The European Commission has set out the most consequential overhaul of the EU Emissions Trading System (EU ETS) in years, proposing the rules that will govern the bloc’s carbon market from 2031 to 2040. Published on 17 July 2026, the package recalibrates supply, extends industrial support, and widens the market’s scope, defining phase 5 of the system.
Carbon prices responded positively. EU Allowance (EUA) prices rose by around €7 after the announcement, reaching €86 on 22 July. Analysts at ClearBlue Markets characterised the reaction as a “relief rally”, pointing to confirmed details that proved less bearish than earlier worst-case expectations.
At the core of the reform sits a gentler cap trajectory. The Commission proposes lowering the Linear Reduction Factor (LRF), the pace at which the emissions cap declines, to 3.7% for 2031–2035 and 1.7% from 2036, down from 4.3% today. The change extends the life of the cap from around 2039 into the late 2040s.
Industrial support features prominently. A new €100 billion Industrial Decarbonisation Bank begins in 2028 with an Investment Booster of 400 million allowances, worth around €30 billion. Free allocation for heavy industry continues past 2030, with an immediate €6 billion top-up of 80 million allowances through revised 2026–2030 fallback benchmarks. For sectors under the Carbon Border Adjustment Mechanism (CBAM), the free-allocation phase-out shifts from 2034 to 2038.
Market-design changes accompany the cap. The Market Stability Reserve (MSR) intake rate drops to 12% from 2028, and the 2027 surplus indicator falls by 173 million allowances to account for past aviation demand. The proposal also admits permanent domestic carbon removals and high-quality international credits into the system, linking the EU market more closely to the Article 6 and CORSIA frameworks.
ClearBlue Markets modelling suggests prices hold up over the phase. Its July 17 scenario puts the EUA price at €138.5 in 2035, only €7 below an extension of current rules, reflecting the reinforced market design.
The proposal now enters the EU’s ordinary legislative procedure, with the Commission, Parliament, and Council facing months of negotiation. Co-legislators are targeting agreement by the first quarter of 2027.