A European Commission July 2026 revision to the EU emissions trading system (ETS) would extend the free allowance phase-out for sectors covered by the Carbon Border Adjustment Mechanism (CBAM) from 2034 to 2038. The change would adjust the timetable used to link domestic carbon costs with charges applied to imports. The proposal would affect steel, aluminium, cement and fertiliser suppliers trading with the EU.
The extension would not suspend CBAM or remove importers’ certificate obligations. Instead, it would modify how free allocation is withdrawn for European manufacturers and, as a result, how adjustments are reflected in CBAM calculations. For firms operating under EU trade rules, the difference between existing legislation and the proposed timetable could influence investment decisions, supply agreements and the financial exposure of individual production facilities.
ETS revision alters CBAM-linked free allocation timetable
Under the current framework, the CBAM factor used in ETS free-allocation calculations is 97.5% in 2026. It declines to 95% in 2027, 90% in 2028 and 77.5% in 2029, continuing downward toward zero by 2034. The percentages describe a benchmark-based reduction trajectory for free allocation rather than a direct share of embedded emissions excluded from CBAM liability.
CBAM certificate obligations are calculated using multiple inputs beyond any single factor. These include the product’s embedded emissions, the applicable benchmark adjustment, qualifying carbon payments made outside the EU and the relevant ETS-linked certificate price. Treating the CBAM factor as a simple discount applied to every tonne of imported material would therefore not reflect actual liability.
The Commission’s proposal would restore part of the free allocation that would otherwise be 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.
Embedded emissions performance drives different import outcomes
For individual suppliers, outcomes 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 results if one operates near the applicable European benchmark while another has substantially higher embedded emissions. Even with exposure to the same ETS-linked reference price, certificate requirements can differ due to emissions performance.
A slower reduction in benchmark-related adjustments changes when these differences translate into higher carbon costs. It does not remove incentives tied to reducing production emissions. The same structure applies to clinker-intensive cement and primary aluminium, although sector-specific emissions boundaries and benchmarks vary.
The financial effects can also extend beyond the final years of the phase-out. Because intermediate factors would change under the proposed schedule, industrial projects commissioned in 2029 or 2031 could face different carbon allocation conditions during their initial years compared with the existing legislative timetable.
Long-term investment modelling depends on annual carbon cost scenarios
For energy-intensive manufacturers, the length of the free allocation period is a key variable when assessing long-term upgrades. 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 would also account for 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 if carbon charges change under the applicable timetable.
These different outcomes can affect project internal rates of return, borrowing capacity and negotiation positions between manufacturers and their customers. The regulatory trajectory can therefore matter when evaluating investments such as new burners, industrial furnaces, electrification systems and carbon capture technologies.
Supply contracts face uncertainty if ETS schedule changes
The proposal also introduces regulatory risk for companies negotiating long-term supply agreements with European customers. An exporter could agree a multi-year delivery price based on the existing phase-out schedule and later face a modified EU timetable adopted after contract signing. Without contractual provisions addressing such changes, disputes could arise over allocation of additional or reduced carbon-related costs.
Supply agreements may therefore need mechanisms that accommodate both the current legislative framework and a potentially revised ETS schedule. Verified installation-level emissions information is also relevant commercially because it can help suppliers demonstrate changes in embedded emissions more accurately.
Where companies rely on default values, visibility may be limited until relevant administrative figures become available. Emissions reporting quality can therefore influence not only compliance but also exporters’ ability to negotiate prices and allocate carbon-related risks with EU buyers.
Free allocation conditions remain relevant for EU producers
European producers receiving ETS free allowances remain subject to allocation conditions tied to benchmark performance and production volumes. Efficiency requirements and proposed future investment obligations also influence eligibility and support levels. This approach aligns with CBAM’s aim of creating comparable carbon-cost treatment 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 facilities. For companies assessing future investments and trade exposure, distinguishing between the current legal framework and the Commission’s proposed revision remains important because current rules provide withdrawal of free allowances by 2034 while the proposal extends it until 2038.
Industrial investment assessments would need to model both regulatory scenarios separately using realistic ETS price ranges and installation-specific emissions data. The eventual legislative timetable would determine when import-related carbon costs increase most significantly, while each facility’s technology choices and emissions performance would determine how much exposure can be reduced.