The European Commission has unveiled a roughly €30 billion investment booster plan for the carbon market, aiming to adjust the pace of carbon allowance sales to fund industrial decarbonization while avoiding downward pressure on carbon prices.
Core of Market Modernization
This initiative is a central part of modernizing the EU Emissions Trading System (ETS), designed to increase the flexibility and resilience of the world's largest carbon market regulatory framework. Specific measures include strengthening the Market Stability Reserve's function, pausing the automatic cancellation mechanism for surplus allowances in the reserve to retain them as a buffer for price fluctuations, and launching a mid-term review focused on assessing the phase-out path for free allowances and sector-specific fallback benchmarks.
Funding and Allocation Details
Under the scheme, approximately 400 million carbon allowances will fund the €30 billion investment booster, allocated on a first-come, first-served basis while ensuring access rights for lower-income member states. The fund will support decarbonization projects in energy-intensive industries, renewable energy, energy storage, and net-zero transport.
Defending the Carbon Market's Role
European Commission President Ursula von der Leyen emphasized that the carbon market will not be weakened, stating it is crucial for reducing gas consumption and dependence on fossil fuel imports. Data shows that between 1990 and 2024, EU emissions fell by 39% while the economy grew by 71%.
Market Pressures and Industry Concerns
However, since the outbreak of conflict in the Middle East, EU natural gas prices have risen by about 70%, and the carbon price has plunged from €92 per tonne at the start of the year to €63.1 per tonne. Several member states have called for weakening or even pausing the carbon market, fearing carbon costs will erode industrial competitiveness. Germany's chemical industry association has urged a slower pace for tightening free allowances.
Key Reform Areas
This reform encompasses four key areas: updating the benchmark values for free allowances, enhancing the Market Stability Reserve, conducting a mid-term review, and launching the investment booster. Regarding benchmark updates, the EU has already published draft values for 2026-2030, with industry expected to continue receiving free allowances covering about 75% of its emissions. The free allocation will also be extended for the first time to cover indirect emissions from electricity use.
Shift in Policy Approach
The reform also plans to introduce sector-specific fallback benchmarks, allocating allowances based on energy input in sectors lacking product-specific benchmarks. Analysts view this as a sign that the EU is shifting the carbon market from a pure price instrument towards a more active industrial policy tool. The European Commission plans to adopt the new benchmark values by the end of June and publish the mid-term review results in July.
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