A European Commission July 2026 proposal to revise the EU Emissions Trading System would extend the free allowance phase-out for CBAM-covered sectors 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 Commission’s plan would not suspend the Carbon Border Adjustment Mechanism (CBAM) or remove importers’ certificate obligations. Instead, it would modify how free allocation is withdrawn for European manufacturers, which in turn changes the adjustments used in CBAM calculations. For firms operating under the EU framework, differences between current legislation and the proposed timetable could influence investment decisions and supply arrangements.
ETS revision shifts 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 downward toward zero by 2034. These percentages reflect a reduction trajectory tied to benchmark-based free allocation.
The CBAM factor does not represent the share of an importer’s embedded emissions that can be excluded from CBAM liability on an automatic basis. CBAM certificate obligations also depend on embedded emissions, benchmark adjustments, qualifying carbon payments made outside the EU and the relevant ETS-linked certificate price. Using the CBAM factor as a simple discount on every tonne of imported material would therefore not match 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. In the proposed schedule, the factor would rise to 91.5% in 2028, then fall to 81% in 2029 and 59% in 2030. After that, it would continue downwards to 15% across 2034–2037.
The revised trajectory would then reach zero in 2038. The proposal therefore alters both the final withdrawal date for free allowances and intermediate annual adjustments compared with the timetable currently in force. This change affects how quickly imported products become exposed to increasing carbon costs under CBAM-linked calculations.
Embedded emissions drive different outcomes for importers
The impact on individual suppliers depends 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 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 higher carbon costs emerge for particular suppliers. It does not remove incentives tied to reducing production emissions. The same structure applies across other covered products.
For clinker-intensive cement and primary aluminium, sector-specific emissions boundaries and benchmarks apply. The treatment of each product must reflect its production characteristics and applicable calculation methodology under CBAM rules. As a result, differences in emissions intensity can translate into different import cost profiles across sectors.
The financial effects also extend beyond the final years of the phase-out because intermediate factors are modified by the proposal. Industrial projects commissioned in 2029 or 2031 could face different carbon allocation conditions during their early operating years than they would under the existing legislative timetable. This links regulatory timing changes directly to facility-level cost exposure.
Carbon cost scenarios affect industrial investment planning
For energy-intensive manufacturers, extending or shortening free allocation duration is a variable when assessing long-term upgrades. A process modernisation investment of EUR 50 million, used as an illustrative assumption rather than a specific project budget, would require annual assessment of expected production volumes and verified emissions reductions. It would also require consideration of maintenance downtime and contractual provisions governing carbon costs passed on to customers.
The investment assessment must also account for commercial value associated with lower emissions performance. A manufacturer may seek to retain financial benefit through higher margins tied to improved emissions outcomes. Alternatively, customers could request lower delivered prices as applicable carbon charges change.
These factors can influence internal rates of return, borrowing capacity and negotiation positions between manufacturers and their customers. The regulatory trajectory therefore matters 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 multiple years can be as relevant as current allowance quotations.
Long-term supply contracts face uncertainty over future CBAM rules
The proposed revision also creates 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 then face a modified timetable adopted by the EU later. Without contractual provisions covering 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 linked to CBAM calculations. Verified installation-level emissions data is another commercial factor because suppliers with reliable production information can assess exposure more accurately. Where companies rely on default values, visibility may be limited until relevant administrative figures are available.
The quality of emissions reporting affects compliance as well as exporters’ ability to negotiate prices and allocate carbon-related risks with EU buyers. This includes how embedded emissions information is used within CBAM certificate obligation calculations under ETS-linked parameters.
Free allocation conditions remain relevant for European producers
European producers receiving ETS free allowances remain subject to conditions governing their allocation beyond calendar timing alone. Benchmark performance, production volumes, efficiency requirements and proposed future investment obligations influence eligibility and support levels available under ETS rules.
This reflects CBAM’s purpose of creating comparable carbon-cost treatment for domestic production and imported goods rather than producing identical carbon invoices for each tonne manufactured inside and outside the EU. Other competitiveness drivers outside CBAM also continue to apply, including national state aid, electricity grid tariffs and differences in cost of capital affecting relative economics across facilities.
For companies assessing future investments and trade exposure, modelling both regulatory scenarios remains relevant because current legislation provides for withdrawal of free allowances by 2034. Under the Commission proposal, that process would extend until 2038. Industrial assessments would need realistic ETS price ranges alongside installation-specific emissions data.
The eventual legislative timetable determines when import-related carbon costs increase most significantly under CBAM-linked calculations. At facility level, technology choices and emissions performance determine how much exposure can be reduced during each period of changing allocation factors.