European Commission Proposed Emission Rule Changes Spark Controversy

From 2029, the European Commission (EC) is looking to extend the European Union (EU) emissions trading system (EU ETS) to include all departing flights within a 5,000-km range from Frankfurt. This would exclude flights to China, India and the US, while bringing Middle East and Turkish flights into the EU ETS.

“This radius sounds very convenient,” one industry observer said. “The optics don’t look good.” The political significance is hard to miss, with the relevant context.

The ETS is a CO₂ emissions cap, under which companies must surrender one allowance for every tonne of CO₂ they emit, and the overall cap reduces over time. Rewinding the clock to 2012, when aviation originally joined the EU ETS, China, India and the US vehemently opposed plans to include all EU arriving and departing flights. By including emissions for the entire flight—not just the portion within European airspace—they argued the EU was overstepping its jurisdiction.

China threatened to cancel Airbus orders, US Congress passed anti-EU ETS legislation, and 26 countries threatened countermeasures against the EU under the Moscow Declaration. The stakes were high.

Ultimately, the EU decided to implement Stop the Clock legislation, temporarily limiting the scope of the EU ETS to flights within the European Economic Area (EEA), which covers the EU member states, Iceland, Liechtenstein and Norway. In return for this temporary derogation—or legal exemption—the EU wanted concrete action toward a global market-based measure through ICAO, which ultimately led to the CORSIA carbon offset and reduction scheme.

Around the same time, anti-Gulf carrier sentiment was building among European network carriers. Some argued that Gulf carriers could offer lower fares for flights transiting the Middle East because they were not subject to the same regulatory burdens.

Fast forward to July 17, 2026, and the EU is now proposing the 5,000-km radius because—in the EU’s eyes—CORSIA is not strong enough yet. Interestingly, this 5,000-km radius is measured from Frankfurt  allegedly because it is the largest airport near the geographical center of the EU. If Brussels, the headquarters of the EC, was the origin point, the radius would clip the extreme northeastern tip of the US, whereas Frankfurt does not. This excludes key EU trading partners that were vocal opponents in 2012—including the US, where President Donald Trump has demonstrated a willingness to impose tariffs on international trading partners—but extends EU ETS to include major Gulf hubs in the United Arab Emirates, Turkey and Qatar.

“The Commission showed very clearly that when it comes to making EU legislation, it will allow the US and China to dictate the outcome,” Climate change NGO Opportunity Green CEO Aoife O’Leary said.

ARBITRARY BOUNDARY

The Arab Air Carriers Organization (AACO) described the 5,000-km boundary as arbitrary, unilateral and extraterritorial, with no legal basis, environmental threshold, or internationally agreed methodology. “While EU states have the right to regulate activities within their airspace, that right does not extend beyond it,” AACO said, citing airspace sovereignty rights laid down by the Chicago Convention.

Recalling the “checkered history” of the EU ETS, Emirates Airline president Tim Clark said, “I think [the EU] needs to think this through very carefully before doing this.”

If the proposal goes ahead, any flights covered by EU ETS would be excluded from CORSIA, but Clark said Emirates had already bought CORSIA credits to offset future emissions.

Riyadh Air CEO Tony Douglas remarked, “Like all other global legislation, wherever it may be, we will comply.”

ALTA, the Latin America and Caribbean air transport association, criticized the EU for extraterritoriality that would create extra work for airlines and fragment global policy, even though ALTA members’ flights would be exempt. ALTA CEO Peter Cerdá said the focus should be on “strengthening the framework that already exists, not duplicating it.”

The Association of Asia Pacific Airlines (AAPA) welcomed the decision not to extend the EU ETS to full scope but said the EU plan was inconsistent with global ambitions for CORSIA: “AAPA believes that a unilateral, regional extension of EU ETS risks setting a precedent for fragmented, extraterritorial climate measures,” it said.

IATA described the changes as unacceptable, harmful, extraterritorial and encroaching on CORSIA’s remit, risking a return to the global trade tensions of 2012. “The EU is repeating a historic error,” outgoing IATA director general Willie Walsh said. “Instead of expanding the EU ETS beyond Europe’s borders, the EU should focus on making CORSIA—the agreed global mechanism—even more successful.”

The Airlines for Europe (A4E) association was similarly scathing. “The Commission has opted to extend a regional system to a global problem,” A4E said. “CORSIA has got to be the bedrock,” British Airways CEO Sean Doyle said. Creating regional distortions was “misguided,” he added.

Eco-body Transport & Environment (T&E) was also unimpressed, labeling the proposal as a “half-hearted step” toward taxing international flights, which “still leaves 47% of European aviation exempt from carbon pricing.”

While the scope extension is grabbing headlines, other aspects are getting less coverage. For example, the linear reduction factor (LRF)—which is the rate at which the EU ETS emissions cap is narrowed—is set to slow to 3.7% in 2031-35, dropping to just 1.7% from 2036-40.

For context, the LRF is currently tracking upward, rising from 4.3% today to 4.4% from 2028 to meet 2030 targets. “Simply maintaining that rate beyond 2030 would not provide a realistic trajectory for the period up to 2040,” the EC said.

T&E warned that the slowdown would trigger excess allowances, depress long-term EU ETS pricing and weaken the business case for clean technologies. “The LRF should remain untouched until 2036,” T&E said.

Geopolitical unrest and competitiveness are also catalysts for the EU ETS reform. “Green is cheaper and wiser. Dependency is expensive,” EC and EVP for a Clean, Just and Competitive Transition Teresa Ribera said. “We know that decarbonization is the best economic and security strategy for Europe.”

CARROT AND STICK

Since its launch in 2005, the EU ETS as a whole, including non-aviation sectors, has generated more than €270 billion ($312 billion) in revenue that goes to member states and EU-level funds.

The EU is often criticized for being “all stick and no carrot,” but some ETS proceeds are channeled into two incentives that benefit aviation. The first of these is free ETS allowances, known as EUAs, that compensate airlines for up to 100% of the additional cost for sustainable aviation fuel (SAF). Airlines can apply annually, based on their verified SAF uplift and the routes operated.

There are currently 20 million EUAs reserved for SAF use in 2024-30, and the EC is proposing that up to 110 million additional EUAs be made available for the period to Dec. 31, 2040. For the first time, other zero- and low-emission propulsion technologies will be covered by this incentive, including electric, hybrid-electric and hydrogen-powered aircraft.

In 2024, this support totaled around 1.3 million allowances, worth approximately €100 million, shared between 53 operators. On top of this incentive, airlines do not have to surrender EU ETS allowances for flights operated with SAF, totaling €25 million in additional support for 2024.

The flip side is that the percentage of cost difference covered will reduce under the proposal, because the support will be spread among a larger number of airlines, longer distances and more propulsion types. Remote islands and outermost regions will still benefit from up to 100% of the cost difference, provided they source fuel locally.

One curiosity from the EU ETS proposal is that book and claim—where airlines that do not have a local SAF supply can buy it for use elsewhere and still claim the benefits—was included in early drafts, but it did not seem to make the final cut.

European Regions Airline Association (ERA) director general Montserrat Barriga said the absence of book and claim could risk “unfairly locking regional airlines out” of SAF-related benefits, because SAF may not be available at smaller airports.

When asked about book and claim, an EC official said the proposal removed the “physical link” between where SAF was physically supplied and where SAF support could be claimed, creating a book-and-claim-style system. However, there is no possibility of trading amongst aircraft operators and regional carriers can only claim 100% SAF price gap support if they physically take delivery of the fuel in remote regions.

Another new feature is that the EU is planning to use up to 3 million EUAs from the aviation pot for the period to 2033 to incentivize contrail management. If airlines integrate contrail management and assessment into their forecasting and flight planning, they will receive free EUAs covering 0.1% of their verified emissions, plus a further 0.02% if they share actual trajectory and fuel-flow data.

Notably, the SAF, net zero propulsion and non-CO₂ incentives will be available to all airlines participating in the EU ETS from 2029, including non-European airlines.

The second EU carrot is the innovation fund, which reallocates the EU share of ETS funds to scale up high risk, first-of-a-kind green technologies, with several aviation recipients. The fund has an estimated €40 billion budget between 2020 and 2030.

Under the proposal, ETS revenues will also fund the new Industrial Decarbonisation Bank (IDB), which will inject €100 billion into proven green technologies in energy-intensive industries. This will begin with the IDB’s €30 billion investment booster in 2028–2030, financed through 400 million EUAs. It is unclear whether aviation will be an IDB beneficiary.

The proposal also allows for future integration of up to 250 megaton of permanent carbon removals into ETS for the first time to kickstart that market. According to carbon markets specialist Sylvera, these carbon removals will come from a centralized body. Airlines will not be able to buy directly from projects, such as direct air carbon capture and storage.

Finally, EU member states will be required to spend 50% of their national ETS revenues on decarbonizing EU ETS sectors, including aviation. Today, around 80% of ETS revenues go to member states. But of that less than 10% has been spent on industrial decarbonization. “National ETS revenues should be reinvested in ETS sectors. The principle is clear: contributions by industry should flow back to industry,” the EC said.

WHAT NEXT?

The proposal is not yet law—it still needs to be negotiated and approved by the European Parliament, which is the voice of EU citizens, and the Council of the European Union, which represents EU member states.

German Member of the European Parliament (MEP) Peter Liese is arguably the most influential MEP on EU climate policy and EU ETS. He is responsible for leading the Parliament’s work and negotiations on the proposal. Liese said European institutions were aiming to finalize legislation by the first quarter of 2027. This means the Council and Parliament will have to form their positions by the end of 2026 so the trilogue can begin in January. “This timetable is very ambitious. The sooner we have clarity, the better,” Liese said.

However, there is a timing anomaly. The 2012 EU Stop the Clock derogation, which stops ETS from applying to all EU arriving and departing flights, expires at the end of 2026 and the proposed EU ETS changes are unlikely to be transposed into national law before 2028. This raises uncertainty over whether EU ETS might temporarily return to full scope in 2027 while the new laws are being finalized. However, the reporting date for 2027 emissions would not be until September 2028, so there is time to reach a legal resolution before then.

Looking further ahead, the EC plans to reassess CORSIA in 2032. If it proves to be “ambitious, efficient and successful,” the EC will return the scope of EU ETS to intra-EEA flights only.

If the 2012 tensions were chapter one in the European ETS story, 2026 is chapter two and the tale continues.