EU ETS Reform Package: the headlines

Today the European Commission published its long-awaited proposal to reform the EU Emissions Trading System (EU ETS).

The review sets out how the scheme could evolve through the remainder of the decade and beyond 2030 in support of the EU's newly agreed 2040 climate target.

For the carbon market, this is the first formal indication of how policymakers intend to balance climate ambition and industrial competitiveness over the next decade.

But these proposals aren’t final. Now begins a period of negotiations with the European Parliament and Council to agree the rules which will be implemented.

The key points

• LRF: significantly loosened, remains as planned to 2030 (4.3% 2027-2028 and 4.4% 2029-2030), then 3.7% from 2031-35 and 1.7% from 2036-40.
• Free allocations: slower phase-out for CBAM sectors, allocations until 2038. New sector-specific fallback benchmarks will result in ~80 million extra allocations between 2026-30, from the New Entrants Reserve. Free allocations will become conditional on decarbonisation plans and investments after 2030.
• Investment Booster: 400 million EUAs allocated to support decarbonisation projects from 2027, expected to largely come from free allocation buffer. From 2030 transition to Industrial Decarbonisation Bank- CfD approach with €100 billion in funding from ETS revenues.
• MSR: 'increase firepower' by reducing intake from 24% to 12% from 2028, intake/ release thresholds will reduce 4% a year from 2029.
• Flexibilities: Integrate 250 million 'permanent' domestic carbon dioxide removals from 2030, through central purchasing facility, cap will be adjusted accordingly. International credits will also be integrated through the purchasing facility from 2036, up to 260 million in line with EU targets, with a possible pilot period from 2031.
• Sector coverage: ETS expanded to flights departing the EU of less than 5000km from 2029. Maritime expanding to ships between 400-5000GT, and more neighbouring ports covered to avoid leakage. Waste incineration phased in from 2031, full coverage from 2034.

Not yet the final outcome

Today's publication is the start of the EU’s legislative process.

The proposal will now be negotiated by the Council and European Parliament before a final text is agreed.

So what’s the process, and when will the final rules become clear?

• Commission proposal — published today
• Parliament and Council develop positions:
  • Council position — agreed target of 11 December 2026
  • European Parliament position — TBC, precedent suggests 6+ months at least
• Trilogue negotiations — Parliament, Council and Commission negotiate a final text.
• Final agreement — agreed target for compromise agreement by the end of Q1 2027
• Implementation — expected to be staggered over 2027-28

Why ETS reform matters

Few markets are as exposed to policy as the EU ETS.

Legislative decisions drive both market fundamentals and confidence.

As a result, this review has dominated attention for months, with leaks and headlines shaping expectations, pricing and positioning well before today's publication.

Today’s publication gives the best indication yet of the likely landing point of the final rules.

• Market balance — overall loosening.
• Supply — a lower LRF after 2030 means a higher cap, and an injection of supply from the Investment Booster. The inclusion of removals and international credits will also boost supply in the longer-term.
• Demand — more free allocations and a slower phase out means emitters will have to buy fewer allowances. Although coverage is increased, increasing demand, this will be offset by raising the cap.
• Price implications — the proposals have brought down price forecasts over the long run, but the immediate market reaction suggests the proposals had already been largely priced-in.

What to watch next

The coming months will reveal which elements command political support, which face resistance, and where compromises are likely to emerge.

Our full briefing explains the details of the proposal, assesses the implications for the carbon market, and outlines what to expect from the Parliament, Council and Commission’s negotiations.

To discuss what this means for your EU ETS strategy, get in touch with our expert team here.