The Commission slows the ETS cap for 2031 to 2040 and keeps free allocation alive until 2038

On 17 July 2026 the Commission published its proposal for a directive amending Directive 2003/87/EC and Decision (EU) 2015/1814, the legal texts of the EU Emissions Trading System (ETS) and of its Market Stability Reserve[1]. The proposal sets the rules of the carbon market for the period 2031 to 2040[2]. It arrives four months after the Council gave its final approval to the amended European Climate Law, which fixes a binding target of a 90% net reduction in greenhouse gas emissions by 2040 compared with 1990[3]. The proposal therefore decides how much carbon the sectors under the cap may still emit during the decade in which our generation will be in its thirties and forties. We read it as a trade of climate stringency for industrial relief.

A slower cap and a later end date

The cap on emissions falls each year by a fixed share of the 2005 baseline, the linear reduction factor. Under the rules in force the factor is 4.3% a year until 2027 and 4.4% from 2028[2]. At that pace the cap would reach zero in 2039[4]. The Commission now proposes 3.7% a year for 2031 to 2035 and 1.7% a year for 2036 to 2040[1]. Allowances would therefore continue to be issued into the 2040s[2]. Carbon Brief reports estimates of the additional emissions permitted under the slower path that range from 1.4 billion tonnes to about 2.4 billion tonnes by 2050, depending on the author[4].

The proposal reconciles this with the 2040 target through international credits. The amended Climate Law allows, from 2036, high-quality credits under Article 6 of the Paris Agreement for up to 5% of 1990 net emissions[3]. The proposal uses less than half of that room. A new Article 9b sets aside up to 260 million allowances for 2036 to 2040, which the Commission would auction in order to buy credits of equivalent volume, roughly 2% of 1990 emissions[5]. Operators could not surrender the credits themselves[2]. The domestic ambition of the ETS falls, in effect, from 90% to 85% by 2040[5]. The proposal contains a safeguard. If the Commission reports by 31 January 2033 that suitable credits are unavailable, the linear reduction factor rises to 2.7% from 2036 and the unused allowances go to the Industrial Decarbonisation Bank[2].

A second supply valve sits in the Market Stability Reserve. Its intake rate falls from 24% to 12% from 2028, so that more allowances stay in circulation[5]. The proposal adds 250 million allowances to the cap for 2031 to 2040, to be auctioned to pay for permanent domestic removals certified under the Carbon Removal Certification Regulation[5]. Each of these measures loosens scarcity. Scarcity is what gives the carbon price its signal.

Free allocation with strings attached

Free allocation to industry was due to shrink after 2030. The proposal keeps it alive to 2040 for sectors outside the Carbon Border Adjustment Mechanism (CBAM), and it slows the phase-out for CBAM sectors so that it ends in 2038 instead of 2034[1][7]. Under the schedule in force, steel, cement, aluminium, fertiliser and hydrogen producers would keep 51.5% of their free allocation in 2030 and none from 2034. Under the proposal they would keep 59% in 2030, 15% from 2034 to 2037 and nothing from 2038[5].

The Commission attaches conditions. From 2031 an operator must file an independently verified "Invest in EU Decarbonisation Plan" and must invest, over each five-year period, at least the full value of the allowances it receives for free[5]. Only 80% of the allocation is released on approval of the plan; the remaining 20% is withheld until the competent authority confirms that the plan has been carried out[2]. An operator that moves production outside the Union must return the allowances[2]. Member States must direct at least 50% of their auction revenues to decarbonisation in ETS sectors, which the Commission values at more than EUR 100 billion before 2030[1].

Commissioner Hoekstra said that "the EU ETS has proven that carbon pricing works"[1]. The reactions are sharp. Green MEP Michael Bloss called it "climate vandalism"[4]. WWF and Carbon Market Watch say it weakens the system; BusinessEurope says the new conditions on free allocation raise concerns[4]. The European Steel Association says the ETS sets a deadline for decarbonisation "without providing a credible pathway" and that free allocation for steel around 2029 and 2030 is largely unchanged[6].

What this means for our generation

The proposal now enters the ordinary legislative procedure. The Irish Presidency of the Council aims for a general approach at the December Environment Council, and the Commission's roadmap targets a political agreement in the first quarter of 2027[2]. If adopted, the directive would apply from 1 January 2029, with the conditionality rules from 1 January 2031[2]. Parliament and Council have about six months to decide whether the cap for the 2030s should bend. We make four recommendations.

First, the co-legislators should write the fallback into the base case. A 2.7% factor from 2036 should apply unless the Commission certifies, by 2033, that the credit facility is operational and that the credits meet the quality criteria of the Climate Law. The credits should have to earn their place in the cap[2][3].

Second, the 20% retention on free allocation should rise. Parliament should test whether a 40% retention, released only on verified emission reductions, would change investment behaviour more than the 100% investment rule alone, because the rule counts spending and does not count abatement[5].

Third, Member States should publish, by 2027, an annual account of the 50% revenue obligation on a common template, so that voters in 2030 can see whether EUR 100 billion reached grids, electrification and industrial projects or general budgets[1].

Fourth, the Commission should publish, before the trilogues, the cumulative carbon budget of the cap for 2031 to 2040 under the current rules and under the proposal, in tonnes. Our generation inherits the difference, and the difference should be a published number before it becomes law[4].