A European Commission July 2026 ETS revision would extend the free allowance phase-out for CBAM-covered sectors from 2034 to 2038. The change would update the timetable used to link domestic carbon costs with charges applied to imports. The proposal would apply to sectors including steel, aluminium, cement and fertiliser supply chains.
The extension would not suspend the Carbon Border Adjustment Mechanism (CBAM) or remove importers’ certificate obligations. Instead, it would modify the pace at which European manufacturers’ free allocation is withdrawn. For companies trading with the EU, differences between current legislation and the proposed timetable could affect investment decisions, supply agreements and the financial exposure of individual production facilities.
ETS revision alters the CBAM adjustment timetable
Under the existing framework, the CBAM factor used in ETS free-allocation calculations is set at 97.5% in 2026. It declines to 95% in 2027, 90% in 2028 and 77.5% in 2029, continuing downwards toward zero in 2034. These percentages reflect a reduction trajectory tied to benchmark-based free allocation.
The factor does not represent the share of an importer’s embedded emissions that can be excluded from CBAM liability. CBAM certificate obligations also depend on embedded emissions for the product, the relevant benchmark adjustment, qualifying carbon payments made outside the EU and the ETS-linked certificate price. Because of these elements, applying the CBAM factor as a simple discount to every tonne imported would not match actual liability.
The Commission’s proposal would restore part of the free allocation otherwise removed through the CBAM factor starting in 2028. Under the proposed schedule, the factor would be 91.5% in 2028, 81% in 2029 and 59% in 2030. The revised trajectory would then continue downward to reach 15% throughout 2034–2037 before falling to zero in 2038.
Supplier emissions performance affects import cost outcomes
Impacts for individual exporters depend on production emissions rather than only on headline carbon allowance prices. Two manufacturers exporting the same covered steel product into the EU could face different CBAM outcomes if one operates close to the applicable European benchmark while another has substantially higher embedded emissions. Even under a shared ETS-linked reference price, certificate requirements can differ due to emissions performance.
A slower reduction in benchmark-related adjustments changes when those differences translate into higher carbon costs. It does not remove incentives to reduce production emissions. The same approach applies across clinker-intensive cement and primary aluminium, though each sector uses different emissions boundaries and benchmarks.
The treatment of each product therefore needs to reflect its specific production characteristics and its applicable calculation methodology. The financial implications can also extend beyond the final years of the phase-out because intermediate factors are modified by the Commission proposal. Industrial projects commissioned in 2029 or 2031 could operate under different carbon allocation conditions during their initial years compared with the current legislative timetable.
Carbon cost scenarios influence long-term industrial upgrades
For energy-intensive manufacturers, the duration of free allocation is a key variable when assessing long-term upgrade economics. An illustrative process modernisation investment of EUR 50 million would require annual assessment of expected production volumes and verified emissions reductions. It would also need consideration of maintenance downtime and contractual provisions governing how carbon costs are passed on to customers.
The investment assessment must also account for potential commercial value linked to lower emissions performance. A manufacturer may seek to retain benefits through higher margins tied to improved emissions outcomes. Alternatively, customers could request lower delivered prices as applicable carbon charges change.
These outcomes can affect project internal rates of return, borrowing capacity and negotiations between manufacturers and their customers. The regulatory trajectory can therefore matter when companies evaluate investments such as new burners, industrial furnaces, electrification systems and carbon capture technologies. For assets with long operating lifetimes, expected allocation conditions over several years may be as relevant as current allowance quotations.
Long-term export contracts face uncertainty over future CBAM rules
The proposed revision introduces regulatory risk for companies negotiating long-term supply agreements with European customers. An exporter could agree a multi-year delivery price based on an existing phase-out schedule that later changes due to a modified timetable adopted by the EU. Without contract provisions addressing such changes, disputes could arise over allocation of additional or reduced carbon-related costs.
Supply agreements may therefore need mechanisms that can accommodate both current legislation and a potentially revised ETS schedule. Verified installation-level emissions information is also described as an important commercial consideration for suppliers. Suppliers with reliable production data can demonstrate changes in embedded emissions more accurately than those relying on default values.
Where default values are used, visibility may be limited until relevant administrative figures become available. Emissions reporting quality affects both regulatory compliance and exporters’ ability to negotiate prices and allocate carbon-related risks with EU buyers.
Free allocation conditions remain relevant for European producers
European producers receiving ETS free allowances remain subject to allocation conditions beyond the timing of phase-out. Benchmark performance, production volumes, efficiency requirements and proposed future investment obligations influence eligibility and support amounts available under ETS rules.
This aligns with CBAM’s stated purpose of establishing a comparable carbon-cost framework for domestic production and imported goods rather than ensuring identical carbon invoices for every tonne produced inside and outside the EU. Industrial competitiveness is also affected by factors outside CBAM scope, including national state aid, electricity grid tariffs and differences in cost of capital between production locations.
For companies assessing future investments and trade exposure, distinguishing between current legislation and the Commission’s proposed revision remains important because current rules provide withdrawal of free allowances by 2034, while the proposal extends this process until 2038. Industrial investment assessments are described as needing separate modelling for both regulatory scenarios using realistic ETS price ranges and installation-specific emissions data.
The legislative timetable determines when import-related carbon costs increase most significantly under each scenario. Technology choices and emissions performance at each production facility determine how much exposure can be reduced over time as factors change under ETS-linked calculations.