The European Commission is preparing a reform of the EU Emissions Trading System (ETS) that would adjust the timing and financing model for Europe’s industrial transition. Brussels is considering a slower reduction in the supply of ETS allowances after 2030, longer access to free allocations for selected energy-intensive sectors, and a more gradual introduction of the Carbon Border Adjustment Mechanism (CBAM). The changes are presented as a restructuring of how industrial decarbonisation is supported rather than a change in climate policy direction.
Alongside the carbon-market adjustments, the Commission is accelerating electrification across industry, transport and heating. The approach combines temporary relief from carbon costs with incentives for companies to replace fossil-fuel use with low-carbon technologies. The reform package links ETS and CBAM design with electrification measures planned under the Commission’s broader policy agenda.
Revised ETS allowance reduction and extended free allocation
Under the proposed framework, the ETS linear reduction factor would decline more gradually. It would fall from 4.3% to around 3.7% between 2031 and 2035 before reaching 1.7% from 2036 onward. This adjustment would change the pace at which allowances are reduced over time.
Free carbon allowances for sectors including steel and cement would remain available until 2038. The extension would provide support for four additional years compared with earlier plans. The Commission’s proposal also includes stricter conditions for businesses receiving free allocations.
CBAM transition delay and conditions for free allocation recipients
The full transition period for CBAM would be delayed until 2038. The change would give companies additional time to adjust to the carbon-border regime. At the same time, businesses receiving free allowances would face updated requirements tied to investment delivery.
Companies investing in EU-based decarbonisation projects would receive 80% of their free allocation upfront. The remaining 20% would depend on completing investments and providing proof that emissions-reduction measures have been delivered. The structure is designed to connect support with verified outcomes.
Investment performance requirements for energy-intensive industries
The Commission’s proposal shifts free allowances toward an investment-performance model rather than traditional carbon-cost protection. Free allocations would increasingly function as support for industrial modernisation instead of a permanent shield from international competition pressures. This change affects how covered facilities maintain eligibility for carbon support.
Steelmakers, cement producers, fertiliser manufacturers, refineries and other covered industrial facilities would need to demonstrate detailed engineering plans. They would also be required to show secured financing, project implementation progress, and measurable emissions reductions to preserve the value of carbon support. These elements are part of the conditions attached to continued access to free allocations.
ETS auction revenue earmarking for decarbonisation projects
The Commission proposes that at least 50% of ETS auction revenues be directed toward decarbonisation projects in covered sectors. Since 2013, the carbon market has generated approximately €260 billion. Under the proposal, directing a larger share of these funds could increase financing available for industrial transformation.
The Commission links this revenue redirection to persistent challenges in financing alternative technologies at the required speed. Redirecting ETS revenues toward industrial investment is intended to strengthen the relationship between carbon pricing and emissions reductions achieved through deployed measures. The proposal therefore ties auction funding more directly to project delivery in covered industries.
Electrification targets and implications for electricity demand
The reform is linked with the Commission’s Electrification Action Plan, which aims to increase electricity’s role in the European economy. Electricity currently represents around 23% of EU final energy consumption, while approximately 70% of electricity generation already comes from domestic low-carbon sources. Brussels is targeting an electricity share of around 46% of final energy demand by 2040.
The Commission argues that faster electrification could reduce Europe’s fossil-fuel import costs by approximately €260 billion annually. It also notes that achieving this target requires more than additional renewable generation capacity. Industrial electrification, electric vehicles, heat pumps, electrolysers and data centres are expected to significantly increase electricity demand and affect peak-load management needs.
The proposal highlights grid expansion, energy storage, demand-response systems, smart meters and long-term electricity supply contracts as essential components for industrial competitiveness. It also points to flexibility regarding electricity taxation and network charges as recognition that electrified industries may face competitiveness risks if electricity regulatory and fiscal costs remain higher than those associated with fossil fuels. For companies switching from gas-based processes to electric alternatives, electricity pricing structures are described as important alongside renewable power availability.
Southeast Europe exposure through CBAM implementation and reporting demands
The implications extend directly to Serbia, Bosnia and Herzegovina, Montenegro and North Macedonia. Companies exporting goods to EU markets may receive additional time before CBAM reaches its full implementation stage, while policy direction remains unchanged overall. The timeline adjustment affects how quickly export-facing obligations are expected to apply.
European buyers are expected to continue demanding more detailed installation-level emissions data. They are also expected to seek supply-chain traceability and verified low-carbon electricity credentials from suppliers. A delayed carbon-cost impact does not remove future compliance expectations tied to these information requirements.
Operational priorities for industrial firms in Southeast Europe
The source outlines three areas of action for industrial companies across Southeast Europe. The first is improving process efficiency to reduce emissions in the short term. The second is securing renewable or low-carbon electricity through contracts supported by transparent monitoring and verification systems.
The third area involves preparing larger technology replacement projects supported by EU programmes, development banks or commercial financing. Even with reduced immediate pressure from rising carbon costs under the reform proposal, it increases emphasis on credible engineering solutions, measurable results and transparent verification. Companies demonstrating real decarbonisation progress are described as likely to be better positioned than those relying only on temporary carbon relief without an investment pathway.