In cooperation with Carbon Pulse. Carbon pulse has launched a free-access EU ETS Portal that collects market data including allowance prices and correlations to other key markets, like gas or power.
What is the EU ETS?
Launched in 2005, the Emissions Trading System (EU ETS) is considered the bloc's main climate policy tool. It currently sets an overall cap on greenhouse gas emissions from power generation, energy-intensive industry, and parts of aviation and maritime transport, which together account for about 40 percent of the EU's total emissions. Companies must surrender one allowance for every tonne of CO2 they emit, while the cap falls over time to drive emissions down and encourage investment in cleaner technologies. It is the world’s first and largest carbon market.
Why is the EU reforming the system?
For three reasons: a review is required under the scheme's legal mandate, emissions must keep falling after 2030, and a potential connection with UN carbon mechanisms requires more scrutiny.
The ETS Directive obliges the European Commission to report on progress by July 2026, and to accompany the report, “where appropriate, by a legislative proposal and impact assessment”.
The current ETS was designed to help deliver the EU's goal of reducing its net emissions by at least 55 percent by 2030, compared to 1990 levels. Following the latest revision in 2023, the cap was tightened to bring emissions down by 62 percent by 2030, compared to 2005 levels. It must now be updated for the decade after, in line with the new EU target of cutting emissions by 90 percent by 2040, compared to 1990 levels. The next reform will therefore determine how quickly emissions should continue to fall between 2031 and 2040, while ensuring the carbon market continues to provide a predictable investment signal for low-carbon technologies.
Moreover, EU heads of state have agreed to allow UN-approved international carbon credits (issued under Article 6 of the Paris Agreement) to cover up to five percentage points of the 2040 goal. Although the Commission has ruled out using those credits for ETS compliance, the decision ultimately will lie in the hands of the European Parliament and the Council of EU member states, acting as co-legislators.
What has the European Commission proposed?
At the core of the proposals which the European Commission presented on 17 July is a slower reduction in the emissions cap after 2030. Instead of maintaining the current annual Linear Reduction Factor (LRF) of 4.4 percent, the Commission proposes lowering it to 3.7 percent between 2031 and 2035, and to 1.7 percent from 2036 to 2040. Officials argue this would make the transition "more manageable and gradual" while still delivering an estimated 85-87 percent emissions reduction between 2005 and 2040.
The proposal also introduces several new so-called “flexibility” mechanisms. For the first time, permanent domestic carbon removals would be integrated into the ETS, with up to 250 million tonnes of certified removals gradually entering the system between 2031 and 2040. In addition, the Commission would allow up to 260 million high-integrity international carbon credits to be used in the ETS after 2035, provided strict quality criteria are met.
To support industrial decarbonisation, the Commission proposed creating an Industrial Decarbonisation Bank, initially backed by an Investment Booster financed through 400 million ETS allowances. The mechanism is intended to mobilise up to €100 billion for clean industrial investment. At the same time, free ETS allowances for energy-intensive industries would become conditional on companies publishing and implementing decarbonisation investment plans.
The proposal also extends free allocations for sectors covered by the Carbon Border Adjustment Mechanism (CBAM), delaying the complete phase-out of free allowances from 2034 to 2038.
Alongside the ETS revision, the Commission proposes changes to the Market Stability Reserve (MSR), the mechanism designed to balance allowance supply. The MSR would become more responsive to a shrinking market, with the intake rate halved from 24 percent to 12 percent and new rules introduced to release allowances more gradually if supply tightens.
The package also expands the ETS to additional sectors. It proposes gradually including municipal waste incineration from around 2031, extending shipping coverage to smaller vessels from 2029, broadening aviation coverage to certain international flights within 5,000 kilometres of the EU from 2029, and maintaining support for sustainable aviation and maritime fuels.
How did key stakeholders react to the Commission proposals?
The Commission's proposal drew strong criticism from many climate groups and policy experts, who argued it weakens one of the EU's most effective climate policies just as it is beginning to drive industrial decarbonisation. Many organisations opposed the slower reduction in ETS allowances after 2030, the extension of free allocations for industry and the planned integration of carbon removals into the carbon market, arguing these measures would reduce pressure to cut emissions.
Carbon Market Watch, for instance, estimated the proposal would allow around 2 billion additional tonnes of emissions from ETS sectors. The NGO criticised what it described as a package of "carrots with very few sticks", arguing that additional support should only go to companies that deliver measurable emissions reductions.
Think tank Strategic Perspectives warned that slowing the emissions reduction trajectory could ultimately undermine Europe's competitiveness. Executive director Linda Kalcher argued the changes would allow companies to delay decarbonisation while competitors elsewhere, particularly in China, continue to accelerate the transition to cleaner production.
Industry reactions were mixed. Business lobby BusinessEurope welcomed the Commission's recognition that the ETS requires reform but warned that new conditions attached to free allocations could increase administrative burdens, and criticised the lack of clarity around international carbon credits.
Italy's Confindustria argued the reforms did not go far enough to address structural problems in the carbon market, saying the limited increase in free allowances and the absence of measures to reduce carbon price volatility would do little to improve industrial competitiveness.
Other industry groups were more supportive. The International Emissions Trading Association (IETA) said the package represented a significant evolution of the ETS and welcomed proposals on carbon removals, international credits and reforms to the Market Stability Reserve.
Finally, the Potsdam Institute for Climate Impact Research described the proposal as a pragmatic response to changing geopolitical and economic conditions that provides industry with greater flexibility without abandoning the EU's climate goals.
What is the timeline of the process?
The European Commission published its legislative proposal on 17 July 2026.
Ireland, which holds the Council of EU member states’ rotating six-month presidency, is aiming to secure an agreement between the national governments in the first half of December. According to a presidency calendar, the objective is to reach a “general approach” (Brussels speak for a joint position) on both the ETS revision and the amendment of the market stability reserve at the meeting of member state environment ministers on 11 December.
The European Parliament is also expected to fast-track its work, so that the so-called “trilogue” negotiations between Parliament, Council and the Commission can begin in early 2027.
EU leaders have called for a final agreement by the end of the first quarter of 2027, an unusually ambitious timetable for one of the bloc's most technically complex pieces of climate legislation.
[Think tank E3G has compiled a briefing about the stakes of the EU ETS reform, including a possible timeline for the legislative process.]
What is the political backdrop?
The reform will be negotiated in a very different political environment from the last ETS overhaul under the European Green Deal.
Industrial competitiveness, affordable energy and economic security have moved higher up on the EU agenda, while governments are increasingly concerned about maintaining support for climate policies that impose additional costs on businesses. The Commission has responded by presenting climate action and industrial policy as increasingly intertwined.
The political calendar also raises the stakes. EU leaders want negotiations wrapped up before campaigning intensifies ahead of France's 2027 presidential election and Italy's expected general election, when governments are typically less willing to endorse politically sensitive climate legislation.
The result is likely to become a difficult balancing act. The Commission has repeatedly described the ETS as the EU's most powerful tool for reducing emissions, but it is also under growing pressure to ensure the system supports investment, protects industrial competitiveness and maintains public acceptance as Europe moves towards its 2040 climate target.