The European Commission has proposed changes to its system of carbon emissions trading in response to the soaring energy prices caused by the war in Iran. The move aims to provide greater stability for the European Union’s energy market while maintaining incentives for industries to cut greenhouse gas emissions.
The EU’s Emissions Trading System (ETS), operational since 2005, requires heavy carbon-emitting sectors, including electricity generation, to purchase permits to release greenhouse gases. The system operates on a cap-and-trade principle, meaning the total allowances are reduced over time to meet the EU’s climate targets. Permits that are not used each year have traditionally been cancelled, tightening the market and encouraging lower emissions.
Under the proposed changes, the automatic cancellation of surplus permits would end. Instead, excess allowances would be placed in a special reserve fund. This “market stability reserve” could be released during sudden spikes in carbon prices, such as those seen recently due to the Iran war, which has pushed gas prices sharply higher. Currently, if the reserve exceeds 400 million permits, the surplus is cancelled. Between 2005 and 2024, some 3.2 billion permits were removed in this way.
The Commission says the ETS has helped cut EU greenhouse gas emissions by nearly 50% since 2025 by encouraging industries to adopt cleaner practices. Money raised from permit sales is invested by member states in renewable energy and energy efficiency projects, raising over €175 billion since 2013. Carbon emissions from electricity generation fell 24% in 2023 and 11% in 2024, while power generation, manufacturing, and aviation together account for about 40% of the EU’s greenhouse gas output.
Some member states, including Italy, have lobbied for a temporary suspension of the ETS, citing heavy reliance on gas for electricity and rising permit costs driven by Iran’s attacks on LNG infrastructure and the closure of the Strait of Hormuz. The European Commission and most member states argue that cancelling the ETS would weaken incentives to shift to renewables and increase dependence on imported fossil fuels.
The EU has set ambitious goals, targeting a 90% reduction in carbon emissions by 2040 compared to 1990 levels. It has also introduced the Carbon Border Adjustment Mechanism (CBAM) to prevent industries from importing goods produced under lower carbon standards, taking effect on January 1 this year.
The Commission’s proposal will require approval from member states and the European Parliament, with a comprehensive review of the ETS scheduled for July 2026. Officials say the changes aim to maintain the system’s environmental effectiveness while cushioning the impact of volatile energy prices on European industries and consumers.
