EU loosens emissions cap, bets big on electrification instead

The European Commission today presented two proposals aimed at strengthening Europe's competitiveness, decarbonization, and independence. On hand, the Electrification Action Plan is intended to make Europe the world's first "electro-powered continent," and a revised Emissions Trading System (ETS) is designed to support industry through the clean transition.

The Commission frames the two files as a single strategic response to Europe's repeated exposure to geopolitical shocks through its reliance on imported fossil fuels — shocks that have pushed up energy costs for households and businesses alike and weighed on the bloc's competitiveness. While around 70% of EU electricity already comes from homegrown clean energy sources, the Commission notes that the broader electrification rate of energy demand has been stuck at 23% for the past decade.

"The best way to reduce Europe’s fossil energy dependency is to power our economy with electricity from clean, homegrown sources. Today, we are proposing to make Europe the world’s first electro-powered continent. From lowering electricity prices to adapting our carbon market to the changing global realities, this is also an investment and independence plan. To keep the clean transition on track, bring relief to our industry, and support decarbonization. Let’s switch it on," stated the Commission's President, Ursula von der Leyen.

Electrification Action Plan: closing the price gap

To accelerate the shift toward electricity in industry, transport, and buildings, the Commission will assess an indicative electrification target of 46% by 2040 as part of the forthcoming post-2030 Energy Union package. Hitting that goal, officials say, could cut the EU's annual fossil fuel import bill by €260 billion by 2040, while lowering energy prices and strengthening energy security.

The plan's central problem is cost: electricity in the EU often costs three times as much as gas, grid connections can take years to secure, and businesses have little incentive to switch away from fossil fuels. The Commission points out that consumer benefits are already substantial — running a battery-electric vehicle can cost up to 78% less than an equivalent fossil-fuelled car, and switching from a gas boiler to a heat pump can cut a household's heating bill by up to 60%.

To narrow the electricity-gas price gap, the plan would allow Member States to reduce network charges for certain consumer groups and cut taxes for energy-intensive businesses, while ensuring that electricity is not taxed more heavily than gas. It also pushes for faster rollout of smart meters and cheaper upfront electrification costs through tools such as social leasing schemes, the Social Climate Fund, the Industrial Decarbonization Bank, and a new Clean Heat Market mechanism. Faster grid deployment — building on last year's Grids Package — and support for scaling up manufacturing of clean-tech and electrification equipment round out the plan, which the Commission says could also generate hundreds of thousands of quality jobs.

ETS review: what's actually changing

The EU's carbon market operates like a shrinking pool of pollution permits: every year, the total number of allowances that companies can buy or trade decreases by a fixed percentage, known as the Linear Reduction Factor (LRF). The smaller the pool gets, the more expensive it becomes to pollute, which is meant to push industry toward cleaner technology.

Under the rules in force today, that pool has been shrinking fast: by 4.4% every year from 2028 onwards. Keep that pace up, and the number of allowances hits zero around 2040 — meaning companies would eventually have no legal room to emit at all under the ETS.

The proposal presented today slows that decline down. From 2031, the LRF would drop to 3.7% a year, and then to just 1.7% a year from 2036. In practice, that means allowances keep being issued into the 2040s instead of running out — giving industry a longer runway and, in theory, a less volatile carbon price. On top of that, up to 2% of the EU's emissions target could be met by buying high-quality carbon credits from projects outside Europe, rather than cutting emissions at home — a tool that wasn't part of the system before.

Other changes round out the package:

• Carbon removal technologies and waste incineration join the system for the first time, free allocation runs longer than planned — with the carbon border tax phase-out pushed back to 2038 — and €6 billion in extra free allowances is added for 2026-2030.
• In return, industry faces stricter investment strings: Member States must now put 50% of national ETS revenue into emissions cuts, backed by a new €100 billion Industrial Decarbonization Bank.
• The Commission is also fine-tuning the Market Stability Reserve, the system's built-in shock absorber, to keep the market liquid and prices steady.

What comes next

Both proposals now move to the European Parliament and the Council for negotiation. The ETS review responds to a mandate from the European Council's June 2026 conclusions and is designed to align with the Clean Industrial Deal, while the electrification target will be formally assessed as part of the Commission's wider post-2030 Energy Union package.