EU ETS proposal: more allowances to support industries, but no earmarking for the cleanest

This is the third and final instalment in our summer series unpacking the European Commission’s proposal to revise the EU Emissions Trading System (ETS). After aviation and shipping, we turn to the money: the pot of allowances the ETS reserves to support industry decarbonisation. For both sectors the proposal puts more money on the table, a real step forward, even if it still stops short of fully backing the cleanest technologies.

Aviation: more support, and a first opening for electric aircraft  

Alongside Member States and EU funds revenues from auctioning, the ETS also provides allowances allocated for free for airlines to help cover the cost gap between fossil kerosene and cleaner fuels. Today, this support is capped at 20 million allowances and runs until 2030. The proposal would extend it to 2040 and add up to 110 million more allowances, available for all flights departing the EEA from 2029. This is a major increase in both the size and duration of the support. However, as the proposal would still not bring all departing flights into the scope of the ETS, this means that, from 2029, some long-haul flights departing the EEA could receive ETS support without paying for their emissions. This could create an uneven playing field for flights covered by ETS, while giving airlines on currently un-covered routes less reason to support extending carbon pricing to their flights in order to access support.

For the first time the support scheme also includes electric and hybrid aircraft, a welcome recognition of zero-carbon emission technologies as a key pillar of decarbonisation, especially on the short and medium-haul routes which represent 75% of European flights. They are eligible to receive the same level of support per MJ of electricity as e-fuels, however this support only lasts until 2035 and does not apply to the infrastructure they will need.

The proposal takes a positive step by phasing out support for used cooking oil (UCO). However, that support still runs until 2030 and advanced biofuels remain eligible beyond 2030, detracting resources that would better serve Europe’s goals by boosting the most sustainable solutions.

The proposal keeps e-fuels’ support ahead but narrows their lead: while these allowances can currently be used to cover 95% of the gap between e-fuel and fossil fuel prices, the proposal would see the price-gap coverage fall to just 60%. Coverage for advanced biofuels only falls from 70% to 50%. In practice, however, allowances are handed out on a first-come first-served basis, meaning that advanced biofuels, which are currently cheaper and more readily available, are likely to capture the bulk of the reserved pot, leaving little for the e-fuels that most need it to scale.

This is particularly concerning given the limits of biofuel pathways: constrained sustainable feedstock availability, growing dependence on imports, fraud-sensitive supply chains and increasing concerns around biodiversity and the effective emissions savings. Continuing to subsidise these fuels risks incentivising solutions that Europe cannot realistically scale in the long run, while failing to sufficiently close the price gap with e-fuels. This weakens the business case for the very technologies, e-fuels and zero-carbon emission aircraft, that Europe will need to secure long-term aviation decarbonisation and industrial leadership.

The proposal also introduces two changes that could help strengthen Europe’s industry and unlock investment. First, limiting support to fuels produced in the EEA would strengthen European production, with an extra 10% price coverage for EU-sourced feedstock. Second, a binding fuel-supply contract of 3 years or more can now reserve allowances upfront for up to five years, giving clean-fuel projects the longer-term visibility they need to secure financing.

Maritime: new support, but not yet aimed at the cleanest solutions

For shipping, the proposal creates a similar dedicated reserve of 110 million allowances (2028–2040) for sustainable maritime fuels and zero-emission propulsion, including electric and wind-assisted systems, covering 90% of the price gap with conventional fuels for e-fuels and zero-emission propulsion, against 55% for biogas and advanced biofuels. As with aviation, it rewards European production: fuels and technologies must be made in the EEA, with a narrow exception for recognised green shipping corridors.

But the same blind spot appears. “Low-carbon” hydrogen and fuels, which can still be fossil-based, such as hydrogen made from natural gas with carbon capture, are covered at 80%, and bio-LNG stays eligible at 55%, risking lock-in to LNG bunkering infrastructure. Keeping a clear share focused on the cleanest options would hold the line. Support also stops at the fuels themselves: to turn it into real uptake, it needs to reach the ports, shore power, megawatt charging infrastructure, and smart energy management systems that clean vessels depend on, paired with longer-term demand signals that give projects the certainty to invest.

The proposal also looks beyond Europe, reserving a small pot of allowances (0.9 million a year, until 2035) to help least-developed countries and small island developing states decarbonise their shipping, a welcome (although modest?) equity signal.

Target the money to build a strong European industrial leadership

The proposal now puts serious money behind clean aviation and shipping. The priority now is to make sure that money is directed towards the technologies that can deliver genuine emission reduction solutions for 2040 and beyond, rather than cheaper options that may only appear cleaner today. Ringfencing support for e-fuels and zero-carbon emission technologies would make every allowance work better, not only cutting emissions, but also helping Europe build the clean-tech industry, investment and industrial leadership it will need for the long term.