flexibility

The Commission proposes that the linear factor that reduces the total number of emission allowances and influences emission reductions in the emissions trading sector would be lowered from the present 4.3 per cent. The annual emission reduction, i.e. the factor, would be 3.7 per cent in 2031–2035 and 1.7 per cent in 2036-2040. Together with the international carbon credits and carbon capture, the smaller factor will allow the sectors to produce more emissions and will lower the price of emission allowances. A lower price, in turn, can make companies less willing to invest in clean solutions.

According to the EU Climate Law, the majority of emission reductions must be achieved within the EU. From 2026 onwards the EU can make limited use of high-quality international carbon credits up to the maximum of five percent of the net emissions in 1990. This means that the EU can buy emission reductions that are generated outside the EU, which in practice means that it finances investments that reduce emissions in non-EU countries. 
The Commission proposes that up to 260 million tonnes of international credits would be used to support the contribution of the emissions trading sector to the achievement of the 90 per cent net target. The aim is to increase flexibility in the emissions trading sector.

Carbon capture included in emissions trading

The Commission would incorporate carbon capture into emissions trading. The aim is to create demand for carbon capture solutions while increasing flexibility for emission reductions. The possibility to use carbon capture units is particularly important in sectors where it is difficult to reduce the last emissions. Biogenic carbon capture, in particular, will create business opportunities for Finnish operators.

The Commission will reform the market stability mechanism so that it would stabilise the fluctuations in the EU’s emission allowances in future as well. The aim is to ensure that the emission allowance market functions in a way that is smooth and predictable.
Incineration of municipal waste would be incorporated into emissions trading stepwise in 2031–2034.

Support for competitiveness and clean investments

The competitiveness of industrial sectors at risk of carbon leakage relative to third counties would be supported by allocating more free emission allowances to them. A condition for free allocation would be that the operators commit to decarbonising their operations.

Revenue from emission allowances to be auctioned are proposed to be targeted even more strongly to decarbonising Europe.
Investments in clean technologies would be increased, which would be implemented by continuing the Innovation Fund and launching the Industrial Decarbonisation Bank (IDB) as a new instrument.

The Commission also proposes that the scope of emissions trading in maritime transport and aviation would be expanded. Winter navigation has been taken into account in the proposal. More information on the Commission’s proposal with respect to the transport sector is available in the press release of the Ministry of Transport and Communications.

Finland supports strong and predictable emissions trading

EU’s emissions trading system has effectively reduced emissions and promoted clean energy production. Emissions trading also strengthens the EU’s security of supply. As the demand for fossil fuels decreases, the EU is less dependent on imports and less susceptible to price fluctuations caused by the energy markets and geopolitical crises.

Strong emissions trading also supports the targets of the non-emissions trading sectors. If the steering impact of emissions trading is weakened, the lower price of emission allowances may postpone investments. This means that emission reductions should be achieved in other sectors where the national measures are often more expensive and more difficult to implement. 

Finland considers that the use of international credits to contribute towards the target for the emissions trading sector should be limited to the minimum to ensure that the steering impact of emissions trading stays strong and, if necessary, credits could be used to support the targets for other sectors. 

Finland’s emissions from the emissions trading sector have decreased faster the elsewhere in the EU, which means that the higher price of emission allowances is a competitive advantage for Finnish companies. The high price of emission allowances has increased Finland’s revenue from auctions, which in 2025 were EUR 410 million.

Finland has taken an active part in the preparation of the proposal and, together with other like-minded countries, has promoted strong and predictable emissions trading.

“For Finland, it is important to maintain the emissions trading system as a key instrument for the decarbonisation of industry and achievement of the climate targets. We will continue the work to ensure that the input of the emissions trading sector to the EU’s 90 per cent climate target is sufficient and investment certainty and incentives for companies to promote the clean transition are preserved,” Minister of Climate and the Environment Sari Multala says.

What’s next?

Next, the Government will form its position on the Commission’s proposal and notify Parliament of it with a Union communication. The Commission hopes that an agreement on the reform of the Emissions Trading Directive could be reached in early 2027.

Inquiries

Ville Laakso
Special Adviser to the Minister of Climate and the Environment
tel. +358 295 047 181
[email protected]

Karoliina Anttonen
Senior Ministerial Adviser
Ministry of the Environment
tel. +358 295 250 065 
[email protected] 

Juhani Tirkkonen
Senior Ministerial Adviser
Ministry of Economic Affairs and Employment
tel. +358 295 062 140 
[email protected]