On 17 July 2026, the European Commission (the “Commission”) presented a package of proposals to revise the EU Emissions Trading System (EU ETS 1) for the period after 2030. The package comprises, in particular, a proposal for a directive amending Directive 2003/87/EC and the Market Stability Reserve Decision, as well as a separate proposal to adjust the benchmarks for the free allocation of allowances for 2026–2030.[1]

The proposal does not envisage abolishing EU ETS 1 or introducing a fixed price cap. The Commission retains the system’s core market-based architecture and operators’ obligation to surrender allowances corresponding to their emissions. It nevertheless proposes slowing the rate at which the number of allowances is reduced after 2030, extending safeguards for industry and channelling a larger share of ETS revenues back into the decarbonisation of sectors covered by the system.

Slower reduction of the emissions cap. The current linear reduction factor is 4.3% and is set to increase to 4.4% in 2028–2030. The Commission proposes reducing it to 3.7% for 2031–2035 and to 1.7% for 2036–2040. Allowances would therefore continue to be issued into the 2040s.[2]

Free allocation will continue, but will be conditional on investment. Benchmark-based allocation would continue beyond 2030. For sectors covered by the Carbon Border Adjustment Mechanism (CBAM), the phase-out of free allocation would be postponed until 2038. From 2031, operators would have to submit verified decarbonisation plans and invest in the EU an amount equal to 100% of the value of the free allowances received in order to obtain their full free allocation.[3]

Immediate adjustment of the benchmarks for 2026–2030. A separate proposal would moderate the tightening of the benchmarks for heat and fuel. The Commission estimates that this would provide energy-intensive industry with additional free allowances worth approximately EUR 6 billion over that period.[4]

A greater share of ETS revenues returned to industry. The review would strengthen financing for industrial transformation, primarily through the following instruments:

• The Industrial Decarbonisation Bank would have funding of approximately EUR 100 billion; its first phase would be the ETS Investment Booster, funded by 400 million allowances with an estimated value of EUR 30 billion for 2028–2030; and
• Member States would be required to use at least 50% of their national ETS revenues for investments in the decarbonisation of sectors covered by the ETS; the Innovation Fund and the Modernisation Fund would also continue (which suggests that new calls modelled on previous ones may be published).[5]

Expansion of the system’s scope. The proposal also envisages gradually bringing additional emissions and sources within EU ETS 1:

• municipal waste incinerators would be required to surrender allowances for 25% of reported emissions in 2031, 50% in 2032, 75% in 2033 and 100% from 2034; subject to certain conditions, a Member State could apply a derogation until 2035;
• in aviation, the ETS would be extended, in particular, to flights from the EEA to third countries located within 5,000 km and to all incoming and outgoing flights by private jets; and
• in maritime transport, the inclusion threshold for selected vessel categories would be lowered from 5,000 GT to 400 GT (“GT” means gross tonnage; lowering this threshold would extend EU ETS 1 to significantly smaller vessels).[6]

In practical terms, the proposal strikes a compromise between climate ambition and competitiveness. Industry would gain more time, more free allowances in 2026–2030 and greater access to funding. In return, it would be subject to investment conditions and continued pressure to decarbonise. The proposal does not, in itself, guarantee a decrease in allowance prices.

The proposed package is not yet binding law. The proposals must be adopted by the European Parliament and the Council of the EU, and their final wording may change.

Please note that the review concerns EU ETS 1 only. It does not affect the rules of the separate ETS 2 system, which has recently sparked considerable political controversy, particularly over concerns about its impact on motor fuel prices and household heating costs. The Czech Republic initially advocated abolishing ETS 2 or at least postponing its introduction, but was unable to secure sufficient support for this approach within the EU.

We will keep you informed of further developments.

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[1]     European Commission, press release IP/26/1596, 17 July 2026; Proposal for a Directive, COM(2026) 616 final. Available here.

[2]     European Commission, Questions and answers on the EU Emissions Trading System (EU ETS) review, QANDA/26/1598, 17 July 2026. Available here.

[3]     European Commission, QANDA/26/1598, section on free allocation. Available here.

[4]     Proposal to adjust the benchmarks for heat and fuel, COM(2026) 619 final. Available here.

[5]     European Commission, QANDA/26/1598, sections on the use of ETS revenues and support for industry. Available here; for previous calls under the Modernisation Fund, see here.

[6]     European Commission, QANDA/26/1598, sections on aviation, maritime transport and municipal waste incineration. Available here.

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This material is for general information on current topics only, it is not advice. It does not take into account any special circumstances, financial situations or special requirements of the addressees. Recipients should therefore always seek appropriate professional services for the information provided. Notwithstanding the careful compilation of this material, bpv Braun Partners s.r.o. advokáti, its partners, associates or co-operating solicitors and tax advisers cannot guarantee the accuracy or completeness of the information contained herein and accepts no responsibility for acting or refraining from acting on the basis of the information contained in this material.