The European Commission has proposed an ambitious plan to raise the European Union’s electrification rate to 46 per cent by 2040, alongside a major overhaul of the European Union Emissions Trading System (EU ETS) backed by more than €100 billion in industrial decarbonisation funding.
The Electrification Action Plan and review of the EU ETS, announced on July 18, 2026, are designed to accelerate the shift away from imported fossil fuels, lower electricity costs, strengthen industrial competitiveness and keep the bloc on track towards its climate targets.
According to the Commission, achieving the indicative 46 per cent electrification target by 2040 could reduce the European Union’s fossil fuel import bill by €260 billion every year. The proposal will be assessed as part of the European Union’s post 2030 Energy Union package.
Europe currently generates around 70 per cent of its electricity from domestically produced clean energyemained stagnant at 23 per cent over the past decade, prompting the Commission to push for faster electrification across industry, transport and buildings
“The best way to reduce Europe’s fossil energy dependency is to power our economy with electricity from clean, homegrownmission
“Today, we are proposing to make Europe the world’s first electro-powered continent. From lowering electricity prices to adapting our carbon market to the changing global realities, this is also an investment and independence plan. To keep the clean transition on track, bring relief to our industry, and support decarbonisation. Let’s switch it on.”
EU ETS review eases compliance while increasing clean investment
The Commission also proposed reforms to the European Union Emissions Trading System, the bloc’s flagship carbon pricing mechanism introduced in 2005.
According to the Commission, the EU ETS has generated more than €270 billion in revenues since its launch, with the proceeds reinvested in innovation, industrial decarbonisation and modernisation of Europe’s energy system. The scheme has also helped reduce emissions by 50 per cent in the sectors it covers.
The revised framework proposes a more gradual decline in emissions allowances by revising the Linear Reduction Factor to 3.7 per cent during 2031 to 2035 and 1.7 per cent during 2036 to 2040. It would also permit the use of up to 2 per cent of high-quality international carbon credits during 2036 to 2040 to finance decarbonisation projects outside Europe.
A key feature of the proposal is the creation of an Industrial Decarbonisation Bank supported by €100 billion to finance industrial decarbonisation projects across Europe. Before 2030, an ETS Investment Booster will serve as the first phase of the bank.
The European Union Innovation Fund will continue supporting the first commercial deployment of clean technologies. Member States will also be required to allocate 50 per cent of their national ETS revenues to investments in decarbonising sectors covered under the scheme, amounting to more than €100 billion before 2030.
Support for lower-income Member States will continue through the Modernisation Fund. The Commission also proposed extending free emissions allowances beyond 2030, while linking them more closely to investments in industrial decarbonisation within Europe.
Permanent carbon removals would also be integrated into the EU ETS to provide greater flexibility for hard-to-abate sectors while encouraging deployment of carbon removal technologies.
In a parallel proposal, the Commission plans to increase free allocations to industry worth €6 billion during 2026 to 2030. For sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the phase-out of free allocations would be slowed and extended until 2038.
The proposal also reforms the Market Stability Reserve to improve market stability, maintain liquidity and reduce excessive carbon price volatility.
Additionally, the Commission plans to strengthen the EU ETS for aration
“The EU ETS has proven that carbon pricing works. It has cut emissions, strengthened Europe’s energy security and mobilised investment across our economy,” said Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth.
“Today’s proposal on the ETS review brings together three key goals: climate action, competitiveness, and independence. It advances climate action by also transforming the ETS into a genuine engine for innovation and investment.”
Electrification plan focuses on lowering costs and speeding adoption
The Electrification Action Plan seeks to overcome cost and infrastructure barriers that have slowed the adoption of electric technologies.
According to the Commission, driving a battery electric vehicle can reduce costs by up to 78 per cent compared to an equivalent fossil fuel vehicle. Replacing gas boilers with heat pumps can reduce the average European Union household’s heating bill by up to 60 per cent while also delivering climate adaptation benefits.
Despite these advantages, electricity often costs three times as much as gas in many parts of Europe, while delays in obtaining grid connections continue to hamper electrification.
To address this, the Commission proposed measures to narrow the price gap between electricity and fossil fuels by allowing Member States to reduce network charges for certain consumer groups and lower taxes for energy-intensive industries. It also proposes faster deployment of smart meters to help consumers better manage electricity use and reduce bills, while ensuring electricity is not taxed more heavily than gas.
The Action Plan also outlines financial tools to lower the upfront costs of clean technologies in buildings, transport and industry. These include social leasing schemes, financial support through the ETS, the Social Climate Fund, the Industrial Decarbonisation Bank and a proposed Clean Heat Market mechanism.
The Commission also stressed the need for faster electricity grid expansion, noting that although Europe’s electricity network is among the world’s largest and most reliable, long waiting times for grid connections and inefficient use of existing infrastructure remain major bottlenecks.
It called for the rapid adoption of the Grids Package proposed last year to support faster electrification across the bloc.
The plan also seeks to accelerate investment in manufacturing capacity for clean energy technologies, strengthen supply chains and develop workforce skills, with the Commission saying electrification has the potential to create hundreds of thousands of quality jobs.
“Europe’s competitiveness will be built on clean energy, not on imported fossil fuels. By strengthening the carbon market and accelerating electrification, we are giving businesses the confidence to invest, innovate and lead next-generation technologies,” said Teresa Ribera, Executive Vice President for Clean, Just and Competitive Transition.
“We are building the foundation for the European Union’s future economy while ensuring that we remain fair to people and businesses.”
Dan Jørgensen, Commissioner for Energy and Housing, said the proposals would place Europe on a path to becoming “the world’s first electro continent”.
“The message we are sending today is very clear: choose electricity over fossil fuels. Choose green, homegrown, cheaper electrons over black, imported, expensive molecules. Choose independence over vulnerability. An accelerated clean energy transition coupled with electrification is the answer to Europe’s challenges in terms of security, competitiveness and decarbonisation,” he said.
