Brussels Redesigns Its Carbon Market for the 2030s, Betting €100 Billion on Industry Buy-In

Why the EU Is Rewriting Its Flagship Carbon Market

The EU ETS is the bloc's oldest and largest carbon pricing tool, and the current legislative cycle only runs through 2030. The Commission's July 17 proposal — formally an amendment to Directive 2003/87/EC and Decision (EU) 2015/1814 — sets the rules for the next decade, Phase 5, and is designed to keep the carbon market credible as a driver of the EU's 2040 climate target while responding to industry complaints that a market that only tightens costs without funding the transition risks pushing production outside Europe. This is the first piece of a larger package; further proposals covering national 2040 targets, an international carbon-credits integrity framework, and Governance Regulation changes are expected later in 2026.

A €100 Billion Bet on Industry Cooperation

The Industrial Decarbonisation Bank is the proposal's most concrete new instrument: a €100 billion fund built from ETS revenue and directed at emissions-reduction projects in the sectors that pay into the system — steel, cement, chemicals and other hard-to-abate industries. Its first phase before 2030 takes the form of an "ETS Investment Booster," continuing alongside the existing Innovation Fund and Modernisation Fund. The logic is to soften the traditional carbon-market trade-off, where tightening the emissions cap raises costs for industry without necessarily funding the investment needed to actually cut emissions, by recycling a larger share of that cost back to the payers as conditional investment support rather than a pure penalty.

Slower Tightening, But Allowances Tied to Delivery

The Linear Reduction Factor — the rate at which the total number of allowances issued each year shrinks — falls from the current 4.3% to 3.7% for 2031-2035 and 1.7% for 2036-2040. A slower reduction rate means a larger supply of allowances relative to the prior trajectory, which would tend to ease upward pressure on the carbon price versus continuing at 4.3%. The Commission is pairing that loosening with a tightening of conditions elsewhere: free allocation after 2031 is split 80/20 between plan-submission and verified delivery, meaning companies that take the free allowances but don't follow through on the investment plan stand to lose the remaining fifth. The Market Stability Reserve, which pulls surplus allowances out of circulation to support prices, also gets more flexibility — its withdrawal rate is proposed to fall from 24% to 12%, keeping more allowances in the market for longer.

The CBAM Connection

For sectors covered by the EU's Carbon Border Adjustment Mechanism — which entered its definitive phase on January 1, 2026 and requires importers of goods like steel, aluminium and cement to buy certificates matching the EU carbon price on embedded emissions — the proposal extends the phase-out of free domestic allowances to 2038, slower than previously planned. That matters for trade: CBAM is designed to equalize costs between EU producers (who pay the ETS price) and importers (who pay an equivalent CBAM certificate price), so slowing how fast free allowances disappear domestically changes the pace at which that cross-border equalization tightens too.

What Happens Next

As a Commission proposal, this now enters negotiation with the European Parliament and the Council of the EU, where both the pace of the Linear Reduction Factor and the size and governance of the Industrial Decarbonisation Bank are likely to be contested — industry groups broadly welcomed the softer near-term trajectory and the Bank, while some environmental groups have already characterized the slower reduction rate as a watering-down of ambition relative to the existing 4.3% pace. The Commission published the ETS review alongside a separate Electrification Action Plan the same day, positioning both as part of a wider package aimed at industrial competitiveness alongside decarbonisation.