The European Commission has announced a reform of its EU Emissions Trading System (ETS), Europe's flagship tool for tackling climate change, but the proposals have been blasted by both environmental groups and manufacturers.

One of the key elements of the review proposes to increase subsidies to the EU’s most polluting industries to at least €160bn after 2020 in a bid to prevent them relocating manufacturing to non-EU regions with laxer constraints on greenhouse gas emissions - known as carbon leakage.

Carbon Market Watch has strongly criticised the proposal for watering down already weak provisions in the EU ETS directive and ignoring the ‘polluters-pay principle’. It has also said that no evidence has ever been detected of carbon leakage.

Femke de Jong, EU climate policy advisor at Carbon Market Watch, said: “After more than a decade, the EU’s main climate instrument still lacks the teeth to make the polluter pay and drive emission reductions. Today’s proposal serves the interests of Europe’s largest polluters at the expense of the climate and taxpayers’ money.”

“Handing out pollution permits worth hundreds of billions of euros for free on the assumption that other countries will not take similar action is not only damaging the process for a strong climate treaty in Paris, it also ignores that revenues from auctioning these permits could fill public budgets to invest in Europe’s climate-friendly economy.”

Speaking from a manufacturer’s viewpoint, Gareth Stace, director of UK Steel, has described the revision as a “flawed solution”.

“UK steel plants are trying to compete internationally against companies facing none of the same compliance costs. The ETS’s carbon leakage measures are meant to address this by ensuring the best-performing plants in the EU are given all the ETS allowances they need for free - but neither the current measures, nor the commission’s new proposals, live up to this promise.”

Read more about the EU's transformation of the energy system here

Also commenting on the proposal for reform of the ETS, a more positive Rhian Kelly, CBI business environment director, said: “British business has long said that the EU ETS should remain the cornerstone of EU energy and climate policy. This proposal gives a long-term view of the scheme, putting us on track to meet our 2030 emissions reduction target.

“It is crucial that the ETS works for all businesses, including the most energy-intensive, so they can stay competitive and help tackle emissions as we move towards a low-carbon economy.

“While some improvements have been made on this front, including helpful progress on innovation funding, there is still much more that must be done to support vulnerable industries. We will continue to work with the European Parliament and the Council of the EU to achieve the reforms we need, serving the needs of both business and the environment.”