EU ETS review 2026: what the Commission's proposal would change, for whom and from when

The Commission's review of the EU Emissions Trading System (EU ETS) would set its rules for 2031 to 2040: a slower-falling cap, free allowances for industry tied to investment in the EU, a slower phase-out of free allocation for goods covered by the Carbon Border Adjustment Mechanism (CBAM), and smaller ships, more flights and waste incineration brought in 1. It is a proposal, not law. Parliament's committee hasn't voted on it yet, and as proposed most of its rules would apply from 1 January 2029, some earlier and many from 2031 1 2. What applies today is on our EU ETS hub.

What would the July 2026 review change?

The Commission proposal COM(2026) 616 of 17 July 2026 would amend the ETS Directive (Directive 2003/87/EC) and the decision that set up the market stability reserve (Decision (EU) 2015/1814) 1. The Commission says it aligns the EU ETS with the EU's 2040 target of a 90% cut in net greenhouse gas emissions, and adjusts its reduction path from 2031 1. You can read the proposal's full text.

The table sorts the proposal by who it would affect. Everything in the middle columns is proposed, not law, and the dates are provisional, as the next section explains.

Who	What would change (proposal)	From when (proposed)	Today's rule
Operators of installations	Free allocation and the carbon leakage rules run until 2040; 80% of free allocation only with a verified investment plan, the other 20% once the investments are made; a slower phase-out for CBAM goods [1]	Plans with the data due by 30 September 2029, for the period starting in 2031; the new CBAM factor from 2028 [1]	Carbon leakage rules for the period until 2030 [3]; see our free allocation explainer
Shipping companies	Certain ships of 400 to 5,000 gross tonnage brought in; derogations extended to 31 December 2035; new rules against evasion; allowances reserved for sustainable fuels [1][4]	Smaller ships from 1 January 2031 [4]	Cargo and passenger ships of 5,000 gross tonnage and above, and offshore ships of that size from 1 January 2027; derogations until 31 December 2030 [5][6][7][8]; see our shipping explainer
Aircraft operators	Departing flights to destinations outside the European Economic Area (EEA) within 5,000 km of Frankfurt airport, with exceptions; business flights; a deduction for costs under CORSIA, the international aviation offsetting scheme [1][4]	1 January 2029; flights outside the EEA stay exempt in 2027 and 2028 [1][4]	Flights to most countries outside the EEA exempt until 31 December 2026 [9]
Waste incineration	Plants burning non-hazardous waste above 3 tonnes per hour would have to surrender allowances, phased in [1][4]	25% of 2031 emissions, 100% from 2034 [1]	Municipal waste incinerators above 20 MW only monitor and report, since 1 January 2024 [6]; see our installations explainer
EU countries	At least 50% of auction revenues on priority areas; the Innovation Fund and Modernisation Fund extended; an Industrial Decarbonisation Bank [1]	Revenue rule from 1 January 2029; the Bank from 2028 [1]	Revenues spent on purposes the Directive lists [10]

Source: Commission proposal COM(2026) 616 and its annexes, 17 July 2026; ETS Directive and maritime monitoring rules as in force 1.

When would the changes apply?

As proposed, EU countries would have to put the new rules into national law by 31 December 2028 and apply them from 1 January 2029 1. The directive itself would enter into force on the twentieth day after its publication in the Official Journal, and some parts would apply earlier or later 1:

From 30 September 2027: the new CBAM factor and the Industrial Decarbonisation Bank, including its Investment Booster 1.
From 1 January 2028: a new definition of "new entrant", with related rules on permits and on returning excess free allowances, which EU countries would transpose by 31 December 2027 1.
From 1 January 2029: the minimum share of auction revenues for priority areas, and wider coverage of flights 1 4.
From 30 September 2029: the investment plans for free allocation in the five-year period starting in 2031 1.
From 1 January 2031: smaller ships, waste incineration, new activities for capturing, transporting and using carbon dioxide, and the new Innovation Fund and Modernisation Fund rules 1 4.

Even as a proposal, several dates are not settled. The text still carries drafting notes in square brackets: next to the offshore shipping rule, Article 3 notes "N.B.: date of application may need to be changed to ensure it starts 2 years after MRV Maritime application in 2029", and one date appears only as "date of application of MRV provisions related to offshore" 1. Other dates are written as bracketed alternatives, such as "2031/two years after inclusion of additional small ships in MRV" for the smaller ships 1. Until an amending directive is adopted and applies, today's rules stand 1.

Which figures would change?

The proposal would change several numbers in today's law. The left column is law; the right column is a proposal.

Rule	Law in force	Proposal (not law)
CBAM factor in 2028	90% [11]	91.5% [1]
CBAM factor in 2029	77.5% [11]	81% [1]
CBAM factor in 2030	51.5% [11]	59% [1]
CBAM factor in 2031	39% [11]	48% [1]
CBAM factor in 2032	26.5% [11]	37.5% [1]
CBAM factor in 2033	14% [11]	27% [1]
CBAM factor from 2034 to 2037	None: no free allocation for CBAM goods from 2034 [11]	15% [1]
CBAM factor from 2038	None [11]	0% [1]
Yearly cut in the cap (linear reduction factor)	4.3% from 2024 to 2027, 4.4% from 2028 [7]	3.7% from 2031 to 2035, 1.7% from 2036 [1]
Share of allowances in circulation placed in the reserve	12%, doubled until 31 December 2030 [12]	12% [1]
Allowances in circulation above which that share goes in	1,096 million [12]	947 million, falling by 4% a year from 2029 [1]
End of the shipping derogations for ice-class ships, islands, public services and outermost regions	31 December 2030 [8]	31 December 2035 [1]
Free allocation for sectors at risk of carbon leakage	For the period until 2030 [3]	Until 2040 [1]

Sources: ETS Directive and Decision (EU) 2015/1814 as in force; Commission proposal COM(2026) 616, 17 July 2026 1. The CBAM factor is the share of the full free allocation that producers of CBAM goods still receive 11.

What would change for installations?

Free allocation would continue after 2030, but it would depend on investing in decarbonisation in the EU 1. Today's carbon leakage rules cover the period until 2030; the proposal would extend them until 2040 and keep the current carbon leakage list until 31 December 2040 instead of updating it 1 3. Our free allocation explainer covers how free allowances are worked out today.

To get free allocation from 2031, operators would establish, publish and submit an "Invest in EU decarbonisation plan" for each installation applying for it 1. Incumbent installations would submit the plan with the information due by 30 September 2029, and every five years after that 1. In each five-year period, the plan's investments would have to equal at least the economic value of 100% of the installation's free allocation, be made in the EU and lead to significant emission cuts at the installation 1.

Once the plan is verified and approved, 80% of the period's free allocation would be handed out year by year 1. The other 20% would come only after the competent authority confirms, no later than two years after the period ends, that the investments were made in the EU and the emission cuts achieved 1. An installation that moves its production outside the EU would have to pay the allowances back 1. The plan rules wouldn't apply to the 10% most efficient installations of a sector, to zero-emission or low-carbon installations, or to installations that stay in the system after falling below the 20 MW threshold 1. Today, free allocation is already cut by 20%, with some exceptions, when an installation doesn't follow its energy audit recommendations or, above the 80th percentile of its benchmark, lacks a climate-neutrality plan 11.

For goods covered by CBAM, free allocation would shrink more slowly and end in 2038 instead of 2034 1 11. The Commission says this reintroduces 15% of the free allocation the CBAM factor phases out, starting in 2028 1. The table above has the year-by-year figures, and our CBAM hub covers what importers pay.

The 20 MW threshold for burning fuels would stay 1. The Commission says lowering it "would not be proportionate, since most of the relevant emissions will be covered by EU ETS2" 1. An installation that changes its processes to cut emissions and falls below 20 MW could choose to stay in the system until the end of the current five-year period, or of one or both of the two that follow 1. Our installations explainer sets out today's thresholds.

Captured carbon dioxide (CO₂) that is chemically bound in a product would be counted where it is finally released: no allowances would be due for CO₂ bound in products from which it will mainly be released in activities that already surrender allowances, such as burning plastic waste 1. CO₂ that is used directly, without being bound in a product, would still be counted at the point of capture 1. For synthetic fuels made with captured CO₂, the emissions would count when the fuels are distributed, a new activity in the annex 1 4. Capturing, processing, transporting and using CO₂ for these purposes would become activities in the EU ETS from 1 January 2031 1 4. The proposal would also delete the words that limit the Directive's definition of "release for consumption" to its chapter on buildings, road transport and additional sectors 1 13 14.

EU countries could still compensate electricity-intensive industries for carbon costs passed on in electricity prices, under State aid rules 1.

What would change for shipping companies?

Certain ships of 400 to 5,000 gross tonnage would come into the EU ETS from 1 January 2031: general cargo ships, offshore ships, oil tankers, chemical tankers, gas carriers and liquefied natural gas (LNG) carriers 4 15 16. Today the EU ETS covers cargo and passenger ships of 5,000 gross tonnage and above, and offshore ships of that size from 1 January 2027; smaller general cargo and offshore ships report their emissions but surrender nothing 5 6 7. Ro-pax ships (ships that carry more than 12 passengers and have roll-on/roll-off cargo space on board) and passenger ships under 5,000 gross tonnage would stay out, and the Commission would report on including them by 31 December 2031 1 4 15 16. The smaller ships' date depends on a separate proposal to change the maritime monitoring rules, COM(2026) 620 1 15.

Emissions from ships performing or supporting offshore operations would count in a new way: a worksite in an EU country's territorial sea, exclusive economic zone or continental shelf would be treated as a port of call 1. The date for this is still a placeholder in the text 1.

The derogations for ice-class ships, islands, public service routes and outermost regions would run until 31 December 2035 instead of 31 December 2030 1 8.

Three changes target evasion through ports outside the EU 1:

A port outside the EU less than 300 nautical miles from an EU port would count as a neighbouring transhipment port when transhipment exceeds 50% of its container traffic, instead of 65% today 1 17.
Ports less than 150 nautical miles from an EU port with the berths and cranes for container transhipment would count too, and the Commission would update the list, where necessary, by 31 December every year 1.
Until 31 December 2035, shipping companies could surrender fewer allowances for voyages of more than 300 nautical miles into the EU by containerships of 10,000 twenty-foot equivalent units (TEU) and above, in line with the share of containers transhipped 1.

Up to 110 million allowances would be reserved to help shipping companies pay for sustainable maritime fuels and zero-emission propulsion, until 31 December 2040 1. They would cover from 55% to 90% of the price gap with fossil fuels, depending on the fuel, and 90% of the extra cost of zero-emission propulsion, before top-ups for islands, EU feedstock and EU shipyards 1. The start of this reserve is still a bracketed choice between 1 January 2028 and 1 January of the "first year after the entry into force of this Directive" 1. If the International Maritime Organization (IMO) adopts a global measure, the Commission would report on it, including on double payment, and could propose changes 1. Our shipping explainer covers today's rules.

What would change for aircraft operators?

From 1 January 2029, flights departing from the EEA to destinations outside it would need allowances if the destination is within 5,000 km of Frankfurt airport, with exceptions 1 4. Three groups of flights would stay exempt until 31 December 2032 1:

Flights to destinations more than 5,000 km from Frankfurt airport 1.
Flights to nearby destinations with less than 15,000 tonnes of yearly emissions from flights from the EEA 1.
Flights departing from an outermost region of an EU country, or from dependencies and territories, to countries outside the EEA, except flights to the United Kingdom or Switzerland and to and from Gibraltar 1.

In the proposal, the outermost-region exemption, the 2027 and 2028 exemption for flights to and from countries outside the EEA, and the distance exemption, proposed Article 28a(1)(a), (d) and (e), each contain the words "except for aircraft operators operating flights between two different States with total annual emissions lower than 10 000 tonnes"; the text leaves unclear what effect this carve-out has 1.

Flights to and from least developed countries and small island developing States, as defined by the United Nations and listed in an implementing act, would also be exempt, except for those States whose gross domestic product (GDP) per head equals or exceeds the EU average 1.

For 2027 and 2028, flights to and from countries outside the EEA would stay exempt, except flights to the United Kingdom or Switzerland and to and from Gibraltar 1. Under the law in force, that exemption ends on 31 December 2026 9. Open question, in our reading: if the proposal isn't adopted by 1 January 2027, the law in force applies from that date, and the proposal's text doesn't say how its 2027 and 2028 exemption would apply once that date has passed 1 9.

Business flights would be covered too 1. The Commission describes this as "all incoming and departing flights by business jets"; the aircraft concerned would be on a list the Commission adopts 1 18. Small aircraft operators would be excluded on an emissions threshold of 1,000 tonnes a year 4.

Three more changes concern the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and cleaner fuels 1:

Allowances owed would be reduced to deduct the costs an aircraft operator bears offsetting under CORSIA, so the same emissions aren't charged twice 1.
Operators would keep cancelling CORSIA units up to the 2033 to 2035 period, by 31 January 2037 for that period 1.
Allowances reserved for sustainable aviation fuels would stay available until 31 December 2040, with up to 110 million more, and from 1 January 2029 for all flights departing from the EEA 1.

By 1 July 2032, the Commission would report on CORSIA 1. If the report finds that CORSIA has been strengthened, and a second condition on participation is met, a proposal could restrict the EU ETS to flights within the EEA, to Switzerland and the United Kingdom, and to and from Gibraltar 1.

What would change for waste incineration?

Plants that incinerate or co-incinerate non-hazardous waste, with a capacity above 3 tonnes per hour, would become an activity of their own in the EU ETS from 1 January 2031; chemical recycling and hazardous waste would stay out 1 4. Today, municipal waste incinerators above 20 MW only monitor, report and verify their emissions, which they have done since 1 January 2024 6. Our installations explainer covers today's rules.

The obligation to surrender allowances would be phased in 1:

For 2031, 25% of verified emissions 1
For 2032, 50% 1
For 2033, 75% 1
For 2034 and each year after, 100% 1

EU countries could exempt plants in outermost regions until 31 December 2035 1. An EU country could also opt its plants out for the emissions of years up to 2035 if it meets two of three conditions: a national carbon tax higher than the EU ETS auction price, adjusted for the phase-in; being on track for its recycling targets; and being on track for its landfill target 1. It would have to notify the Commission by 31 July 2029 and cancel allowances equal to the exempted emissions; the plants would still monitor and report 1.

Landfills of non-hazardous waste would have to monitor and report their emissions from 1 January 2031, or from 1 January 2034 if landfill registers and EU rules on best available techniques for landfills aren't in place 4. By 31 December 2034, the Commission would report on whether to bring landfills into the EU ETS 1.

What would change for EU countries?

EU countries would have to spend at least 50% of their auction revenues on priority areas for the sectors in the EU ETS, from 1 January 2029 1. The areas include clean energy and grids, industrial decarbonisation, carbon capture and storage, shipping and aviation, and waste prevention and recycling 1. Today, they must use their revenues for purposes the Directive lists, and the Commission says only around 5% now goes directly to industrial decarbonisation 1 10. Revenues would have to be spent by the third year after they are raised, and the source of the funding made visible 1.

The funds paid for with allowances would change:

An Industrial Decarbonisation Bank would start in 2028 1. In its first phase, an Investment Booster would hand out 400 million allowances from 2028 to 2030 to industrial projects on a "first in, first served" basis 1. For the first 18 months, 100 million of them would be reserved for projects in EU countries with a GDP per head below 75% of the EU average in 2022 to 2024 1. From 2031 to 2040, another 400 million allowances would fund projects through competitive bidding for carbon contracts for difference or carbon premiums 1. The Commission's Q&A says the Bank would provide €100 billion in funding, and puts the Booster at an estimated €30 billion 18.
The Innovation Fund would continue with 200 million allowances 1.
The Modernisation Fund would run from 2031 to 2040 for the same group of EU countries, funded by 2% of the cap, plus 0.5% for their projects under the Industrial Decarbonisation Bank 1.

Waste incineration also gives EU countries a decision: whether to use the opt-out described above, by 31 July 2029 1.

What would change for the market as a whole?

The cap would fall more slowly after 2030: by 3.7% a year from 2031 to 2035 and 1.7% from 2036, against 4.4% a year from 2028 today 1 7. The Commission says allowances would then still be issued in the 2040s 1. It would publish the new Union-wide quantity of allowances by September 2028 1.

The slower cut from 2036 assumes the EU buys international credits. Up to 260 million allowances would fund the purchase of up to 260 million tonnes of international credits for 2036 to 2040 1. If such credits aren't available, the yearly cut would revert to 2.7% from 2036, following a Commission report due by 31 January 2033 1.

Permanent carbon removals would enter the system. The cap would rise by 250 million allowances, which the Commission would auction from 2031 to 2040 to buy removal units from biogenic emissions capture with carbon storage (BioCCS) and direct air capture with carbon storage (DACCS) 1. Businesses in the system could also compensate their fossil emissions with certified removals from storing their own biogenic emissions 1.

The market stability reserve, which takes allowances off the market when too many circulate and releases them when too few do, would take in a smaller share: 12% instead of 24%, from 2028 according to the explanatory memorandum 1 12. Its thresholds and the 100 million allowances it releases would fall by 4% a year from 2029 1. A separate proposal, COM(2026) 153, would stop invalidating the allowances held in the reserve above 400 million 1 12 19.

Does the review change ETS2?

No. The separate emissions trading system for buildings, road transport and additional sectors (ETS2) is left out: the proposal's explanatory memorandum says ETS2 "is excluded from the scope of this proposal as it will become fully operational in 2028" 1. Regulation (EU) 2026/667 has postponed ETS2 until 2028 14. Our EU ETS hub has a short section on it.

Where does it stand, and what happens next?

The proposal is with Parliament's committee. On 25 October 2026, Parliament's procedure file showed it as "Awaiting committee decision", after referral to the committee on 17 September 2026 2. The rapporteur, Peter Liese, presented a draft report on 15 September, according to Parliament's research service; a draft report is not Parliament's position 20.

These are the next steps. They are targets and indicative dates, not decisions:

Parliament: the indicative date for the plenary vote is 14 December 2026, and Parliament "aims to have a position ready by the end of the year" 2 20.
Council: environment ministers are "targeting a general approach", their negotiating position, on 11 December 2026 20.
Both: Parliament and the Council are targeting an agreement in the first three months of 2027 1 20.

Any agreement would then have to be adopted and published in the Official Journal before it becomes law 1.

Three related proposals move separately:

COM(2026) 619, on revised values for the heat and fuel benchmarks for 2026 to 2030: Parliament voted on it on 22 October 2026 and sent it back to its committee for talks with the Council 21 22. According to Parliament's research service, the Council's Permanent Representatives Committee agreed a negotiating mandate on 16 September 2026 23. Our free allocation explainer covers it.
COM(2026) 153, on the market stability reserve: Parliament voted on it on 15 September 2026 and sent it back for talks with the Council; the indicative plenary date is 23 November 2026 19 24.
COM(2026) 620, on the maritime monitoring rules that the small-ship date depends on: awaiting committee decision, with an indicative plenary date of 14 December 2026 15 25.

What can I do now?

Nothing in the proposal binds you yet: no rule changes until an amending directive is adopted and applied 1. You can prepare for the parts that concern you:

If you expect to apply for free allocation from 2031, list the decarbonisation investments you plan, since the proposal would ask for a verified plan with the data due by 30 September 2029 1.
If you run general cargo or offshore ships, tankers or gas carriers of 400 to 5,000 gross tonnage, check which of your ships would need allowances from 2031 4 15.
If you fly from the EEA to countries outside it, map which routes are within 5,000 km of Frankfurt airport, and which of them fall under the proposed exceptions 1.
If you run a waste incineration plant, ask your national authority whether your country plans to use the opt-out, which it would have to notify by 31 July 2029 1.
Watch for Parliament's vote and the Council's position, both planned for December 2026 2 20.

This is general information, not legal advice. For decisions about your company, check with a lawyer or adviser.