EU sets up biggest climate fight of 2026 by slamming brakes on carbon market

EU sets up biggest climate fight of 2026 by slamming brakes on carbon market

POLITICO — 2026-07-16

News from Brussels

The European Commission will ring the opening bell for the biggest climate bust-up of the year on Friday when it unveils an overhaul of the EU’s carbon market.

The long-awaited revision will propose weakening the Emissions Trading System, the bloc's most powerful tool for tackling climate change, to allow heavy industry to emit more planet-warming emissions for longer.

The proposal is the latest example of a green backlash that has defined Brussels policymaking since 2024, when right-wing gains in European Parliament elections reoriented the entire bloc away from the European Green Deal's environmentalism towards industrial competitiveness.

Laws on petrol cars, corporate reporting, deforestation and greenwashing have all been watered down over the last year and a half, in major victories for the right.

But the ETS revision takes that trend to another level.

No other policy is more important to the EU’s goal of reaching zero emissions by 2050. The 20-year-old ETS, which forces companies to pay for every ton of carbon dioxide they emit, has been enormously successful, slashing emissions from factories and power plants by half over its lifetime.

“The EU ETS is the cornerstone of the EU climate architecture,” wrote the center-left Socialists & Democrats in a letter to the Commission in July, defending the ETS. “Europe is the fastest warming continent. We have a responsibility but also an interest in maintaining strong climate action.”

The proposal must now go to member countries in the Council of the EU and to the European Parliament to be debated, amended and eventually passed into law.

While many in both institutions will fight for its survival, some will fight to weaken the ETS further, fearing any self-imposed cost on European businesses is self-defeating, given few other jurisdictions around the world impose similar carbon prices on their industry (EU ETS carbon permits cost around €80 per ton of CO2 at current prices).

"Europe can no longer afford a system that tightens faster than industry can realistically transform," Markus Kamieth, CEO of German chemicals giant BASF and president of the influential chemicals lobby Cefic, said in a statement ahead of the ETS review. Without major changes to the ETS, he warned, "the outcome is predictable: investments will leave Europe before emissions do."

Even before its release, the fight had started inside Berlaymont, with multiple senior EU officials objecting to parts of the proposal, pushing the final sign-off to the very last minute. By Friday morning, journalists had not been briefed on the policy, which is unusual for such proposals.

It’s not surprising it’s been so controversial. Under current rules, emissions from the sectors covered by the ETS — which account for nearly half of the EU’s total greenhouse gas emissions — must reach zero by 2039. But that would change under the proposal, pushing the zero target well into the 2040s, with lots of other changes being considered that would allow industry to keep pumping out greenhouse gases.

That will have implications for the EU’s ability to meet its legally binding goal of achieving climate neutrality by 2050.

Altogether, Friday’s proposal sets the stage for an explosive and unpredictable contest in the coming months, as lawmakers and national capitals fight over what is more important: Saving the planet or saving European industry.

The fight in Parliament

Lawmakers expect the review to be fiercely contested in the European Parliament, where the center-right European People’s Party holds the balance of power — the group of both President Ursula von der Leyen and EU climate chief Wopke Hoekstra, the architect of the review.

Publicly, Hoekstra’s department has signaled it will decrease the so-called linear reduction factor — the rate at which industrial pollution is reduced annually. Depending on who you ask, lowering it by a single digit or by “at least 1 percent” — as the EPP proposes — is an environmental catastrophe or a reasonable concession to industry.

“I think he needs to make everybody unhappy,” said an EPP lawmaker familiar with Hoekstra’s conundrum. “If he hits that sweet spot, then he should be okay. If he makes too many people happy and a few people very unhappy, that’s not going to work.”

Other groups are waiting for what the EPP will do when the review lands. The second largest party in Parliament, the center-left Socialists & Democrats, say they have “red lines” on meddling with the landmark climate policy.

“They know where we stand, now we know where they stand,” said Mohammed Chahim, a Dutch S&D lawmaker, referring to the EPP. But according to him, any discussion of the ETS for S&D “has to fulfill the 2040 climate target” of reducing the EU’s domestic emissions by at least 85 percent.

“Those are our conditions, and if that’s met then we can have discussions on how to get there,” he warned.

But German EPP lawmaker Peter Liese, who will lead the Parliament’s work on the ETS review, has downplayed the severity of what his group is calling for. “If the [linear reduction factor] is changed from 4.4 to 3.4 percent [per year], the ETS 1 will have climate neutrality in [2042] just three years later,” he said at an event in Brussels recently. “It looks like a big thing, but it is not a big thing.”

Sitting between the two parties is the centrist Renew Europe. Pascal Canfin, one of its leaders on climate policy, wonders whether the bloc's most powerful party will swing towards Renew and S&D, or to the right and far-right sides of the aisle, where it also has the option of forming a minority.

“The opposite scenario,” said the French lawmaker, “would be EPP dealing with this reform with [European Conservatives and Reformists] and Patriots.”

Siding with the far right used to be taboo for centrist groups, but the EPP has abandoned that convention and begun crossing the so-called cordon sanitaire over the last year.

For its part, the right-wing ECR wants a “halt” and rethink of the ETS, while the far-right Patriots for Europe has trumpeted its hatred of the ETS.

But Canfin believes that while conventional thinking might hold that the “Patriots will never vote [for] ETS at the end,” he thinks they “could vote as soon as you have voices in the industry saying, okay, now [ETS is] weakened enough.”

Member countries split into factions

Even if Parliament manages to come to a speedy compromise on the ETS, the Council of the EU will be another theater of war.

At the outset of the Iran war and resulting spike in energy costs, a gang of 10 countries led by Poland and Italy used the sensitive moment to demand major changes to the ETS. Initially, they were seen as a fringe band of nations who hadn’t taken decarbonization seriously enough, but their demands have begun to rope in more influential voices.

Just days ago, a similar group of 10 doubled down and issued a new letter to von der Leyen and pressured the Commission to weaken the ETS, in a clear sign they’re willing to be a blocking minority in the Council if new ETS legislation doesn’t satisfy them.

Polish Secretary of State Krzysztof Bolesta told POLITICO the letter shows the 10 countries are prepared for constructive ETS debates, but also described it as a “gentle reminder” that there is a “significant group whose weight cannot be ignored.” He added: “The bazooka is there in case we might need it at some stage.”

But the big question is where France and Germany fall on the issues. The two giants of the EU have previously avoided publicly denigrating the ETS, but the ongoing uncertainty around the Strait of Hormuz and U.S. tariffs have led them to quietly lean closer to the “dirties,” as one EU diplomat, granted anonymity to speak openly like others in this article, referred to the gang of 10.

“I think it’s more the French working and the Germans supporting them, than the other way around,” the diplomat claimed. “The French are much more active, and the Germans are following them […] But I think nobody now and nobody in the near future is questioning the ETS as a system as such… [needs] fine tuning.”

On the other side is a seven-country alliance of ETS-purists, led by Spain, Sweden and the Netherlands, who jointly published a letter demanding the Commission resists meddling with the current legislation and hold the course on the linear reduction factor. In perhaps a bad sign for the defenders of the ETS, three people familiar with that letter told POLITICO Germany pulled out from signing it at the last minute.

As for Paris, a French official said that “the issue is not so much about ‘changing’ the ETS as it is about defining its parameters for the post-2030 period,” and while France did not sign the letter, “it shares a great deal of their position.” The same official reiterated that France is committed to the ETS. A German official echoed a similar position, but stopped short of formally allying with the pro-ETS coalition.

“My perception now [since last year] is really a different situation in the Council also in terms of majorities,” said another EU diplomat on the changing tides.

“What the Commission puts in the proposal and on the table is obviously the starting point for where the Council and Parliament start to discuss, and if that is already unambitious,” they said, “it will not make it so easy in the Council.”