EU ETS review: what the post-2030 carbon market means for industry

On 17 July 2026 the European Commission proposed a broad revision of the EU Emissions Trading System (ETS). It sets the rules for the system’s fifth phase, from 2031 to 2040, and aligns it with the EU’s target of a 90% net cut in greenhouse gas emissions by 2040. For energy-intensive industry the questions are concrete: how fast the cap tightens after 2030, and whether free allowances continue and on what conditions. Environment ministers held their first debate on 12 October; Council and Parliament aim to set their positions in December, with a final agreement targeted for the first quarter of 2027.

What the Commission proposed

The review consists of three legislative proposals: the main revision of the ETS Directive (Directive 2003/87/EC) and the market stability reserve (MSR) Decision, COM(2026) 616; a targeted regulation increasing free allocation under the heat and fuel benchmarks for 2026–2030, COM(2026) 619; and an earlier proposal of 1 April 2026 to stop the automatic invalidation of allowances in the MSR, COM(2026) 153.

The starting point is the amended European Climate Law (Regulation (EU) 2026/667), which sets the 2040 target and allows limited use of high-quality international credits from 2036. The review also answers the European Council’s request of 19 March 2026 to reduce carbon price volatility. The ETS for buildings and road transport (ETS2), due to start in 2028, is not covered.

The cap, credits and removals

The lower factor from 2036 assumes that around 260 million allowances are auctioned to buy high-quality international credits in 2036–2040, roughly 2% of the EU’s 1990 emissions. If such credits are not available, the factor would revert to 2.7%; the Commission would report by January 2033.

The cap would also rise by 250 million allowances, auctioned in 2031–2040 to fund purchases of permanent removals from bioenergy with carbon capture and storage (BioCCS) and direct air capture (DACCS), certified under Regulation (EU) 2024/3012. Operators could use certified removals to offset their own residual emissions, down to zero but not beyond.

In the MSR, the intake rate would be halved from 24% to 12% of the surplus, releases would be recalibrated to bring the surplus back towards 400 million allowances when it falls below that level, and the thresholds would fall by 4% a year from 2029.

Free allocation: longer, but conditional

Free allocation and carbon leakage protection would continue until 2040, without an update of the carbon leakage list. Three changes stand out.

• Investment conditionality. From 2031, all free allocation would depend on an ‘Invest in EU decarbonisation’ plan covering investments equal to the value of the free allowances. Of each five-year period’s allocation, 80% would be issued annually once the plan is verified, and the remaining 20% only once the investments are verified as implemented. According to the Parliament’s research service, plans would be due from 30 September 2029, with exemptions for, among others, the 10% most efficient installations against their benchmark. Operators that relocate activities outside the EU would have to return allowances received.
• CBAM sectors. For the sectors covered by the carbon border adjustment mechanism (CBAM), such as steel, aluminium, cement and fertilisers, 15% of the free allocation phased out because of CBAM would be reintroduced from 2028, and the phase-out would be extended from 2034 to 2038. The CBAM charge on imports would then also rise more slowly.
• Benchmarks. For 2031–2040, the maximum annual reduction of benchmark values would fall from 2.5% to 2%, and the buffer against a cross-sectoral correction factor would rise from 3% to 4%.

In the shorter term, COM(2026) 619 would raise free allocation under the heat and fuel ‘fallback’ benchmarks for 2026–2030 by around 80 million allowances, worth about €6 billion according to the Commission, delivered through the 2027 allocation. Oil and gas extraction, refining and pipeline transport would be excluded. The Council’s mandate of 16 September would mobilise around 121 million allowances. The environment committee has requested the urgent procedure, and a plenary vote is indicatively scheduled for 19 October.

The legal basis for national compensation of indirect emission costs (Article 10(6) of the ETS Directive) would remain.

New instruments and sectors

• Industrial Decarbonisation Bank. With around €100 billion according to the Commission, the bank would support emission cuts at ETS installations. Before 2030, the Investment Booster would pay a fixed carbon premium from a reserve of 400 million allowances, first come, first served, with completion deadlines and payments linked to verified avoided emissions; 160 million allowances would be reserved for lower-income Member States. From 2031, support would be awarded through competitive bidding for carbon contracts for difference or carbon premiums.
• Auction revenue. Member States would have to spend at least 50% of their ETS auction revenue on priority areas such as industrial decarbonisation, clean energy and grids, and low-carbon transport; spending that locks in fossil-fuel infrastructure would be prohibited.
• Waste incineration. Non-hazardous municipal waste incinerators above 3 tonnes per hour would enter the ETS, surrendering allowances for 25% of verified emissions in 2031, rising to 100% in 2034. Member States meeting at least two of three criteria (on carbon taxation, recycling and landfill) could exempt them until the end of 2035.
• Other changes. Obligations for CO₂ used in short-lived products would be deferred until the CO₂ is released; ships of 400 to 5,000 gross tonnage and, from 2029, flights to nearby non-EU destinations would be covered.

Where the file stands (15 October 2026)

• Council. Environment ministers held a first policy debate on 12 October. Irish climate minister Darragh O’Brien, chairing the meeting, said the Presidency is ‘focused on reaching agreement by December’; the next Environment Council meets on 11 December. According to Agence Europe, positions diverge widely. Denmark, Sweden, Finland, Spain, Portugal, the Netherlands and Luxembourg want little change or a steeper cap, and the Nordic countries oppose international credits. A larger group, including Poland, Italy, Austria, Czechia and Belgium, wants a weaker reduction factor, and many of them want ETS2 postponed or made optional. Germany wants free allocation tied to investment commitments; France opposes that condition as an administrative burden.
• European Parliament. The environment committee (ENVI) leads, with Peter Liese (EPP, Germany) as rapporteur. Liese has announced amendments to bring biochar and permanent storage technologies into the system and to let the Commission auction additional allowances if the target is out of reach. Amendments by S&D shadow rapporteur Mohammed Chahim pull the other way: keep the 4.4% reduction factor until 2035, delete international credits, end the CBAM-sector phase-out in 2034 and keep the MSR intake rate at 24%. The committee vote is expected in early December and the plenary vote on 14–17 December.
• Market stability reserve. On the separate invalidation file, Parliament voted on 15 September to keep invalidation but raise the threshold from 400 to 650 million allowances from 1 February 2027. The Council’s mandate of 23 September would suspend invalidation until the end of 2030 and apply an 800 million threshold from 2031. The Council aims to conclude negotiations by the end of 2026.
• Timing. The ‘One Europe, One Market’ roadmap targets agreement on the full review by the first quarter of 2027. As proposed, the CBAM-sector changes would apply from 2028, and the new reduction factor and investment conditionality from 2031.

What it means in Belgium

The ETS is EU law, but in Belgium it is administered largely by the regions. In Flanders, the Flemish Energy and Climate Agency (VEKA) is the competent authority for installations, including free allocation; in Wallonia, the Walloon Air and Climate Agency (AWAC) manages emissions verification. The federal Climate Change Service runs the registry. Which authority would approve and verify the new investment plans is still open.

Belgian auction revenue is divided between the regions and the federal state by cooperation agreement: for 2021 and 2022, Flanders received 52.76%, Wallonia 30.65%, Brussels 7.54% and the federal state 9.05%. The proposed 50% spending obligation would therefore bind regional as well as federal budgets.

According to Agence Europe, Belgium sided on 12 October with the Member States calling for a weaker reduction factor and for ETS2 to be postponed or made optional, and it opposes using ETS revenue as an EU own resource. Belgium’s line in the Council is agreed between the federal government and the regions.

Electricity-intensive companies in Flanders receive compensation for indirect emission costs through VLAIO (latest call: emission year 2025); the proposal keeps the legal basis for such schemes. Municipal waste incinerators would become ETS operators from 2031 unless Belgium uses the temporary exemption.

What to do now

1. Model your free allocation to 2040. Combine the lower reduction factors, the 2% ceiling on benchmark updates and, for CBAM sectors, the slower phase-out to 2038. If you rely on heat or fuel benchmarks, include the 2026–2030 increase.
2. Start preparing an investment plan. Identify EU decarbonisation investments that could match the value of your free allowances in 2031–2035, and the evidence a verifier would need. With 20% held back until verification, investment timing becomes a cash-flow question.
3. Check your projects against the Investment Booster. First-come, first-served support before 2030 favours projects that are technically mature and close to a final investment decision.
4. Check whether you enter the system. Municipal waste incinerators, users of captured CO₂, smaller ships and some flights would face new obligations between 2029 and 2034.
5. Engage before December. The ENVI vote, the Environment Council of 11 December and the plenary vote will set the negotiating positions. In Belgium, that means both the regional governments and the federal level.

Sources

1. European Commission, Proposal COM(2026) 616 amending Directive 2003/87/EC and Decision (EU) 2015/1814 as regards driving competitiveness and cost-effective decarbonisation, 17 July 2026 (explanatory memorandum).
2. European Commission, press release IP/26/1596 on the Electrification Action Plan and ETS review, 17 July 2026.
3. European Commission, Proposal COM(2026) 619 on revised benchmark values for the heat and fuel benchmarks for 2026–2030, 17 July 2026.
4. European Commission, Proposal COM(2026) 153 as regards ceasing the invalidation of allowances in the market stability reserve, 1 April 2026.
5. EUR-Lex, Regulation (EU) 2026/667 amending the European Climate Law as regards a 2040 climate target, 11 March 2026.
6. Council of the EU, Environment Council, 12 October 2026: main results.
7. Council of the EU, Outcome of proceedings 13134/26: mandate on the heat and fuel benchmarks, 16 September 2026, and Outcome of proceedings 13517/26: mandate on the market stability reserve, 23 September 2026.
8. European Parliament, Legislative Observatory, procedures 2026/0212(COD), 2026/0211(COD) and 2026/0085(COD), consulted 15 October 2026.
9. European Parliamentary Research Service, Revision of the EU emissions trading system and the market stability reserve, 16 September 2026.
10. European Parliament, ENVI committee, amendments to COM(2026) 616, 6 October 2026 (document published by Table.Media).
11. Agence Europe, Peter Liese to table four amendments to ETS revision proposal, assures they come with safeguards, 9 September 2026 (paywall).
12. Agence Europe, Revision of ETS: first substantive discussion in Environment Council reveals divergent national priorities across EU, 12 October 2026 (paywall).
13. The Brussels Times, EU lawmakers split over carbon market reform as allowance rules face overhaul, 15 September 2026.
14. International Carbon Action Partnership, EU Commission publishes EU ETS review proposal, July 2026.
15. Herbert Smith Freehills Kramer, EU ETS review: key proposed changes to the EU’s carbon market, 12 August 2026.
16. Flemish Energy and Climate Agency (VEKA), ETS obligations for stationary installations; Wallonia, Agence wallonne de l’Air et du Climat (AWAC).
17. Belgian Chamber of Representatives, Bill assenting to the cooperation agreement of 22 September 2023 on climate and energy targets and the distribution of auction revenue, DOC 55 3626/001, 25 October 2023.
18. VLAIO, Apply for compensation of indirect emission costs for emission year 2025, 23 February 2026.

This analysis reflects the state of the file on 15 October 2026. We update it when the file moves.