The European Commission’s proposed carbon-market reform should be viewed not as a reversal of climate policy, but as an attempt to change the timing and financing structure of Europe’s industrial transition. Brussels is considering a slower reduction in the supply of EU Emissions Trading System (ETS) allowances after 2030, extended access to free allocations for selected energy-intensive industries and a more gradual introduction of the Carbon Border Adjustment Mechanism (CBAM).
At the same time, the Commission is pushing for a much larger role for electricity in Europe’s industrial, transport and heating systems. The strategy combines temporary carbon-cost relief for vulnerable industries with stronger pressure to replace fossil fuels through electrification and low-carbon technologies.
Under the proposed changes, the ETS linear reduction factor would decrease more gradually, moving from 4.3% to approximately 3.7% between 2031 and 2035, before falling to 1.7% from 2036 onwards. Free allowances for industries such as steel and cement would remain available until 2038, four years longer than previously planned, while the full CBAM transition would also be postponed until that year.
The reform would also introduce stronger conditions for companies receiving free allowances. Industrial firms investing in decarbonisation projects within the EU would receive 80% of their free allocation upfront, while the remaining 20% would depend on the successful completion of investments and evidence of implementation.
For energy-intensive industries, the main change is the move from simple carbon-cost protection towards a model based on investment conditionality. Free allowances would increasingly function as support for verified transformation projects rather than as a permanent shield against international competition.
Steel producers, cement manufacturers, fertiliser companies, refineries and other covered facilities would need to demonstrate credible engineering plans, financing structures, commissioning progress and measurable emissions reductions in order to maintain the economic value of carbon support.
The European Commission also wants at least half of ETS auction revenues to be directed towards decarbonisation projects in covered sectors. The carbon market has generated approximately €260 billion since 2013, and a larger, more predictable allocation of these funds could help address one of Europe’s main transition challenges.
While carbon prices have increased the cost of emissions, many companies have struggled to finance and deploy replacement technologies at the same speed. Redirecting ETS revenues towards industrial transformation could therefore strengthen the link between carbon pricing and actual emissions reductions.
The accompanying Electrification Action Plan provides the broader industrial framework for the reform. Electricity currently represents around 23% of final energy consumption in the EU, despite approximately 70% of electricity generation already coming from domestic low-carbon sources. Brussels aims to increase the electricity share of final energy demand to around 46% by 2040.
The Commission estimates that faster electrification could reduce Europe’s fossil-fuel import costs by approximately €260 billion annually. However, achieving this target will require far more than additional renewable generation capacity.
Industrial heat, electric vehicles, heat pumps, electrolysers and data centres will significantly increase electricity demand while also creating greater challenges for peak-load management. As a result, grid expansion, energy storage, demand response, smart metering and long-term electricity supply contracts are becoming central elements of industrial competitiveness.
The proposed flexibility regarding network charges and electricity taxation reflects the growing recognition that electrified industries cannot remain competitive if electricity carries a higher regulatory and fiscal burden than fossil fuels. For factories switching from gas to electricity, the price structure of power becomes as important as the availability of renewable generation.
The implications of the reform extend directly to Serbia, Bosnia and Herzegovina, Montenegro and North Macedonia. Companies exporting products to EU markets may receive additional time before CBAM reaches its full implementation stage, but the long-term direction remains unchanged.
European buyers are expected to continue increasing requirements for installation-level emissions data, supply-chain traceability and verified low-carbon electricity claims. A delayed carbon-cost timeline does not remove future compliance obligations.
For industrial companies in Southeast Europe, the strongest response will likely require three parallel measures. The first is improving process efficiency to reduce emissions immediately. The second is securing renewable or low-carbon electricity through contracts supported by transparent metering and verification systems. The third is preparing larger technology replacement projects backed by EU funds, development banks or commercial financing.
The proposed reform may reduce the immediate pressure from rising carbon costs, but it also increases the importance of credible engineering plans, measurable results and transparent verification. Companies able to demonstrate real decarbonisation projects will be better positioned than those relying only on temporary carbon-cost relief without a clear implementation strategy.
