European Commission pushes to redirect carbon levy revenue to industry

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EU redirects carbon levy

Highlights

European Commission seeks to mandate a larger minimum share of ETS revenue be used to support industries paying into the carbon market, raising transparency requirements.
Brussels is considering extending the Emissions Trading System to outbound flights and revising shipping coverage, while attaching stricter conditions to free emissions permits to stimulate cleaner industry investment.
Finance ministries and national governments resist the overhaul, warning that earmarking more ETS funds for industry could create public budget gaps and limit funding for other climate or general spending priorities.

ETS revenue overhaul and policy scope

As reported by Financial Times, the European Commission is reviewing the emissions trading system to require a larger minimum share of national ETS revenues to support sectors that pay into the scheme, while also increasing transparency over how the money is used.

Under the current system, polluting companies must buy or receive permits to emit carbon, and member states largely retain the proceeds. Since 2023, governments have been required to spend the funds on climate action, but the commission says less than 5 per cent is currently used to help industries cut their own emissions and invest in cleaner technology.

The review is part of a broader effort to align the ETS with the EU goal of cutting greenhouse gas emissions by 90 per cent by 2040 compared with 1990 levels. Brussels is also considering extending the scheme to flights leaving the EU, revising its application to shipping, and allowing some companies to keep free emissions permits for longer, while attaching stricter conditions to push investment in cleaner operations in Europe.

Budget tensions and industrial impact

Resistance is building because finance ministries control national budgets and could lose flexibility if more ETS revenue is earmarked for industry. Diplomats and officials say many governments already rely on the funds for other climate-related projects or wider public spending, raising the prospect of gaps in national budgets if the rules are tightened.

Examples vary across the bloc. Austria has used substantial ETS revenue to help finance a railway tunnel beneath the Alps, while France has directed funds to housing efficiency and general budget purposes; the Netherlands and Germany do not disclose detailed spending. One senior climate official says Brussels is examining how to ensure a minimum share supports ETS-paying sectors, while a senior diplomat warns that reallocating the money more narrowly towards industry would create real budget problems for some states.

Heavy emitters covered by the system include utilities, steel, cement, fertiliser and aviation. EU officials argue that using more carbon market revenue for these sectors would help answer complaints over competitiveness, higher operating costs and limited direct benefit from the levies, while supporting the bloc's longer-term aim of preserving industrial capacity on the path to net zero by 2050.

Our earlier coverage of the House Budget Committee’s FY2027 budget resolution markup explained how Republicans are using the process to kick off another budget reconciliation effort and advance their fiscal agenda. We noted that while the move signals a more active phase in FY2027 budget negotiations, specific provisions and potential amendments were not yet detailed.

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