EU Emissions Trading System regulatory reforms

The European Union’s Emissions Trading System (ETS) is undergoing significant regulatory updates to align with the ‘Fit For 55’ climate targets, which aim for a 55% reduction in emissions by 2030 and climate neutrality by 2050.

In July 2026, the European Commission presented a reform package (COM-2026-616) that adjusts the annual emission-reduction path for industry and power plants to 3.7% per year until 2035. To address concerns regarding industrial competitiveness and ‘carbon leakage,’ the reform proposes extending the conditional allocation of free allowances for sectors such as steel, cement, and aluminum, potentially beyond 2039. While the Commission seeks to balance decarbonization with economic stability, environmental groups have warned that these changes may weaken a mechanism that has reduced sector emissions by approximately 47% to 50% since 2005. Recent market data shows average prices in 2023 reached approximately 86.17 euros per tonne, with 2026 projections estimated between 80-82 euros per tonne.

The updated framework also introduces provisions for up to 260 million tonnes of non-EU carbon credits starting in 2036 and explores direct removal mechanisms like bio-CCS and DACCS to generate negative emissions.

Expansion efforts are also targeting the transport and waste sectors. A new ‘ETS2’ for fuels is expected to begin in 2028, shifting diesel carbon pricing to a market-based European system. Additionally, the Commission has proposed including municipal waste incineration plants in the EU-ETS 1 starting in 2031, with annual increases of 25 percent until 2034. The industry association ITAD has warned this could create a paradox where carbon pricing makes thermal waste recovery more expensive than landfilling, potentially undermining the European circular economy.