The European Union is considering a change to the Emissions Trading System (ETS) that would extend the period during which European manufacturers receive free carbon allowances. The proposal comes as importers enter the first year of binding Carbon Border Adjustment Mechanism (CBAM) obligations. The interaction between the two instruments is central to EU industrial and climate policy discussions.
The European Commission’s proposed changes would lengthen the time before free allocations for sectors covered by CBAM reach zero. Under the existing framework, free allowances are scheduled to disappear progressively and reach zero in 2034. In its July 2026 ETS revision proposal, the Commission would extend that deadline to 2038, slowing the withdrawal of allocations.
ETS and CBAM timelines linked through transitional certificate adjustments
The ETS and CBAM were designed to operate in parallel. The ETS sets a carbon price for emissions from installations within the EU, while CBAM applies a corresponding carbon cost to selected imported products. During the transition, adjustments to CBAM certificate obligations are intended to reflect the free allowances still available to European producers.
This transitional design aims to prevent imported products, including steel and cement, from facing the full carbon charge while EU manufacturers continue receiving benchmark-based free allocations. At the same time, the framework does not produce identical carbon costs across all industrial installations. Operational efficiency, product composition, emissions accounting boundaries, and national support schemes can affect how much carbon exposure individual facilities face.
Under the Commission’s proposed timetable, European industrial installations would keep free allocations for longer than currently planned. Brussels says manufacturers need additional time and investment support to complete decarbonisation projects while maintaining their position against international competitors. For importers, a longer phase-out could moderate how quickly CBAM exposure increases.
For producers outside the EU, the revised schedule would alter when competitive effects tied to product carbon intensity emerge. The extension remains subject to the EU legislative process and is not an adopted exemption from existing CBAM-related obligations. Importers therefore continue operating under binding requirements while legislative outcomes remain uncertain.
Sector-specific decarbonisation costs shape competitiveness considerations
The implications differ across industrial sectors covered by carbon pricing and border adjustment. Integrated steelworks would need substantial capital expenditure to replace or modify production technologies. Cement producers face emissions reductions linked both to fuel combustion and limestone processing.
Aluminium smelters must manage electricity procurement costs alongside improvements in production efficiency. A carbon price can encourage investment in lower-emission production, but it can also add pressure on industrial margins where financing access, suitable technologies, and supporting infrastructure are limited. The Commission’s approach seeks to address this through ETS revenues and investment-linked allocation mechanisms.
Access to support is not uniform between EU installations and producers located outside the EU. That difference can create distinct conditions for companies competing in the same markets even when they face similar product categories under trade flows. The policy challenge described in the proposal discussions is maintaining incentives for emissions reductions without accelerating relocation of industrial investment to jurisdictions with less stringent carbon constraints.
CBAM compliance depends on regulatory eligibility, verified emissions and settlement terms
For companies importing covered products, managing CBAM exposure involves three areas: regulatory eligibility, emissions performance, and financial settlement. Regulatory checks start with correct customs classification, confirmation of the declarant’s authorisation status, and verification that the imported product falls within CBAM’s scope.
The technical assessment focuses on emissions generated at the producing installation, relevant upstream inputs, and whether verified actual emissions data are available. Replacing default values with reliable installation-specific information can affect how much carbon exposure an imported product carries under CBAM calculations.
The financial assessment covers official CBAM certificate reference prices, deductions for eligible carbon payments made in the country of production, certificate purchasing dates, and how costs are allocated through commercial contracts. These elements can create different compliance risks within a single business operation.
A company may complete regulatory preparations but lack reliable emissions data, or it may have verified production information while facing uncertainty about how carbon costs are treated in contracts. Separating these assessments helps identify whether exposure stems mainly from regulatory requirements, reporting shortcomings at factory level, or missing commercial arrangements. It also prevents projected carbon prices from being treated as a complete proxy for CBAM compliance costs.
Free allocation changes introduce contract uncertainty for cross-border supply
The proposed extension of the free allowance phase-out has implications for trade agreements and industrial procurement. Importers and suppliers need clarity on which contractual party bears financial consequences of carbon pricing. They also need agreement on who guarantees embedded-emissions information and how additional costs are allocated if rules change after a shipment price has been set.
Contracts based on a fixed assumed CBAM charge may become exposed if ETS carbon prices change or if adjustments occur to the free allocation timetable. This uncertainty can affect both buyers and sellers, particularly where agreements cover deliveries over extended periods rather than single shipments.
Scenario-based pricing is described as a more appropriate framework than relying on one forecasted carbon-cost figure. Supply agreement terms increasingly need to account for changes in carbon pricing levels, requirements for emissions verification, and timing of regulatory adjustments that may occur after contract signing.
Western Balkans electricity exports face different CBAM exposure requirements
In the Western Balkans, CBAM-related challenges are described as particularly complex for electricity exports. Electricity may be subject to a substantially sharper carbon adjustment than industrial products that benefit from transitional benchmark relief under CBAM arrangements.
Domestic carbon taxes may reduce amounts payable under CBAM where relevant payments meet eligibility requirements and can be properly documented. Establishing origin and emissions characteristics of electricity deliveries is also identified as critical for determining how obligations apply.
A renewable electricity producer able to provide credible evidence of generation may have a different compliance position than a power trader that cannot demonstrate origin of electricity included in a scheduled delivery. As a result, commercial implications for exporters extend beyond regulatory design alone.
Technical reporting, generation documentation, and physical arrangements governing cross-border electricity deliveries influence how exports are treated under CBAM rules. These requirements create different exposure levels for renewable generators, electricity traders, and industrial exporters operating within the region.
Legislative process leaves firms managing two ETS-CBAM timelines
The Commission’s proposed endpoint of 2038 adds another variable into how Europe’s carbon pricing system interacts with its border adjustment mechanism. Policymakers would need to decide whether extending free allocations preserves industrial competitiveness while providing sufficient time for investment without weakening incentives to reduce emissions.
For manufacturers, importers, and international suppliers, distinguishing between obligations already applicable in 2026 and potential legislative changes affecting later years is described as essential for planning compliance activities. The existing ETS and CBAM framework continues to provide the basis for current compliance requirements.
The proposed revision remains subject to the legislative process rather than being adopted already. Businesses therefore face binding obligations alongside uncertainty about how quickly free allocation withdrawal will proceed and what that will mean for cross-border industrial trade under CBAM.