EU Steps Up on Electrification and Away From Emissions Reduction

The European Union (EU) has for years prided itself on the rigor of its approach to sustainability. From the Paris Agreement in 2015 to the Green Deal in 2019, the EU has consistently led the way in establishing sustainability standards that would, in theory, provide the foundation for the transition to a green society that reduced the impacts of global warming and support strong, equitable economic growth for every EU citizen.

The world of 2026, however, is not the one supporters of the EU Green Deal might have imagined it would be when they formalized their ambitions to reach net zero and create a climate-neutral economy. The 2024 Draghi Report was an early signal that the tide was beginning to turn against sustainability in favor of shoring up competitiveness in EU industries.

Since then, the business-friendly members of the EU have been simplifying and revising key components of the Green Deal, including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and the EU Deforestation Regulation (EUDR). The return of President Donald Trump to the U.S. White House energized the EU's push to water down its rigorous sustainability vision in favor of an approach that favored deregulation and trade relationships with the U.S.

Now, the European Commission has set up what could become one of the biggest regulatory battles of 2026 with its July 16, 2026, announcement of proposed revisions to the EU Emissions Trading System (ETS) and its Electrification Action Plan, which Executive Vice-President for Clean, Just, and Competitive Transition Teresa Ribera portrayed as a strategy for strengthening sustainability ambitions while supporting EU industry.

“Europe's competitiveness will be built on clean energy, not on imported fossil fuels,” said Ribera in a press release. “By strengthening the carbon market and accelerating electrification, we are giving businesses the confidence to invest, innovate, and lead next generation technologies. We are building the foundation for the EU's future economy while ensuring that we remain fair to people and businesses.”

ETS Revisions Set the Stage for Conflict

The ETS is one of the world's largest carbon markets. In this market, polluters pay for greenhouse gas (GHG) emissions from electricity and heat generation, industrial manufacturing, and aviation. It sets a limit on what industry as a whole can emit, and the cap is reduced each year to accelerate progress towards EU emission targets. Emission allowances that permit companies to emit one ton of carbon dioxide (CO2) equivalent are sold at auctions and can be traded between companies, though some allowances are free. Allowances are reduced in line with the cap reduction. Since 2005, the ETS has reduced industrial emissions by 47%.

The proposed revisions overhaul the ETS by reducing the reduction factor applied to the cap. Until 2020, the cap decreased by 1.74% each year. In 2021, the factor was increased to 2.2%, with a planned increase to 4.3% in the period from 2024 to 2027 and then to 4.4% after 2028. Now, the factor will be reduced to 3.7% for 2031 to 2035 and then to 1.7% after 2036.

Up to 2% of carbon credits could also be purchased from outside the EU to finance international decarbonization projects. Emission allowances, which were due to end in 2039, will now be extended beyond that date into the 2040s, allowing companies to emit higher levels of GHGs for a longer period of time. Sectors that are covered under the Carbon Border Adjustment Mechanism (CBAM) would see the reduction of free allocations slowed, with the eventual phaseout extended until 2038.

There will also be more than €100 billion of funding going towards industrial decarbonization at scale through the Industrial Decarbonization Bank, with the ETS Innovation Fund continuing to provide support for commercial applications of clean technologies. Member states would also be required to spend 50% of ETS revenues on decarbonization investments.

The changes are likely to be well received by industry, which has been pushing for revisions. In an opinion piece from July 13, 2026, the European Chemical Industry Council (CEFIC) President Markus Kamieth said that the goal of decarbonization must not come at the expense of European industrial transformation, which would result in lost jobs, dependence on non-EU supply chains, and the transfer of investment and production to other global regions with weaker environmental laws, and that the transition to a decarbonized chemical industry relies on conditions that are not yet in place.

“The ETS was designed to make emissions reductions economically attractive by putting a price on carbon,” said Kamieth in the opinion piece. “That logic works where low-carbon technologies, infrastructure, finance, permitting, and customer demand are in place. It cannot work where a company's plant has no access to the grid, where it cannot deploy carbon capture and storage at scale, or where it has no viable markets for the resulting products. In such situations, the reality for most chemical sites today is that the ETS adds unavoidable costs rather than an incentive to invest.”

In press remarks after the announcement, Commissioner for Climate, Net Zero and Clean Growth Wopke Hoekstra said that the proposed revisions would advance climate action while transforming the ETS into an engine for innovation and investment in a clean economy. At the same time, Hoekstra said that the proposal was likely not the end of the simplification process pruning away at the Green Deal.

“While the ETS is important, we need more to fix the EU's industry more at large,” said Hoekstra. “We need more simplification, the completion of our internal market, a capital markets union, and an end to an unlevel playing field for too many of our companies. We're convinced that, along with all these measures, today's review is the best way forward for our climate, competitiveness, and independence.”

However, in a LinkedIn article, Director at Cleantech for Europe Victor van Hoorn and President of the Business for CBAM Coalition Leon de Graaf said that EU industry is the author of many of its own struggles, citing outdated industrial technology that needs modernizing and the excessive purchase of CO2 permits that companies then sell to return billions to shareholders instead of investing in low-carbon technology, which the authors called “free handouts.”

“Blaming the ETS for today's European industry competitiveness woes is a claim that needs to be resolutely debunked,” said van Hoorn and de Graaf. “Europe's industrial base needs to modernize as quickly as possible to compete globally. This can only be achieved through supported decarbonization, and maintaining a strong ETS with a meaningful carbon price is indispensable in that quest. Delaying the investment signal and continuing dancing until the music stops is no long-term competitiveness strategy.”

In a LinkedIn post, Professor and Associate Dean at the Copenhagen Business School Andreas Rasche noted that the proposed revisions provided little clarity for industry.

“Once again, the EU undermines investment certainty, slows climate action, and penalizes firms that already invested in decarbonization,” said Rasche.

EU Pushes Towards Electrification

In the same announcement, the commission unveiled the Electrification Action Plan, the goal of which is to lower the costs of energy by moving towards electrification in industry, transport, and building sectors.

The objective of the plan is to generate 46% of EU energy from electrification by 2040, which is twice the current level. The commission estimates this will cut gas imports by more than 70% and crude oil imports by 40% while reducing the costs of imported fossil fuels by €260 billion.

“With this plan, we are putting Europe on a course to become the world's first electro-continent,” said Commissioner for Energy and Housing Dan Jørgensen in the press release. “The message we are sending today is very clear: choose electricity over fossil fuels. Choose green, home-grown, cheaper electrons over black, imported, expensive molecules. Choose independence over vulnerability. An accelerated clean energy transition coupled with electrification is the answer to Europe's challenges in terms of security, competitiveness, and decarbonization.”

The commission hopes the plan will level the playing field between electricity and fossil fuels. Despite the benefits of electrification, widespread adoption is currently constrained by higher costs, delayed grid connections, lack of technological innovation, and little incentive on the part of industry to make the transition.

To address these constraints, the plan proposed lowering upfront costs across key industries with tools such as social leasing schemes and ETS financial instruments. It will also speed up grid deployment and promote the development of investment projects and manufacturing solutions to facilitate the uptake of electrification solutions and other clean energy technologies.

The plan also included measures to increase the rate of heat pump installations by 2030 in homes, offices, and public buildings through investment and by providing guidance and information to consumers about possible savings. It will support the continued adoption of electric vehicles and ensure 50% of final customers have smart meters by 2030, while allowing member states to reduce network charges and taxes for some consumer groups and energy-intensive businesses.

Speaking at a press conference, Jørgensen said that doubling the rate of electrification will be no small feat.

“It took us from the stone age until now to get to 23% and now we want to double it in 14 years,” he said. “But it's necessary and we also think it is both plausible and realistic.”

In a press release, Mohammed Chahim, vice-president for the Green Deal, energy, and climate for the left-leaning Socialists and Democrats party, praised the commission's plan for using social leasing to reduce upfront energy costs for households that cannot afford the initial investment. However, he also said that social leasing is only one component of a strategy that must include significant public investment to improve the daily lives of citizens.

“By making clean technologies affordable and accessible to everyone, we can strengthen Europe's strategic autonomy, reduce our dependence on imported fossil fuels, boost the competitiveness of European industry, and deliver tangible improvements to citizens' daily lives,” said Chahim. “The clean energy transition will only succeed if it is also a social transition that lowers the cost of living and leaves no one behind.”