On 17 July, the European Commission unveiled its much awaited proposal for the review of the world’s largest carbon market: the EU Emissions Trading System (EU ETS).

This review has key implications for Europe’s energy and carbon intensive industries, as a separate carbon market – the ETS2 – puts a CO₂ price on buildings, road transport and other sectors’ emissions that sat outside the main system in the last revision in 2023. 

The revision also has deep implications for Europe’s aviation sector, and its rapidly rising emissions. 

A limited expansion, not a global carbon price

Until now, the EU ETS has only covered aviation emissions from flights within the EU – and not those flights to and from the EU travelling globally. This decision was made in 2008 and upheld in 2012, to facilitate the creation of a global framework to limit the increase in aviation carbon emissions known as CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). 

This global scheme has delivered very little to date. 

Now, amid renewed debate over European competitiveness and climate policy, EU institutions are willing to re-open this decision by the first quarter of 2027. 

According to the Commission’s proposal, from 2029 the EU ETS would finally reach beyond the European Economic Area to cover departing international flights to third countries located no further than 5,000 kilometres from Frankfurt. 

That would level the playing field between European airlines and hubs and their direct competitors just outside Europe’s borders (Dubai, Doha, Istanbul), as well as Russia. 

Previous ICCT modelling has shown that such a “near‑neighbourhood” approach could bring additional ETS revenues, while limiting the potential “carbon leakage” from Europe to neighbouring countries.  

However, covering a large part of Africa, and other parts of Asia, while leaving bigger economies (USA, India, China) untouched, continues to pose geopolitical and just transition challenges for the Commission’s proposal.  This distance‑based design means that most intercontinental long‑haul flights – including some of the most carbon‑intensive routes on the planet – will continue to face no carbon price under the EU’s system at all.

Private jets finally pay for their pollution

In addition to the change in geographical scope, for the first time, all private and business jets would be fully brought into the EU ETS scope. 

This closes a glaring equity gap in the current framework, where ultra‑high‑emitting private flights often escaped carbon pricing despite outsized per‑passenger emissions. This is a small but symbolically powerful shift: at a time when citizens are being asked to shoulder higher carbon costs, exempting private jets has been politically toxic. 

Including them sends a clear signal that the EU is willing to address high‑carbon privilege, not just economy‑class holidaymakers.

Kicking the CORSIA can to 2032

The proposal foresees a major review in 2032 to consider whether to expand the scope of flights further, effectively giving CORSIA yet another chance to prove its worth. 

By then, the Commission is expected to reassess CORSIA’s effectiveness, even though its own assessments already concluded that the global scheme is not a credible alternative to EU ambition.

A reshaped financing framework for alternative fuels, with a greater focus on e-kerosene

The reform significantly scales up and extends the FEETS scheme – the scheme where EU ETS allowances are earmarked to support alternative aviation fuels to fossil jet fuel. 

Under the revision, the scheme would be reserved for alternative fuels produced in the EU, UK, Switzerland, or other third countries whose ETS is formally linked to the EU’s, effectively creating a “Made in Europe” clause. 

The scheme’s lifetime will also be extended by ten years to 2040 and its size increased, with an additional 110 million allowances on top of the 20 million already foreseen from 2024 to 2029. 

Ten million of these allowances will also now be  conditional on airlines and fuel suppliers signing at least three‑year offtake agreements for advanced biofuels, renewable fuels of non-biological origin (RFNBOs) and electricity for zero‑emission aircraft – an essential lever to de‑risk early projects and crowd in private finance. 

However, the Commission intends to make FEETS available to all aviation fuels burned on flights, including those currently outside the proposed ETS scope. This means that airlines operating long‑haul routes that remain exempt from paying a carbon price could still benefit from EU‑funded price support if they uplift eligible fuels. 

Channeling allowances to fuels on non‑priced routes risks diluting the signal in the covered market and undermines the principle that support should be tightly coupled to paying a carbon price. This approach could pressure less airlines to decarbonise where it matters most.

Crucially, the Commission will phase out support to HEFA based fuels – made from vegetable oils, waste oils, or fats – and certain waste‑based fuels by 2029, after an initial reduction in support from 50% to 30% (a 40% decrease), tightening the window in which they can benefit to focus support on less mature, and potentially higher integrity alternative fuels. 

The proposal also cuts headline support levels for alternative fuels at precisely the moment when the sector needs strong, predictable incentives to scale. The maximum price support for advanced biofuels is reduced from 70% to 50%, and renewable hydrogen support is trimmed from 70% to 60%. 

Meanwhile aviation RFNBOs – the very e‑kerosenes expected to shoulder the bulk of long‑term decarbonisation – see support slashed the largest percentage, from 95% to 60%. This significantly narrows the price incentive differential between advanced biofuels and e‑kerosene, reducing the previous 25‑percentage‑point gap to just 10 points. This will fail to reinforce e‑fuels’ strategic importance. 

Electricity and zero‑emission aircraft enter the frame

A welcome innovation is explicit ETS coverage of electricity used for zero‑emission aircraft (ZEA), recognising that future battery‑electric or hydrogen‑electric planes will draw on a decarbonising power sector. 

By making electricity eligible within FEETS and associated support schemes, the proposal anticipates the need to integrate aviation with the broader energy transition, rather than treating it as a siloed sector.

This approach could help catalyse early zero-emission aircraft deployments on short‑haul routes, provided that airport infrastructure, grid connections and regulatory frameworks keep pace. But without a strong, durable carbon price signal, the risk remains that such aircraft become niche demonstrators rather than a mainstream replacement for regional jets.

Contrail prevention: small pot, big symbolism

The proposed allocation of EU ETS allowances for contrail prevention marks another novel feature of this current review. Airlines that embed contrail forecasting and avoidance into their flight planning would receive free allowances equivalent to 0.1 per cent of verified emissions, recognising the significant near‑term climate impact of non‑CO₂ effects.

While the volume is modest, the signal is important. It institutionalises contrail mitigation within EU climate policy, nudging airlines to integrate atmospheric science into operational decisions and offering a template for other jurisdictions to follow. To be effective, however, this instrument must be paired with robust monitoring, verification and science‑based guidance to avoid green‑washing claims of “contrail‑free” flying.

Carbon removals enter the EU ETS – cautiously

The reform also opens the door to allocating EU ETS allowances to certified, permanent carbon removals such as direct air capture or bioenergy with carbon storage, under the EU’s emerging Carbon Removal Certification Framework. This represents a cautious step. But the move could risk undermining the integrity of the cap by blurring the line between emission reductions and removals, especially if removals are used as a substitute for decarbonising in‑sector activities.

A new €100 billion Industrial Decarbonisation Bank

Complementing sector‑specific measures, the Commission proposes a new €100 billion Industrial Decarbonisation Bank, designed to reduce commercial risk for mature projects and accelerate large‑scale deployment across hard‑to‑abate sectors. If designed well, this could provide the blended finance backbone needed to bring e‑fuel plants, advanced biofuel facilities and hydrogen infrastructure to final investment decisions (FID).

For aviation, this is a double‑edged sword. While, it creates a powerful anchor for de‑risking capital‑intensive alternative fuel projects, it could generate fierce competition for scarce concessional capital.

Recycling ETS revenues into the transition

The new proposal sets an indicative target that 50 per cent of national ETS revenues should be reinvested into sectors covered by the carbon market, including aviation and maritime. If implemented, this could pave the way for Member States to channel revenues into the eSAF Early Movers Coalition double‑sided auctions (DSA) or contracts for difference (CfDs), moving from ad‑hoc subsidies to a more predictable, rules‑based approach.

But “indicative” is not “binding”. Without hard earmarking or clear guidance, there is a real risk that ETS revenues continue to flow into general budgets or unrelated projects, leaving the aviation transition under‑funded despite growing carbon costs for passengers.

What this potential reform means for aviation decarbonisation

Taken together, the EU ETS reform proposal for aviation is a study in contrasts. It extends carbon pricing to some international flights, brings private jets into scope, creates a bigger and longer‑lasting FEETS scheme, and introduces innovative measures on contrails, electricity and carbon removals. However, it leaves most long‑haul emissions untouched, dilutes support for e‑fuels at the very moment they need to scale, and leans heavily on a 2032 review that may keep extra-EU flights largely carbon exempt.

For climate advocates, investors and progressive airlines, the task now is clear: push to strengthen the proposal in the co‑decision process, close loopholes for exempted long‑haul routes, and ensure that every euro of ETS revenue and every allowance allocated to higher integrity fuels, contrails or removals is aligned with a credible pathway reaching net zero aviation by 2050.