The most important event of the decade has finally happened, the event everyone was waiting for and of which everyone is now talking about: on 17 July 2026, the European Commission has presented the revision of the EU ETS, the milestone of its environmental politics.
The EU ETS must now be adapted to the European objective of reducing net emissions to 90% by 2040 and must take into consideration the impacts on industries of an international context dominated by geopolitical tensions that has create high energy prices and the need of energy independence.
The European Commission is determined to achieve energy independence, pursue the fight against climate change and preserve the competitiveness of European industries.
The objective of the reform, in the intentions of the Brussels executive, is to transform the ETS into an instrument capable of supporting not only emissions reductions, but also industrial growth and investment in green economy.
Reduction of the cap
The most relevant change concerns the Linear Reduction Factor (LRF), the parameter that determines the annual decrease in the overall number of allowances placed on the market. The Commission proposes a slowdown in the annual reduction of the ETS cap.
The LRF remains unchanged at 4.3% until 2030, then decreases to 3.7% for the period 2031–2035, to reach 1.7% for the period 2036–2040. This allows companies to have more time to make the investments necessary to transform production processes, but the reduction is nevertheless calculated to achieve the 2040 target of reducing emissions by 90%.
Reduction of the Market Stability Reserve
The Commission also proposes to reform the Market Stability Reserve (MSR), the mechanism that absorbs surplus allowances and makes them available in case of scarcity, helping to stabilise the market and prevent prices from falling too low.
In particular, the rate at which the reserve absorbs allowances will fall from 24% to 12%, allowing a greater number of permits to remain on the market for longer.
The measure integrates the April 2026 proposal to stop the automatic cancellation of allowances held in the reserve above the threshold of 400 million. Overall, the changes aim to ensure liquidity and reduce the risk of excessive fluctuations in allowance prices.
Proposal to eliminate free allocation
Of great importance, in line with the need to protect the competitiveness of European industry, and to protect the sectors most exposed to carbon leakage, is the Commission’s proposal to revise the rules on free allocation of allowances.
The Commission changes the pace of the reduction in the elimination of free allowances for sectors most exposed to the risk of carbon leakage, those affected by CBAM, extending the elimination from 2034 to 2038.
The proposal eases also the reduction of the benchmark used to determine the number of free allocations.
Use of ETS revenues
Another point of the proposal is the use of revenues generated by the ETS. Since 2013, the ETS has generated more than €270 billion in revenues, however, only a limited part of these resources has directly supported the decarbonisation of industry, which is responsible for around 47% of ETS emissions.
To increase support for the green transition of industry, from 2028 the Industrial Decarbonisation Bank will be established, using 400 million EUA allowances (worth around €30 billion at current prices) until 2030 to promote industrial decarbonisation projects.
The Modernisation Fund would continue to operate beyond 2030, with an additional 280 million allowances allocated to lower-income Member States.
Use of international credits
An interesting new element of the proposal is the introduction of flexibility mechanisms in decarbonisation policies and the use of international credits of high environmental integrity as a means of achieving emissions reduction targets.
As regards the ETS, the Commission allows high-quality international credits to represent 2% of the total emissions reductions required from the sectors covered. From 2036, the proposal opens to the use of international credits to achieve the broader 2040 target, up to a maximum of 5%, while at least 85% of the reduction must be achieved in the EU.
The proposal also provides for the integration into the EU ETS of certified permanent CO2 removals carried out within the territory of the Union through CCS (Carbon Capture and Storage) and DACCS (Direct Air Capture With Carbon Storage) methodologies.
Expansion to other sectors
The revision also addressed the expansion of the scope of the ETS to other sectors beyond those provided for in the original 2005 legislation.
For aviation, the proposal extends the ETS to private flights and commercial flights departing from Europe to destinations up to 5,000 km from the centre of Europe, including Dubai and Istanbul, but excluding transatlantic flights.
Coordination with CORSIA remains in place, while the revenues generated by the extension of the ETS will finance sustainable fuels and research into decarbonisation projects for aviation.
In maritime transport, the ETS will be extended to certain categories of ships with a gross tonnage of 400 tonnes, instead of only the current 5,000 tonnes.
The waste sector will also be included in the system, in particular incineration plants, gradually from 2031, and will cover 100% of verified emissions from 2034. The auction revenues must be invested in projects for waste reduction and recycling.
Next steps
The proposal will now be examined by the European Parliament and the Council, with the aim of reaching an agreement by the first quarter of 2027.
There will be much to assess, especially the effect that the greater availability of allowances and international credits will have on allowance prices and on companies’ strategies to reduce emissions in order comply with the legislation and consequently manage credits in the market.
It is clear, however, that the European Union is seeking the best compromise between the ambitious emissions reduction targets it has set for 2040 and the need to preserve the competitiveness and growth of European industry, which has long been subject to the heavy repercussions of the energy crises.
