EU Extends Industry Pollution Permits

The European Commission proposed on 17 July to slow down the tightening of its carbon market and extend free pollution permits for heavy industry until at least 2037, asking factories to show they are investing in cleaner production in return (Commission press release, Le Monde). What is still missing is the part that matters most in a small state like Malta: the public rulebook saying what counts as a serious investment plan, who checks it, and what happens when a company takes the permits but fails to deliver (Commission impact assessment).

A slower squeeze

The EU's Emissions Trading System, known as the ETS, is the bloc's main carbon-pricing machine. Power stations and factories must hold one permit for every tonne of CO₂ they emit. The cap on those permits falls each year, making them scarcer and, in theory, more expensive. That is the lever: either companies cut emissions, or the cost of polluting rises.

The Commission now wants that lever pulled more gently. The cap would fall by 3.7% a year from 2031 to 2035, and by only 1.7% from 2036 to 2040, instead of the 4.3–4.4% already planned (Commission press release, Reuters). More permits would remain in circulation. The price pressure pushing factories towards cleaner production would be weaker.

Free permits for steel, cement and chemicals would not be unconditional. Firms would receive 80% after submitting an approved investment plan, and the remaining 20% only after proving they have delivered on it (Commission impact assessment). A new Industrial Decarbonisation Bank would also distribute 400 million allowances as extra investment support (S&P Global).

Who gains, who pays

The immediate winners are energy-intensive manufacturers. Germany, with its large steel and chemicals base, stands to gain most (Deutschlandfunk). Poland led a twelve-country coalition pressing for slower reductions and called the proposal a "milestone" (Energetyka24).

The losers include companies that moved early. Swedish steelmakers SSAB and Stegra invested heavily in hydrogen-based steel, betting that a rising carbon price would eventually make their cleaner product cheaper than conventional steel. If conventional producers are now given more free permits and more time, that moment is pushed further away.

National treasuries also lose room for manoeuvre. ETS auction revenues have brought in roughly €260–270 billion since 2013, with most of the money flowing into general government budgets (Update EU). Brussels now wants at least 50% of future auction income directed towards industrial decarbonisation instead (Europa Press, Commission press release). For member states, including smaller ones that rely on EU-level climate money to stretch limited national budgets, that means less cash available for other climate funds or ordinary spending.

The missing rulebook

There is an economic case for some flexibility. A steel plant cannot switch to hydrogen before the pipes, storage and supply exist. Buying time for that transition is not, by itself, irrational.

The problem is that the public proposal still does not show the test companies will have to pass. What makes an investment plan credible? Who sets the criteria? Who audits delivery? What happens if a company pockets the free permits and delays the investment? The Commission says it will define the rules through delegated acts, a form of secondary legislation drafted by the Commission without a full Parliament vote. For a deal of this size, the enforcement is being left very late.

Environmental groups Bellona and the European Environmental Bureau say the proposal weakens the carbon market from several sides at once: a slower cap, more free permits, and a softer mechanism for removing surplus permits from circulation (Bellona, EEB). If industry cuts less, the missing emissions reductions will have to come from other sectors, such as transport and home heating, where change is often harder and more expensive for households.

The Commission is offering industry a subsidy paid for through a weaker carbon signal. It has not yet produced the rulebook that would make sure the subsidy becomes investment.