EU Unveils Sweeping ETS Overhaul With €100 Billion Industrial Decarbonisation Bank

The European Commission has published its long-awaited reform of the EU Emissions Trading System (EU ETS), setting the rules for the bloc's carbon market through 2040. The proposal, released on July 17, 2026, aims to keep industry competitive while locking in the EU's 90% emissions cut target for 2040.

At the center of the plan is a new Industrial Decarbonisation Bank (IDB), which will channel up to €100 billion into industrial decarbonisation projects across the bloc. An early phase called the ETS Investment Booster will roll out an estimated €30 billion before 2030 to reward companies that move first on cleaning up their operations.

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What Changes Under the Reform

The reform adjusts the pace at which emissions allowances shrink, updating the Linear Reduction Factor to 3.7% a year from 2031 to 2035, then 1.7% from 2036 to 2040. That's a slower trajectory than the current 4.3-4.4% rate, giving industry more breathing room to plan long-term investments.

The plan also folds in up to 250 million tonnes of high-quality domestic carbon removals and opens the door to international credits from 2036 onward, capped at 2% of the EU's emissions space to protect the integrity of the 90% target.

Support for Member States and Industry

Member states will now be required to put 50% of their national ETS revenues toward decarbonizing ETS-covered sectors. The Innovation Fund stays in place to help bring first-of-a-kind low-carbon tech to market, while the Modernisation Fund continues supporting lower-income member states as they upgrade their energy systems.

Free allocation for industry will extend beyond 2030, but companies will need to commit to "Invest in EU Decarbonisation Plans" and put the full value of their free allowances into decarbonisation projects to keep getting that support. Sectors covered by the Carbon Border Adjustment Mechanism (CBAM) will see their free allocation phase-out extended to 2038.

Aviation and Maritime Get New Rules

The ETS will expand to cover smaller vessels between 400 and 5,000 gross tonnage and will stay closely aligned with the International Maritime Organization (IMO)'s emerging global carbon framework to avoid double pricing. On the aviation side, the ETS scope grows to cover flights departing to destinations within 5,000 km of the EU, while the Commission continues coordinating with CORSIA to prevent airlines from paying twice for the same emissions.

Earlier this year, EU Commission President Ursula von der Leyen pointed to the need to modernise the system and make it more flexible, framing the update as a way to keep the ETS effective without losing its edge as an investment driver.

Industry Impact

Since 2013, the EU ETS has generated more than €270 billion in revenue, and the Commission expects the new reforms to unlock over €100 billion in additional investment before 2030 through the IDB, the Investment Booster, and required member state spending. The proposal now moves to the European Parliament and Council for negotiation, a process expected to run through 2027.

About the European Commission

The European Commission is the executive branch of the European Union, responsible for proposing legislation, implementing decisions, and managing the day-to-day business of the EU, including climate and energy policy across all 27 member states.

Source: ESG Today