The Commission took important steps in April, May, and June 2026 to reinforce the stability and predictability of the European Union Emissions Trading System in preparation for the comprehensive review scheduled for July 2026.
This review aims to address emerging challenges while aligning the ETS with the newly adopted 2040 climate target, representing one of the most significant evaluations of the carbon market since its establishment in 2005.
Geopolitical tensions contributed to significant increases in energy prices across Europe, highlighting the interaction between energy costs and carbon pricing and placing additional pressure on electricity markets and industrial production.
Throughout early 2026, several Member States called for an accelerated review of the carbon market, arguing that the existing framework lacked sufficient flexibility to respond to rapidly changing global conditions while preserving its environmental integrity.
The 2026 review of the EU ETS aims to ensure greater resilience of the system by implementing mechanisms that are better able to respond to exceptional market conditions, continue to support decarbonisation and emission reductions without amplifying temporary energy price shocks, and strengthen European industrial competitiveness.
A central element of the 2026 review concerns the alignment of the EU ETS with the revised European Climate Law, which establishes the objective of achieving a 90% net reduction in greenhouse gas emissions by 2040 compared with 1990 levels.
To reflect this objective, the overall emissions cap and the Linear Reduction Factor (LRF) will be recalibrated (the LRF is the mechanism that controls the annual rate at which the ETS cap decreases).
The Commission intends to maintain a progressively declining emissions cap while applying a somewhat lower annual reduction rate, reflecting the extended time horizon towards 2040.
On 11 May 2026, the European Commission presented updated benchmark values for the 2026–2030 allocation period and launched a public consultation with Member States. The benchmark revision is central to determining the level of free allocation granted to European industry.
Industrial installations will continue to receive free allocation covering approximately 75% of their emissions. This adjustment is estimated to provide approximately 4 billion euros in additional support during the 2026–2030 period for industries investing in electrification and lower-carbon production processes, and it is part of the broader strategy to balance decarbonisation incentives with the protection of the international competitiveness of European industry.
Under the current ETS, free allocation is determined by benchmark values that reflect the performance of the cleanest 10% of installations in each product category; installations whose emissions exceed the benchmark must purchase additional allowances.
The Commission also intends to introduce sector-specific benchmarks to reflect the characteristics of individual industrial sectors, rather than relying exclusively on the existing product benchmark system.
One of the most significant aspects of the 2026 review is the reform of the Market Stability Reserve (MSR), which was established to address the structural surplus of emission allowances following the 2008 financial crisis. The MSR has adjusted the supply of allowances by transferring surplus allowances into the reserve when circulation exceeds predetermined thresholds and releasing allowances when shortages occur. The Commission considers this mechanism to have restored confidence in the EU carbon market, reduced the historical surplus and strengthened carbon price signals.
Under the current rules, allowances held in the reserve above a baseline threshold equivalent to the previous year’s auction volume, historically hovering around 400 million allowances, are permanently invalidated.
On 1 April 2026, the Commission proposed the first amendments to the MSR to modernise the reserve while preserving its environmental purpose. This proposal, published as “Proposal COM(2026)153”, would transform the MSR from a mechanism primarily focused on permanently restricting allowance supply into a strategic instrument designed to manage future supply risks.
Rather than continuing automatic invalidation, the proposal would retain surplus allowances in the reserve as a strategic buffer to respond to unforeseen economic shocks, geopolitical crises, or sudden increases in allowance demand. This strategy aims to improve the MSR’s responsiveness while maintaining its transparency, predictability, and credibility.
The Commission is also reviewing the MSR’s operational parameters, including intake rates, release rates, and activation thresholds. Two approaches are under consideration: adjusted fixed thresholds of 650 million and 310 million allowances, or dynamic thresholds of 833 million and 400 million allowances.
On 19 June 2026, the Commission adopted its annual Communication on the Total Number of Allowances in Circulation (TNAC), calculating the 2025 TNAC at 1,023,494,202 allowances. Consequently, 190,494,202 allowances will be transferred into the MSR between 1 September 2026 and 31 August 2027, with the corresponding reduction reflected in future auction calendars.
A further major component of the European Commission’s 2026 review concerns the possible integration of carbon removals into the ETS, recognising that emissions reductions alone may not be sufficient to achieve the long-term climate targets set out in the revised European Climate Law for 2040.
The review distinguishes between the use of international carbon credits and the integration of domestic permanent carbon removals certified under the European Union Carbon Removal Certification Framework (CRCF). Under the revised European Climate Law, up to 5% of the 2040 climate target may be achieved through international carbon credits from 2036 onwards. However, operators participating in the EU ETS will not be permitted to surrender international carbon credits instead of EU Allowances.
By contrast, the Commission foresees a greater role for domestic permanent carbon removals certified under the CRCF. They have two main goals: to provide additional compliance flexibility for sectors where complete emissions elimination remains technically or economically difficult, and to provide greater investment certainty for the emerging carbon removal industry by creating predictable demand for certified removals. The Commission, anyway, stresses that carbon removals must complement, rather than replace, emissions reductions.
The July 2026 review also examines whether the scope of the EU ETS should be expanded to include additional sectors, such as municipal waste incineration and ETS2. The objective is to ensure that carbon pricing reflects technological developments and sector-specific factors while simplifying monitoring and reporting obligations.
The Commission is assessing whether municipal waste incineration, hazardous waste, and landfilling should be included in the ETS, even as the waste sector raises concerns about costs, regulatory burdens, and interactions with existing waste-management and circular-economy policies. No final decision has been taken, and the Commission has emphasised that any future inclusion must be coordinated with the review of the Circular Economy Act.
The review also considers the development of ETS2, which extends carbon pricing to buildings and road transport. Although ETS2 is separate from the existing EU ETS, the Commission aims to ensure consistency between the two systems while taking account of social impacts, energy price volatility and public acceptance.
The use of ETS revenues is another central element of the July 2026 review. Since 2013, the EU ETS has generated approximately €260 billion, most of which has been allocated to national budgets. Although Member States are required to spend all ETS revenues on climate and energy purposes, the Commission considers current reporting insufficiently transparent and enforcement weak: the review therefore proposes stronger transparency requirements and a revision of eligible expenditure categories.
Only around 5% of national ETS revenues are currently devoted to industrial decarbonisation, which the Commission considers inadequate given the investment required to transform energy-intensive industries.
In particular, the Innovation Fund, financed through ETS revenues, has awarded €14.6 billion to 253 projects since 2020, but the Commission has recognised that the Fund alone is not sufficient to drive greater decarbonisation.
On this note, the Commission is developing the Industrial Decarbonisation Bank (IDB), expected to be a 100 billion-euro initiative designed to finance decarbonisation in energy-intensive sectors through funds from the Innovation Fund and revenues from the ETS.
The Commission is also planning the ETS Investment Booster, an instrument that replaces the competitive grant model with a mechanism that guarantees support for qualifying projects, with monthly application rounds and payments linked to verified emissions reductions. This will be followed by an auction-based competition and contracts for difference to provide long-term revenue stability.
The final major issue under review concerns free allocation and the risk of carbon leakage, particularly in sectors not covered by the Carbon Border Adjustment Mechanism (CBAM). Carbon leakage occurs when production relocates outside the European Union to nations with weaker climate policies, potentially increasing global emissions while reducing European industrial competitiveness.
The Commission continues to regard free allocation and CBAM as complementary measures. It intends to maintain the existing three-tier structure under which sectors exposed to carbon leakage receive full free allocation, district heating receives partial allocation, and other sectors receive progressively lower levels of support.
At the same time, the Commission is considering replacing the existing 52 product benchmarks with more detailed sector-specific benchmarks to better reflect technological diversity across industries.
According to the Commission, generous free allocation over the past two decades has meant that many industrial operators have faced an effective carbon price of around €10 per tonne rather than the headline price of approximately €70 per tonne. Although free allocation has reduced carbon leakage risks, it has also weakened incentives to invest in clean technologies.
To support the transition, the Commission plans to establish a temporary decarbonisation fund for 2026–2027 while developing a permanent framework that reconciles carbon leakage protection.
Specifically, Aither:
The July 2026 review will recalibrate the emissions cap, update the Linear Reduction Factor (LRF), revise free allocation benchmarks, and better align the carbon market with the objective of achieving a 90% net reduction in greenhouse gas emissions by 2040.
The Commission proposes transforming the MSR into a strategic reserve capable of responding to future market shortages and economic shocks while maintaining predictable carbon price signals.
Updated benchmark values, continued free allocation covering around 75% of emissions, support for industrial electrification, and sector-specific benchmarks aim to balance decarbonisation with the protection of competitiveness for European industry.
The review examines the integration of certified permanent carbon removals in the ETS, as well as the use of international carbon credits. The system is also expanding into additional sectors such as waste incineration and improving coordination with ETS2.
The Commission will propose stronger controls and a more transparent use of ETS revenue. It will expand support to decarbonisation and accelerate investment in low-carbon technologies in high-emissivity sectors through the Innovation Fund, the ETS Investment Booster, and the Industrial Decarbonisation Bank.
In a market that is influenced by international crises, constantly changing regulations towards stricter rules and challenging environmental results to achieve, Aither is the partner that allows companies to navigate the change.