EU ETS Review 2026: What the Reform Means for Carbon and Power Buyers
The European Commission has proposed the largest redesign of the EU Emissions Trading System in years. The central aim is to keep the carbon market aligned with the EU’s 90% net emissions-reduction target for 2040, while easing pressure on European industry and providing more money for clean investment.
The proposal does not abandon carbon pricing. It changes how quickly the system tightens, how long industries receive free allowances and how ETS revenues are spent. For energy buyers, the first market signal is softer than the previous trajectory, but the longer-term effect is less clear.
A slower decline in allowance supply
Under the existing rules, the number of allowances available under the ETS falls each year. The Commission now proposes reducing the annual rate of decline to around 3.7% from 2031 and 1.7% from 2036, compared with 4.3% currently. This would allow covered industries to continue emitting further into the 2040s instead of pushing the allowance supply towards zero by 2039.
The slower reduction reflects the EU’s decision to allow limited use of high-quality international carbon credits from 2036. Permanent carbon removals would also be introduced into the ETS, with strict monitoring and safeguards intended to ensure that removal units represent lasting reductions in atmospheric carbon.
Taken alone, these measures create a less restrictive allowance-supply outlook than the market had previously expected. This is a bearish change for longer-dated EUA fundamentals, although it does not mean the carbon price will simply fall. The cap will continue to shrink, and the final rules may change during negotiations.
More protection for industry
The Commission also proposes extending free allocation for CBAM-covered sectors, including steel and cement, until 2038 instead of completing the phase-out in 2034. Around €6 billion in additional free allocation would be available during 2026 to 2030.
Access would become more closely tied to investment. Companies would receive 80% of their free allowances upfront if they have an approved European decarbonisation plan, while the remaining 20% would be released once the investment is completed. This moves free allocation away from unconditional cost protection and towards a form of investment support.
The change could lower the amount of EUAs that eligible industrial companies need to buy. It does not provide the same relief to fossil-fuelled power generators, which remain exposed to the carbon cost and continue to pass part of it through wholesale electricity prices.
Carbon revenues redirected towards investment
The Commission wants at least 50% of national ETS revenues to be reinvested in decarbonising sectors covered by the system. Since 2013, the ETS has generated around €260 billion, but only a small share of current spending directly supports industrial sectors such as steel, chemicals and fertilisers.
A new ETS Investment Booster would be financed with 400 million allowances and is expected to provide around €30 billion during its first phase. It would later form part of an Industrial Decarbonisation Bank with an indicative budget of about €100 billion for 2030 to 2040. Support would include fixed carbon premiums for verified emissions reductions, helping projects where the carbon price alone does not provide a bankable investment case.
Wider coverage
The proposal would gradually bring municipal waste incineration into full ETS compliance between 2031 and 2034. It also expands aviation coverage to flights departing Europe for destinations within 5,000 kilometres and extends parts of the system to smaller ships. Separate allowance support would help shipping companies cover part of the additional cost of sustainable maritime fuels and zero-emission propulsion.
These additions create new sources of EUA demand, partly offsetting the softer cap trajectory. They also mean that carbon costs will reach more transport, logistics and waste-management contracts.
What the review means for energy buyers
The immediate policy signal is moderately bearish for EUAs compared with the previous post-2030 pathway. The cap would decline more slowly, eligible industries would receive free allowances for longer, and credits and removals would create additional flexibility. EUAs were trading at around €79 per tonne when the proposal was published.
That does not make carbon exposure irrelevant. Gas and coal generators must still buy allowances, so the EUA price will continue to affect wholesale power whenever fossil generation sets the marginal price. A softer carbon trajectory could reduce some upward pressure on longer-dated power prices, but gas prices, generation margins and renewable output will still determine how much of that effect reaches the power curve.
Buyers should now distinguish between the relatively settled rules up to 2030 and the less certain period after 2030. Carbon assumptions for long-term budgets and power contracts should use a range of EUA scenarios rather than one fixed forecast. Industrial buyers should also assess whether their sites qualify for free allocation, what investment conditions will apply and how CBAM exposure changes after 2030.
The proposal is only the start of the legislative process. EU governments and the European Parliament will propose amendments before negotiating the final text, with an agreement targeted during 2027. Until then, political developments may cause repeated moves in both EUA and forward power markets.
The review softens the path, but it does not remove the carbon price from European energy costs. For buyers, the task is to manage a market where long-term scarcity remains, while the route towards it has become more political and less predictable.