The European Commission announced the release of its proposed updated Emissions Trading System (EU ETS) benchmark values for 2026-2030, including measures to implement the system’s expanded free allocation of allowances to indirect emissions from electricity use, anticipated by the Commission to provide around €4 billion in additional value to industry through 2030.
The Emissions Trading System (ETS) is the EU’s internal cap and trade carbon pricing mechanism. Established in 2005, the ETS puts a price on carbon emissions for key GHG intensive sectors, including electricity and heat generation, oil refineries, steel, cement, paper, chemicals, and commercial aviation, among others.
Under the ETS, industrial companies are required to pay for their greenhouse gas emissions by surrendering carbon allowances. To help companies remain competitive while encouraging emissions reductions, the EU provides a portion of these allowances for free, based on emissions “benchmarks” that reflect the performance of the most efficient facilities in each sector. Companies that emit less than their allocation can sell excess allowances, while those exceeding their allocation must buy additional permits, creating a financial incentive to cut emissions.
The new proposal is part of a required 5-year update to the ETS benchmarks, but comes as the Commission is increasingly focused on balancing the delivery of the EU’s climate goals with the need to maintain competitiveness, particularly in the midst of concerns from industry facing pressure from soaring energy costs.
EU Commission President Ursula von der Leyen recently pledged to introduce near-term measures to revise the ETS, with a comprehensive review of the ETS planned for July 2026, while she has also defended the system as an effective tool to drive reduced dependence on imported fossil fuels, accelerate the shift to cleaner energy sources and fund investments in decarbonization-focused technologies.
In a press release announcing the new proposals, the Commission said that it “is addressing industry concerns by making full use of the legal flexibilities available” in the benchmark update, highlighting in particular its extension of free allocation covering indirect emissions from electricity use across 14 product benchmarks, which were previously only given for direct emissions, which the Commission said will lead to higher benchmark values with a financial impact of around €4 billion for the 2026-2030 period.
The Commission also confirmed that despite tightening the ETS benchmarks, industry will, on average, continue to receive free allocation covering around 75% of its emissions, addressing concerns of a significant jump in requirements to purchase allowances for emissions.
Additionally, the Commission said that in response to industry concerns, it will propose the introduction of sector-specific fallback benchmarks as part of the upcoming EU ETS revision. Fallback benchmarks are default formulas used under the ETS to calculate free allowances for industries that do not have their own product-specific benchmark, typically based on heat or fuel use. The proposed change would effectively create more tailored benchmarks for specific sectors that more accurately reflect their decarbonization progress, reducing the risk of a decline in allowances in areas where emissions reduction progress is more challenging.
Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth, said:
“Today, we deliver on the commitment made by President Ursula von der Leyen to reinforce Europe’s carbon market. Strengthening the Market Stability Reserve as proposed on 1 April will improve resilience to volatility, while updating the benchmarks further incentivises investments into the clean transition. This ensures the EU ETS continues to drive decarbonisation, competitiveness and clean investment.”
The Commission said that it aims to adopt the ETS benchmarks by the end of June, following a 4-week consultation and scrutiny by EU member states.
