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The EU released a draft reform of its Emissions Trading System in July, redistributing decarbonization pressure across industries. (Photo: iStock)
The European Commission released its proposed revision to the EU Emissions Trading System (EU ETS) on July 17. Market attention initially focused on the slower decline in the emissions cap and the reduced volume of allowances absorbed by the Market Stability Reserve (MSR). These changes suggest that the supply of EU carbon allowances will no longer contract as rapidly after 2030 as previously expected. However, companies that interpret the reform simply as a sign of easing carbon price pressure may underestimate the new risks emerging from the policy shift.
The reform redistributes decarbonization pressure across sectors. EU manufacturers and companies covered by the CBAM would receive a longer buffer through extended free allowances. Aviation and maritime transport, by contrast, would move toward broader coverage and tighter emissions management. The proposal also creates room for international carbon credits and permanent carbon removals, but does not allow regulated companies to use international credits directly in place of EU allowances for compliance.
This article examines the key changes and their implications for different industries, helping market participants understand the likely direction of policy and prepare their response.
Unlock the full article to explore three key takeaways:
- The proposal would lower the Linear Reduction Factor (LRF) to 3.7% after 2031 and extend the phaseout of free allowances for CBAM sectors to 2038. Companies would need to submit domestic decarbonization investment plans to qualify for the remaining 20% of free allowances.
- Aviation coverage would expand to flights within 5,000 kilometers, while 110 million allowances would be reserved to support sustainable aviation fuel (SAF). For maritime transport, the EU would first strengthen monitoring, reporting, and verification (MRV) requirements before assessing formal inclusion by the end of 2031.
- From 2036, up to 260 million allowances could be used to purchase international carbon credits, potentially lowering the required share of domestic emissions reductions from 90% to 85%. However, if credit supply proves insufficient, the LRF could be adjusted back to 2.7%.