EU plans to protect industries from carbon costs if they invest in the bloc

The European Commission is weighing a change to the EU’s carbon market that would keep free emissions allowances in place beyond the current 2039 cutoff, but only for companies that commit to investing in Europe, according to Financial Times reporting based on an internal document.

The reported idea would mark a more conditional industrial carveout in the EU emissions trading system, or ETS, the bloc’s main carbon-pricing tool. Under the current framework, free allowances for some sectors are due to phase out by 2039.

The reported plan would scrap that time limit and allow some companies to keep receiving free carbon permits into the 2040s if they make investments inside the EU. The Commission is said to be considering that approach as it reviews the ETS alongside the bloc’s wider climate and industrial policy goals.

Why the change matters

The move would matter most for energy-intensive sectors such as steel, chemicals and heating-system producers, which have long argued that carbon costs can weaken their competitiveness if rivals outside the bloc do not face similar charges.

Free allowances have long been used in the ETS to limit carbon-cost exposure for some industries while the system gradually tightens. The reported proposal would preserve that protection, but make it more conditional on investment decisions inside Europe.

The ETS generated more than €43 billion in revenue in 2025, according to the FT’s reporting. Any redesign of free allowances would therefore affect not only industrial strategy, but also the flow of revenue into the system.

The review is also tied to the EU’s 2040 climate target, which the FT says calls for a 90% cut in emissions from 1990 levels. That makes the Commission’s task more difficult: it is trying to keep the carbon market credible while limiting the risk that major industrial investment moves elsewhere.

Political pressure on Brussels

The reported change comes after member states and heavy industry pushed Brussels to soften carbon-cost pressure during the ETS review. On May 27, the FT reported that six countries - Czech Republic, Bulgaria, Poland, Romania, Greece and Slovakia - had asked the EU to shield heavy industry from carbon costs and increase free permits for transitioning industries.

That pressure reflects a broader political tension inside the bloc. Governments want to preserve industrial activity and jobs, while climate policymakers are trying to keep the carbon market tight enough to drive emissions reductions.

The Commission’s reported approach would try to bridge that gap by linking longer-lived free allowances to investment in Europe. In practice, that would be designed to encourage companies to keep production and capital expenditure inside the bloc while still buffering them from carbon costs.

Broader ETS review

The carbon-market review is also reported to be considering bringing additional sectors into the ETS, including waste and flights departing the bloc. That would widen the reach of the system even as some industrial relief is preserved.

The timing matters because the Commission is expected to present its ETS review in mid-July, according to the FT. Until then, the reported ideas remain part of an internal process and could change before any formal proposal is published.

Several key questions are still open. It is not yet clear what exact investment conditions would qualify a company for continued free allowances, whether the proposal would require changes to ETS law or only secondary rules, or how much political support the Commission has for the package.

Even so, the direction of travel is clear. Brussels is looking for a way to keep Europe’s carbon market working as a climate policy tool while reducing the risk that energy-intensive industry shifts investment outside the bloc.