On 17 July 2026, the European Commission published its EU ETS revision proposal, setting out a series of adjustments to how the EU carbon market would operate after 2030.
It is important to note that this is a legislative proposal, not a rule change that has already taken effect. The proposal still has to go through the European Parliament and the Council of the EU, and the final content may change during the legislative process.
That said, the direction is clear: the EU still sees EU ETS as a central tool for delivering its 2040 climate target, while at the same time trying to re-balance climate ambition, industrial competitiveness, energy security and business transition costs.
1. A revised post-2030 cap trajectory
The core mechanism of EU ETS is to set an absolute cap on emissions and reduce available allowances each year, pushing companies to cut emissions. The faster the cap declines, the tighter the market tends to be; the slower it declines, the more relaxed the pressure.
Under the proposal, the Commission would adjust the post-2030 Linear Reduction Factor (LRF):
- 2031–2035: LRF proposed at 3.7%
- From 2036 onwards: LRF proposed to fall to 1.7%
In simple terms, the EU ETS cap would keep falling after 2030, but at a more gradual pace than the market had previously expected. Under the 2040 climate framework, this gives industry and high-emitting sectors a longer transition runway.
From an EUA market perspective, a slower tightening path could soften long-term scarcity expectations after 2030 and put mild downward pressure on far-forward EUA prices.
2. A limited role for high-integrity international carbon credits
The proposal also opens the door for high-integrity international carbon credits to enter EU ETS in the 2036–2040 window.
Based on what has been disclosed so far, the EU would set aside and auction a portion of allowances to raise funding to purchase high-quality international carbon credits. These credits would be linked to international cooperation mechanisms under Article 6 of the Paris Agreement and used to support delivery of the EU's 2040 climate target.
If this arrangement is confirmed, it would give EU ETS additional flexibility. For companies and market participants, it means EU ETS would no longer rely exclusively on internal EU reductions and a shrinking cap; part of the compliance pressure could be met through international mitigation outcomes.
Many details still need to be defined — credit quality, verification standards, environmental integrity, volume, and market impact — and the Commission will need to bring forward further implementing arrangements.
3. Free allocation continues, but tied more closely to decarbonisation investment
Free allocation has always been an important tool in EU ETS for balancing carbon costs and carbon leakage risks.
Under the earlier arrangement, free allowances for sectors covered by CBAM were set to be phased out gradually, with CBAM taking over as the leakage safeguard at the import border. The new proposal would extend the phase-out for CBAM-covered sectors to 2038.
This reflects a rethink on carbon pricing and border adjustments in light of pressures on European industry. For steel, cement, aluminium and fertilisers, a slower phase-out of free allowances helps ease near-to-medium-term carbon cost pressure.
But free allocation would not be unconditional. A key theme of the proposal is linking free allowances to companies' decarbonisation investment plans. In other words, in order to receive free allowances, companies may need to submit verified decarbonisation plans and demonstrate real progress on investments and emissions reductions.
This signals a policy shift: free allocation is no longer just a cost cushion; it becomes a lever to push companies to convert regulatory space into concrete low-carbon investment.
4. MSR reform: more liquidity, less excessive volatility
The Market Stability Reserve (MSR) is a key mechanism for managing allowance supply in EU ETS.
The proposal would adjust the MSR to fit better with the gradually tightening cap, while improving market liquidity and reducing excessive price volatility.
Based on disclosed information, the MSR intake rate could be reduced from 24% to 12%, keeping more allowances in the market for longer. MSR thresholds and release volumes may also become more dynamic to align with a shrinking cap.
For the EUA market, MSR reform is not a direct compliance rule change, but it will affect the pace of allowance supply and market liquidity. For companies that need to buy EUAs, MSR changes may indirectly influence medium-to-long-term procurement costs and the market's volatility range.
5. Permanent carbon removals to be brought into EU ETS
The proposal also foresees bringing permanent carbon removals into the EU ETS framework.
Permanent carbon removals typically refer to technologies that remove CO₂ from the atmosphere or biogenic sources and store it durably in a verifiable way — for example, bioenergy with carbon capture and storage (BECCS) and direct air capture with storage (DACCS).
This means EU ETS in the future may not only address emissions reductions, but also gradually incorporate emissions removals into its design.
That said, integrating removals into EU ETS still needs to address permanence, accounting boundaries, monitoring and reporting, liability and credit quality. For now, this is more of a directional signal for post-2030 design than an immediate change to today's compliance obligations.
6. An Industrial Decarbonisation Bank and reinvestment of ETS revenues
The Commission also proposes setting up an Industrial Decarbonisation Bank to support the scale-up of low-carbon industrial technologies.
In parallel, the proposal strengthens the use of EU ETS revenues, requiring Member States to channel a defined share of ETS auction revenues into priority areas such as clean energy, grids, low-carbon transport, industrial decarbonisation, waste management and R&D and innovation.
EU ETS is moving beyond being purely a "carbon cost" mechanism, and further toward a combined "carbon cost + transition investment support" policy tool.
7. Expanding coverage; continued adjustments for shipping
The EU ETS review also touches on scope expansion.
Based on disclosed information, the EU plans to bring non-hazardous waste incineration and co-incineration facilities gradually into EU ETS, and to make further adjustments for aviation and shipping.
For shipping companies, this is particularly worth watching.
Since 2024, EU ETS has covered emissions from large vessels of 5,000 gross tonnes and above. The current phase-in schedule is:
- 2025: surrender 40% of reported 2024 emissions
- 2026: surrender 70% of reported 2025 emissions
- From 2027: surrender 100% of reported emissions
In addition, from the 2026 emissions year onwards, the greenhouse gases covered by EU ETS for shipping expand from CO₂ alone to CO₂, CH₄ and N₂O.
The review further proposes a new Sustainable Maritime Alternative Propulsion (SMAP) mechanism, which would recycle part of ETS revenues back into shipping decarbonisation — supporting sustainable maritime fuels and alternative propulsion technologies. The proposal also touches on extending scope to some smaller vessels, anti-circumvention measures, ice-class vessels and certain special routes.
In other words, shipping's role in EU ETS will keep expanding. Going forward, shipping companies will need to track not only the annual 31 March reporting and 30 September surrender deadlines, but also how EU ETS, FuelEU Maritime and IMO's medium-to-long-term measures connect together.
8. Likely EUA market impact: broadly softer over the long term, but not one-directional
Overall, the proposal could soften long-term EUA scarcity expectations after 2030.
Reasons include: a slower cap trajectory, the potential introduction of international credits, permanent removals entering the framework, an extended phase-out of free allowances, and MSR reform improving market liquidity.
Together, these factors introduce more flexibility and could ease upward pressure on far-forward EUA prices.
At the same time, EU ETS scope keeps expanding — aviation, shipping and waste incineration are all being adjusted — which brings new sources of demand. EU ETS continues to serve the EU's 2040 climate target and 2050 climate neutrality objective, and the long-term reduction direction is unchanged.
So the outcome should not be read simply as "bearish" or "loosening". It is better understood as the EU trying to advance post-2030 carbon market reform in a more gradual and more flexible way.
Closing thoughts
The signal from this EU ETS review is that the EU has not stepped back from the carbon market as its core reduction tool, but is trying to strike a new balance between climate ambition, industrial competitiveness and business transition costs.
For shipping companies, the near-term focus remains completing current EU ETS compliance. Over the medium to long term, they will need to watch how post-2030 rule changes affect EUA prices, shipping's carbon cost and green fuel investment.
As EU ETS, FuelEU Maritime and IMO rules increasingly interact, shipping carbon compliance is no longer a once-a-year task. It is becoming a strategic issue for cost control, contract design and long-term competitiveness.
If you have needs around EUA procurement, allowance forecasting or annual compliance planning, please feel free to reach out to Tecway Maritime to discuss further.
References
- European Commission, Press release: EU ETS review, 17 July 2026
- European Commission, EU Emissions Trading System (EU ETS)
- European Commission, Reducing emissions from the shipping sector
- ICAP, The EU Commission publishes EU ETS review proposal, 17 July 2026