The European Commission is set to unveil an overhaul of the European Union's Emissions Trading System (EU ETS) on Friday, seeking to balance the bloc's long-term climate ambitions with mounting concerns that high carbon costs are hurting industrial competitiveness.The proposed changes would allow industries to continue receiving free carbon permits for longer, slow the pace at which emissions limits tighten, and link financial support more closely to investments in clean technologies. The proposals will form the basis of negotiations between EU member states and the European Parliament over the next year.What is the EU ETS?The EU ETS is the European Union's flagship climate policy and the world's strictest carbon pricing mechanism. Introduced in 2005, it requires power plants, industrial facilities, airlines and shipping companies to surrender one emissions permit for every metric tonne of carbon dioxide (CO2) they emit.The system currently applies across all 27 EU member states, along with Iceland, Liechtenstein and Norway, and is linked to Switzerland's emissions trading system. It also covers emissions from flights within Europe, shipping within the region, and half the emissions from international shipping voyages to or from EU ports.Each year, the EU caps the total number of permits available, gradually reducing supply to drive down emissions. Around 57% of permits are auctioned while the remaining allowances are distributed free of cost to certain industries to help them remain competitive against overseas rivals that do not face comparable carbon costs.Carbon permits currently trade at around €79-80 per tonne, up sharply from below €10 during the 2010s.Why is the system being revised?The existing ETS was designed to help deliver the EU's 2030 climate targets. If left unchanged, the scheme would run out of available carbon permits by 2039.The Commission wants to extend the system into the following decade and align it with the EU's 2040 target of reducing net greenhouse gas emissions by 90%.However, the review comes amid growing political resistance to Europe's green agenda. Countries including Italy and Poland have argued that rising carbon costs are eroding industrial competitiveness, while others such as Sweden and Denmark have called for maintaining a strong carbon price to support investments in cleaner technologies.What changes are being proposed?According to Reuters, the Commission plans to reduce the annual rate at which the emissions cap declines to around 3.7% from 2031, compared with the current 4.3%, before slowing it further from 2036. The proposals were still under negotiation ahead of publication.The Commission also plans to extend free carbon permits for industries until the end of 2037 instead of ending them in 2034, when they were originally scheduled to be replaced by the EU's Carbon Border Adjustment Mechanism (CBAM). That could also delay the full rollout of the carbon border levy until the end of 2037.In addition, companies would receive 80% of their free permits upfront if they commit to investing in decarbonisation projects within Europe, while the remaining 20% would be released after those investments are completed.Brussels is also proposing stricter rules governing how governments use ETS revenues, requiring half of the proceeds to be reinvested in domestic industries.Has the ETS worked?The system has delivered significant emissions reductions in sectors it covers. Emissions from ETS-regulated sectors have fallen by around half since 2005, with the largest reductions coming from the power sector as higher carbon prices made renewable energy and gas-fired generation more competitive than coal.Heavy industries, however, saw limited emissions reductions until the 2020s. Some companies argue that more recent declines have been driven by plant closures, weak industrial demand and high energy prices rather than investments encouraged by the ETS.What's at stake?The ETS covers around 40% of the European Union's greenhouse gas emissions, making it central to the bloc's climate strategy.Since 2013, the system has generated €260 billion in revenue. Around 75-80% of those proceeds have gone to national governments, while the remainder has funded EU clean energy programmes.The Commission's proposal to require governments to reinvest 50% of ETS revenues into domestic industries is expected to face resistance from countries that currently use the funds to support broader public finances.The overhaul will also determine how long industries continue receiving free emissions allowances, which have been worth around €250 billion since the scheme began.Industry and government divideThe proposed reforms reflect competing priorities across Europe.Some companies, including German chemicals producer BASF, have called for lower carbon costs and the continuation of free emissions permits. Others, such as Swedish steelmaker SSAB, which has invested heavily in low-carbon production technologies, favour maintaining a robust carbon price to protect those investments.Governments are similarly divided. Italy and Poland have pushed for a weaker ETS, while countries including Sweden and Denmark want the carbon market to remain stringent.Separately, the Commission is also proposing to expand the ETS to include emissions from international flights departing Europe to destinations up to 5,000 kilometres away. This would cover routes to hubs in Turkey and the Middle East but exclude flights to the United States. The proposal has already drawn criticism from the American Chamber of Commerce, which warned it could trigger retaliatory measures from major trading partners.What happens next?Once the Commission presents its proposal, EU member states and the European Parliament will submit amendments before negotiating the final legislation, a process expected to take about a year.However, the Commission is expected to seek faster approval for some measures, including increasing the number of free emissions allowances available to industries from this year onward.(With inputs from agencies)