The European Parliament has approved three pieces of climate legislation that underpin the European Union’s efforts to reduce greenhouse gas emissions by at least 55% by 2030.

'We have finally agreed on the “Holy Trinity”,' said Peter Liese, an MEP from the conservative European People’s Party (EPP), on Tuesday (18 April) following the vote in Strasbourg. 'Everyone will benefit from this.'

The first piece of legislation adopted was the updated version of the Emissions Trading System (ETS) for industry, which increases the emission reduction targets for industrial sectors to 62% by 2030.

'This law is about both energy security and the energy transition,' stated Parliament President Roberta Metsola, explaining the need to increase the target. 'We are not going green just for the sake of being green. The more incentive we provide to go greener, the more independent we will be.'

To protect against major polluters outside Europe who do not face additional costs, a system of free allowances was incorporated into the ETS when it was first launched in 2005. Under the updated rules, these free allowances will be phased out between 2026 and 2034, thereby increasing the cost of carbon emissions. To maintain the competitiveness of European Union industry, a Carbon Border Adjustment Mechanism (CBAM) for goods imported into Europe was also adopted by a large parliamentary majority, forming the second part of the so-called Holy Trinity.

This levy will apply to imported steel, fertilisers, aluminium, cement, electricity generation and hydrogen. It will be phased in from 2026 to 2034 at the same pace as free allowances are phased out under the ETS. 'This is the future of climate policy and maintaining industrial competitiveness, because we need to create a level playing field,' said Mohammed Chahim, an MEP from the Progressive Alliance of Socialists and Democrats (S&D) and the rapporteur for the document.

MEPs also confirmed that the ETS will be extended to the shipping industry for the first time and that free allowances for aviation will be phased out by 2026—a year earlier than proposed by the EU Commission. Half of the available allowances will be phased out in the two preceding years.

A separate carbon trading system (ETS II) for households and cars will also be introduced in 2027 (or 2028 if energy prices remain historically high). This will increase heating, cooling, and transport costs for consumers and businesses, stimulating the shift to electric vehicles, electrified heat pumps, and renovations.

To protect vulnerable households, small businesses, and drivers from the costs associated with this part of the legislation, MEPs have also approved an €87 billion Social Climate Fund, which will enter into force in 2026, forming the third and final part of the broad set of market-based climate rules that are central to the EU’s climate ambitions.

The fund will be financed by auctioning ETS II (transport and heating) emission allowances worth up to €65 billion, with an additional 25% covered by member states, although revenues will depend on the price of carbon.

According to P. Liese, ETS I and II will generate €700 billion in public revenue across the bloc, which member states must invest in the transition to a green economy.

“Should” versus “must”

Previously, the requirement to use ETS funds for economic restructuring was vaguely phrased (“should”), which resulted in only half of the ETS funds being reinvested into climate-related efforts. In the new rules, this wording has been changed to a stricter “must”, indicating that countries no longer have a choice.

'Governments are not allowed to spend the funds on whatever they want; they must spend them on the transition,' noted EPP MEP Peter Liese, who fought for “three to four years” to change the wording.

Although it may seem like a minor detail, the rules have already affected the situation. Since the EU reached political agreement on the updated ETS rules for the first time in December, carbon prices soared to €100 per tonne in February for the first time in their history and have remained at this level since, representing a fivefold increase in three years. Tuesday's adoption by a large majority in Parliament further reduces uncertainty regarding the trajectory of the legislation, further strengthening market prices.

'I am very grateful that we have reached an agreement on the Emissions Trading System,' said MEP P. Liese on the sidelines of Tuesday’s (18 April) parliamentary session. 'The ETS is our most important piece of climate legislation.'