The European Commission has presented an Electrification Action Plan aimed at making Europe the world’s first electro-powered continent, alongside proposals to reform the EU carbon market (EC press release, 17/07/2026).
According to the Commission, “While 70% of EU electricity is now generated from homegrown clean energy sources, the electrification rate of energy demand has stalled at 23% over the past decade”.
The EU intends to accelerate the electrification of key energy-consuming sectors, particularly industry, transport and buildings. In support of this objective, the Commission will assess an indicative electrification target of 46% by 2040 as part of the post-2030 Energy Union package. According to the press release, achieving this target could reduce the EU’s fossil fuel import bill by EUR260bn annually by 2040.
The European Commission also announced a revision of the Emissions Trading System (ETS) rules, describing the reform as a source of “relief” for industry. The proposal would reduce the pace at which the emissions cap declines by lowering the linear reduction factor from the current 4.3% (4.4% from 2028-2030) to 3.7% over 2031-2035 and 1.7% over 2036-2040, effectively easing the speed at which companies will be required to reduce their emissions. In addition, the EU plans to allow the use of "high-integrity" international carbon offset credits to account for 2% of the emissions reductions required from ETS-covered sectors starting in 2036, thereby reducing the burden on domestic industries.
Although these measures will slow the pace of the ETS, the Commission stated that they are intended to ensure the system remains consistent with the EU’s 2040 climate objective of reducing net GHG emissions by 90%. The ETS currently covers approximately 40% of total EU emissions. In addition, the Commission proposed a reform of the Market Stability Reserve (MSR) to strengthen market stability and predictability for investments, maintain liquidity and reduce excessive price volatility.
The Commission further proposed increasing free allocation to industry worth EUR6bn for the 2026-2030 period. For sectors that are covered by the Carbon Border Adjustment Mechanism (CBAM), such as steel and cement, the reduction of free allocation will be slowed and the phase-out extended until 2038, instead of phasing them out in 2034 as originally planned. For sectors not covered by CBAM but exposed to carbon leakage risks, the proposal extends the carbon leakage framework until 2038. Consequently, the full implementation of the carbon border levy would also be postponed until 2038.
Under the proposal, the Commission intends to make access to free emissions permits conditional. Companies with investment plans for decarbonisation projects in Europe would receive 80% of their free permits upfront, while the remaining 20% would only be allocated once those investments have been completed. However, the 10% most efficient industrial installations would be exempt from these conditions as a reward for their efforts to reduce CO₂ emissions.
Furthermore, the Commission proposed extending the scope of the ETS to include emissions from flights departing Europe to destinations located up to 5,000 km away. At present, the system applies only to flights operating within Europe.
The EU also proposed expanding the ETS to include ships of 400 gross tonnage or more, compared with the current threshold of 5,000 gross tonnage. In addition, maritime companies would receive 110 million free CO₂ allowances, which could be monetised to finance investments in clean fuels and shipping technologies, under a mechanism already available to airlines.
Finally, emissions generated by waste incineration would be progressively incorporated into the ETS over the period 2031 to 2034 (25% of verified emissions reported for 2031, 50% for 2032, 75% for 2033 and 100% for 2034 and following years).
EU countries and the European Parliament will each put forward their own amendments and then negotiate the final rules, a process that can take up to a year.
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