Changes to the EU Emissions Trading System (EU ETS) are being presented as a source of financial and regulatory uncertainty for companies that face obligations under the Carbon Border Adjustment Mechanism (CBAM). While CBAM compliance is handled at the customs and declaration level, the cost exposure is linked to how the EU carbon market functions.
In particular, the EU ETS sets the reference price used for CBAM certificates. The EU ETS also includes free-allocation arrangements that affect how residual emissions liability is calculated for covered imports. As a result, developments in either area can shift the overall cost of CBAM compliance.
European Commission proposal targets EU ETS parameters affecting CBAM
On 17 July 2026, the European Commission proposed a targeted revision of the EU ETS. The proposal covers industrial competitiveness, free allocation, CBAM and the Market Stability Reserve (MSR).
The legislative process creates uncertainty for importers estimating future carbon costs. Changes to allowance-market conditions could affect expected EUA prices, while revisions to free-allocation rules could influence the quantity of emissions that feed into CBAM obligations.
EU ETS reform can therefore affect importers through two separate channels. One channel relates to movements in carbon prices, while the other relates to changes in how certificate requirements are calculated under CBAM.
Allowance supply and scarcity can move CBAM-linked certificate prices
The first transmission channel runs through the price of EU emissions allowances, known as EUAs. Expected availability and scarcity of allowances can influence the forward carbon-price curve used in market expectations.
If allowance availability tightens due to a tighter emissions cap or faster reduction in allowance availability, EUA values could rise. If industrial demand weakens or additional allowances enter the market, prices could face downward pressure.
Because CBAM certificate prices are linked to EU ETS auction prices, expectations about future allowance-market conditions can affect anticipated compliance expenditure. This means importers may need to track EU ETS developments even when their own operations do not involve purchasing allowances directly.
Free allocation rules affect residual emissions volumes used for CBAM
The second transmission channel concerns how CBAM interacts with free allocation for EU industrial producers. The CBAM framework was designed to be phased in alongside reductions in free allowances allocated to covered sectors under the EU ETS.
As a result, an importer’s effective certificate obligation cannot be derived by simply multiplying embedded emissions by an expected EUA price. The applicable free-allocation adjustment and benchmark methodology also determine which emissions quantities are used for calculating CBAM obligations.
This creates regulatory exposure that is distinct from carbon-price movements. Even if expected EUA prices remain unchanged, modifications to how residual emissions are calculated under CBAM could change an importer’s financial liability.
Treasury hedging manages market risk but not legislative calculation changes
The separation between price exposure and regulatory exposure affects corporate treasury planning. Companies can use EUA futures, options and swaps, along with staged purchasing strategies, to manage expected movements in carbon prices.
However, these instruments cannot fully protect importers from legislative changes that alter the quantity of emissions covered by their CBAM obligation. That gap creates basis risk between financial hedges and the underlying regulatory liability.
Treasury teams therefore need to distinguish market risk from policy risk. Market exposure can be managed using carbon-market instruments, while regulatory uncertainty requires contractual change-in-law provisions and ongoing reassessment of hedge ratios and exposure limits.
Banks and traders assess credit risk across both price and policy channels
The same distinction applies to banks and commodity traders assessing creditworthiness for companies importing goods covered by CBAM. A borrower may hedge expected EUA price exposure but still face vulnerability if the methodology used to calculate its CBAM liability changes.
A credit assessment based only on a carbon-price hedge could therefore underestimate remaining exposure. Credit analysis needs to combine EUA price stress tests with regulatory scenarios that cover potential changes involving free allocation, allowance supply and the CBAM calculation itself.
For lenders and commodity financiers, carbon exposure includes both a market-price component and a legislative component. Treating them as a single financial risk could leave changes in future compliance costs outside the assessment.