Brussels weighs 400 million new carbon permits

The European Commission publishes its review of the EU Emissions Trading System (the ETS, Europe's main market for pricing pollution) on July 17. The choice is blunt. Brussels can keep the cap on industrial emissions tightening, or give heavy industry more time and more free permits (European Parliament, Carbon Herald). But the debate over whether rules are too ambitious obscures an awkward fact: generous free allocation has already dulled the carbon price for most heavy industry, and governments have spent the revenue on almost everything except helping firms go clean.

How the cap works

The ETS is a cap-and-trade system. The EU sets a ceiling on total emissions from power plants, steelmakers, cement factories, airlines and shipping companies. Every firm must hold one tradable permit for each tonne of CO₂ it emits. The ceiling shrinks each year by a fixed percentage, currently set at 4.4% from 2028 (Argus). At that pace, the cap hits zero around 2039.

The Commission is expected to stretch that timeline. Officials have signalled that permits will be issued "well into the 2040s," and Poland wants the annual reduction closer to 3% (Euronews). The proposal also includes a so-called Investment Booster: 400 million new allowances that would be auctioned to raise money for clean-technology investment, described as the first phase of a planned Industrial Decarbonisation Bank (S&P Global). More permits in the market means each one is worth less. Firms that already bought theirs at higher prices absorb the loss; firms that waited get cheaper compliance.

Free permits have already softened the blow

The headline carbon price sits near €70 per tonne, but most industrial emitters do not pay anything close to that. German environment agency data shows energy-intensive companies received almost 91% of their allowances free in 2025, and the market still held a surplus of roughly one billion certificates (Frankfurter Rundschau). A high market price matters less if firms get most permits for nothing. The effective cost for many industrial operators was closer to €10 per tonne (Aither).

Those free permits were meant to prevent "carbon leakage," where production and jobs move to countries without a carbon price. But SteelWatch found that three major steelmakers collected €25.7 billion in free allowances while investing only €3.2 billion in cutting emissions (Euronews). Protection against relocation turned into a subsidy for postponing change.

Ten governments want more room — two say it would punish early movers

A ten-state declaration led by Italy and Poland argues the current path risks driving industry out of Europe entirely (Eunews). Poland's case is sharpened by its coal-heavy power mix: the same carbon price hits a Polish factory harder than a French competitor running on nuclear electricity (Energetyka24). Italy's steel and cement sectors face rising costs as free allocation started phasing down in January 2026 (Bruegel).

Sweden and Finland push back. Sweden's climate minister Jessica Rosencrantz has said Stockholm will oppose any dilution because companies that spent billions on fossil-free steel should not see that advantage erased by cheaper dirty production (Omni). Saarstahl, a German steelmaker investing in hydrogen-based production, warned that looser rules keep dirty steel artificially competitive (Zeit).

Where the carbon money went

How governments spend what they collect from auctioning permits matters as much as the cap itself. Poland has received more than 200 billion złoty from the ETS since 2012. Yet in 2024–2025, more than 26 billion złoty out of 32.5 billion in revenues went into the general budget, while only about 32 million went directly to climate purposes (Money.pl). When governments pocket the money instead of using it to help firms and households adapt, industry bears costs without the public investment the system was designed to finance.

Europe's carbon market has cut covered emissions by roughly half since 2005 (Florence School of Regulation). Most of the industrial shift, however, lies ahead. If the Commission extends free permits tomorrow without tightening investment conditions, it will be protecting today's producers more than financing tomorrow's industry.