The European Commission published its targeted EU ETS revision, COM(2026) 616 final, on July 17, 2026, setting the Phase 5 framework for 2031-2040 and proposing the single biggest change to importers' long-term CBAM cost math since the Omnibus. For the six CBAM sectors, 15 percent of the already phased-out free allocation would return from 2028, and the full free-allocation phase-out would move from 2034 to 2038. Nothing changes for 2026 or 2027, but EU importers of steel, cement, aluminium, fertilizers, electricity, and hydrogen budgeting certificate costs for 2028 through 2038 are looking at a materially flatter cost curve.
That flatter curve is not law yet. COM(2026) 616 is a legislative proposal, and the ordinary legislative procedure runs through 2026 and 2027, with the Commission targeting agreement by early 2027.
What the ETS Phase 5 proposal changes for CBAM sectors
COM(2026) 616 would reintroduce 15 percent of the phased-out free allocation for CBAM sectors from 2028 and extend the free-allocation phase-out from January 1, 2034 to 2038, explicitly slowing the CBAM phase-in by four years. No revision since the Omnibus amendment (Regulation (EU) 2025/2083) rewrote the compliance calendar has touched the certificate cost trajectory this directly.
Under the current EU ETS free allocation phase-out, the CBAM factor climbs from 2.5 percent in 2026 to 100 percent in 2034, and each year's certificate obligation equals verified embedded emissions multiplied by that factor. The proposal would push the 100 percent point to 2038 and lower the factors in between. The Commission frames the slower schedule as transition support for industry while the 2031-2040 cap aligns with the 90 percent net emissions reduction target for 2040.
The full package: cap, MSR, credits, and a EUR 100bn bank
The proposal pairs the slower CBAM phase-in with a gentler cap trajectory, a weakened Market Stability Reserve, a limited opening to international credits, and a EUR 100bn Industrial Decarbonisation Bank. The six elements with the largest bearing on carbon price formation are compared against current law below.
| Element | Current law | COM(2026) 616 proposal |
|---|---|---|
| Free allocation, CBAM sectors | Phase-out completes January 1, 2034 | 15% of phased-out allocation returns from 2028; phase-out completes 2038 |
| Linear reduction factor | 4.3% (2024-2027), 4.4% from 2028 | 3.7% (2031-2035), 1.7% (2036-2040) |
| MSR intake rate | 24% | 12% from 2028 |
| Free allocation conditionality | None | Tied to decarbonisation investment plans from 2031 |
| International credits | Not permitted | Up to 2% in 2036-2040 |
| Industrial funding | Innovation Fund | EUR 100bn Industrial Decarbonisation Bank |
The International Carbon Action Partnership's summary of the proposal adds precision on three of those rows: the conditionality regime from 2031 releases 80 percent of free allocation when an installation's decarbonisation investment plan is approved and holds back 20 percent until emission reductions are demonstrated, the international credit opening ring-fences 260 million allowances for 2036-2040, and the Industrial Decarbonisation Bank reserves 400 million allowances for carbon premia in its first phase from 2028 to 2031.
The schedule this proposal would unwind was written by the 2023 ETS reform inside the Fit for 55 package, which coupled the CBAM phase-in to the free-allocation phase-out in the first place. That coupling survives; only its speed changes.
What does not change for 2026 and 2027
The proposal leaves every current CBAM obligation untouched: the 2.5 percent CBAM factor for 2026, the 5 percent factor for 2027, certificate sales from February 1, 2027, and the first declaration deadline of September 30, 2027 all stand. Four fixed points continue to anchor near-term compliance planning:
- The CBAM factor stays at 2.5 percent for 2026 imports and 5 percent for 2027 imports.
- CBAM certificates go on sale February 1, 2027, with the 50 percent quarterly holding requirement applying from that point.
- The first annual declaration, covering calendar year 2026, remains due September 30, 2027.
- Authorization, registry, and verification rules under Regulation (EU) 2023/956 continue unchanged.
The purchasing mechanics themselves sit in a separate workstream: the Commission is consulting on the sale and repurchase rules for February 2027 regardless of what happens to the ETS file.
How the certificate cost trajectory would flatten from 2028
Returning 15 percent of the phased-out free allocation would cut the number of certificates importers must surrender for 2028 and every year through 2037, with the 100 percent CBAM factor arriving in 2038 instead of 2034. The current-law baseline shows what is at stake.
| Year | CBAM factor under current law | Under COM(2026) 616 |
|---|---|---|
| 2026 | 2.5% | Unchanged |
| 2027 | 5% | Unchanged |
| 2028 | 10% | Reduced: 15% of phased-out allocation returns |
| 2030 | 48.5% | Reduced |
| 2034 | 100% | Below 100% |
| 2038 | 100% | 100%: phase-out completes |
The steep section of the current free allocation phase-out schedule runs from 2029 to 2034, when the factor jumps from 22.5 percent to 100 percent. That stretch is where the proposal's flattening carries the largest budget effect. An importer of blast furnace steel at roughly 2.0 tCO₂ per tonne can keep its 2026-2027 certificate numbers exactly as modeled and treat the current schedule from 2028 onward as the ceiling scenario until co-legislators fix the final factors.
Certificate prices are a separate variable from certificate volumes. CBAM certificates are priced off the EU ETS, and EUA prices held around EUR 80 to EUR 82 in the sessions after the announcement, a muted reaction for a package of this size. The proposal therefore shifts expected certificate volumes, not the price mechanics behind the CBAM certificate price forecast 2027.
Reactions split along familiar lines
Environmental groups called the proposal a retreat that delays CBAM, while steel and aluminium producers warned the package still leaves their competitiveness exposed. The European Environmental Bureau headlined its assessment "Commission caves to industrial laggards," arguing that extending free allowances to 2038 rewards emitters without requiring real decarbonisation investment from a system that has cut covered-sector emissions by 50 percent since its introduction. Duncan Woods, Senior Policy Officer for Industrial Decarbonisation at the EEB, called the ETS "Europe's engine for industrial renewal" and warned that "weakening the carbon market means weakening Europe's competitive edge."
Bellona's Francesco Lombardi Stocchetti made the CBAM link explicit: "By delaying the phase-out of free allowances and CBAM's full implementation, the Commission risks squandering the EU's credibility with investors and trading partners alike."
Industry read the same text the opposite way. Eurofer and European Aluminium warned the package risks European competitiveness, positions consistent with the wider industry battle lines before the September plenary, where steel is pushing for a stronger CBAM and aluminium for a pause.
What happens next
Co-decision on the EU ETS revision runs through 2026 and 2027, with the Commission targeting political agreement by early 2027. The file follows the ordinary legislative procedure, and the free-allocation reintroduction is likely to be among the most contested provisions before adoption. Three checkpoints matter for importers:
- The European Parliament's committee report and the Council's general approach, expected over the coming months.
- Trilogue negotiations, which the early 2027 target implies would conclude in the first quarter.
- The parallel CBAM review, where the ENVI position on downstream expansion heads to the September plenary on a separate track.
Until any of that becomes law, budget against the rules as they stand. Every confirmed date remains in the CBAM timeline, and it changes only if and when COM(2026) 616 is adopted.