EU extends free pollution permits to 2037

The European Commission proposed on 17 July to slow its emissions cap and extend free pollution permits for heavy industry until at least 2037, asking factories to prove they are investing in cleaner production in return (Commission press release, Le Monde). But no public rules yet define what counts as a credible investment plan or what happens to firms that take the permits and don't deliver (Commission impact assessment).

A slower squeeze

The EU's Emissions Trading System (ETS) is a cap-and-trade market. Power plants and factories must hold one permit for every tonne of CO₂ they release, and a shrinking cap makes those permits scarcer and pricier each year, pushing firms to cut emissions or invest in cleaner processes.

The Commission wants to slow that shrinking. The cap would fall by 3.7% a year from 2031 to 2035, and just 1.7% from 2036 to 2040, down from the currently planned 4.3–4.4% (Commission press release, Reuters). More permits stay in circulation. The price signal pushing factories toward cleaner production weakens.

Free permits for steel, cement and chemicals come with conditions. Firms get 80% after submitting an approved investment plan, and the remaining 20% only after proving they delivered on it (Commission impact assessment). A new Industrial Decarbonisation Bank would distribute 400 million allowances as additional investment support (S&P Global).

Who gains, who pays

Energy-intensive factories are the clear winners. Germany, with a large base of steelmakers and chemical plants, stands to benefit most (Deutschlandfunk). Poland led a twelve-country coalition pushing for slower reductions and called the proposal a "milestone" (Energetyka24).

Companies that already bet on green production lose out. Swedish steelmakers SSAB and Stegra invested heavily in hydrogen-based steel, betting that a rising carbon price would make their cleaner product cheaper than conventional steel over time. If conventional producers now get more free permits and more time, that price crossover gets pushed further away.

National treasuries take a hit too. ETS auction revenues have totalled roughly €260–270 billion since 2013, with most flowing into general government budgets (Update EU). The Commission now wants at least 50% of future auction income directed toward industrial decarbonisation instead (Europa Press, Commission press release). That means less money for national climate funds and general budgets.

The missing rulebook

Some flexibility is economically defensible. A steel mill cannot switch to hydrogen before the hydrogen infrastructure exists. Buying time for that transition has a logic.

But this investigation found no public template in the proposal for what qualifies as a credible investment plan. Who writes the criteria? Who checks delivery? What happens if a company pockets the permits and delays? The Commission says it will define these rules through delegated acts, secondary legislation drafted by the Commission itself without a full Parliament vote. For a bargain this large, the enforcement comes remarkably late.

Environmental groups Bellona and the European Environmental Bureau argue the proposal loosens the carbon market from too many directions at once: a slower cap, more free permits, a weaker mechanism for removing surplus permits from circulation (Bellona, EEB). Any shortfall in emissions cuts would need to be made up in sectors like transport and home heating, where reductions are harder and more expensive.

The Commission has proposed an industrial subsidy paid through a weaker carbon signal. It has not yet produced the rulebook that turns that subsidy into investment.