EU ETS Review 2026

CBAM = Carbon Border Adjustment Mechanism (the EU's carbon charge on imports)

The Market Stability Reserve (MSR) is the ETS's automatic volume-adjustment mechanism. It reacts directly to past surpluses, cuts future auction volumes of EU emissions allowances (known as EU Allowances, or EUAs) and shifts those volumes into a reserve. Until now, any volume in the reserve above 400 million EUAs was automatically cancelled. That automatic cancellation is now being scrapped, giving policymakers more scope to respond quickly to price movements using allowances drawn from the reserve in future. In addition, the rate at which the MSR cuts auction volumes would fall from 24% to 12%. At first glance, this looks like a substantial change. In practice, however, the MSR is unlikely to be triggered at all in the coming years, since past surpluses now sit below the threshold that would activate it. The real-world impact of this change is therefore very limited.

The annual reduction in the total number of allowances issued (the Linear Reduction Factor) currently stands at 4,4% per year through 2030. Under the proposal, this rate would ease to 3,7% per year from 2031 to 2035, and 1,7% per year from 2036 to 2040. These changes stretch out the EU's decarbonisation trajectory somewhat, giving industry more time to complete the transition.

Waste incineration plants have so far been treated quite inconsistently across the EU; this review resolves that inconsistency. Waste incineration plants would enter the ETS from 2031 (rather than 2028, as previously expected). The surrender obligation would be phased in gradually: 25% of verified emissions in 2031, 50% in 2032, 75% in 2033, and 100% from 2034.

Free allocation for industrial users would be extended to 2040 (2038 for sectors covered by the Carbon Border Adjustment Mechanism, or CBAM). From the 2031 allocation period onward, however, it would become fully conditional on investment commitments. The only exemption applies to the 10% most efficient installations under each benchmark, which the EU considers to have already done their decarbonisation homework. Industrial companies would need to submit an "Invest in EU Decarbonisation Plan": a verified, publicly available investment pathway toward climate neutrality by 2050.
 
The calculation of free allocation itself would remain largely unchanged, still based on sector-specific benchmarks that are progressively tightened. What's new is that the Commission would gain the power to set sector-specific fallback benchmarks for heat and fuels, to better reflect the actual abatement potential of individual sectors.

Until now, only flights within Europe have fallen under the ETS. From 2029, this would extend to all flights up to a distance of 5,000 km, measured from Frankfurt. At a carbon price of €80/t, a return flight from Vienna to Istanbul would incur roughly €20 in carbon costs.

The Industrial Decarbonisation Bank (IDB) would be established from 2028 as a new EU instrument. It would fund both investment costs, including grid-connection, storage and flexibility costs, and operating costs for emissions reductions and permanent CO₂ removals. Waste incineration plants are explicitly included.
 
The Bank would operate in two phases. From 2028 to 2030, 400 million EUAs would be reserved for a so-called Investment Booster. This funding would be awarded on a first-come, first-served basis in the form of fixed carbon premiums, and could take the form of allowances allocated directly.
 
From 2031 to 2040, a further 400 million EUAs would be auctioned. The resulting revenue would then be distributed mainly through competitive tenders, such as Carbon Contracts for Difference or carbon premiums.