Introduction

On July 17, 2026, the European Commission tabled its long-awaited proposal to reform the EU Emissions Trading System, setting the legal framework for Phase 5 of the market from 2031 through 2040. For import compliance leads, carbon strategy teams, and sustainability executives managing exposure under the Carbon Border Adjustment Mechanism (CBAM), covering goods such as steel, aluminium, and cement, this reform proposal arrives alongside an EU ETS price trading between EUR 79.4 and EUR 81.8 per tonne in July 2026, meaning certificate cost exposure and long-term compliance planning are both moving at the same time. This article explains what changed on July 17, how it compares to current price conditions, and what CBAM importers should do next.

Key Takeaways

• The European Commission proposed a Phase 5 ETS framework (2031 to 2040) aligned with the EU’s 90 percent net emissions reduction target by 2040.
• EU carbon prices traded between EUR 79.4 and EUR 81.8 per tonne in July 2026, with the market closely watching the reform announcement.
• The proposal includes a slower Linear Reduction Factor, extended free allocation tied to industrial investment, and a more flexible Market Stability Reserve.
• A proposed Industrial Decarbonisation Bank with a EUR 100 billion budget would help finance industrial emissions reduction projects.
• CBAM’s core obligations, including the September 30, 2027 certificate surrender deadline and the 50-tonne de minimis threshold, remain fixed regardless of how the ETS reform negotiations conclude.

What Did the European Commission Propose on July 17, 2026?

The Commission’s proposal sets the legal framework for Phase 5 of the EU ETS (2031 to 2040), aligning the trading system with the EU’s target of a 90 percent net emissions reduction by 2040. The review is mandated under the EU ETS Directive as a periodic system assessment.

• Goal: provide relief for industry while keeping the ETS central to the EU’s climate strategy.
• Paired with a separate Electrification Action Plan targeting 46 percent of final energy consumption from electricity by 2040, roughly double today’s share.
• Relevance for CBAM importers: the ETS price is the direct input for CBAM certificate costs, so a reform reshaping long-term allowance supply will eventually affect that price, even though CBAM’s near-term rules are unchanged.

Key Structural Changes: Linear Reduction Factor, Free Allocation, and the Market Stability Reserve

Three proposed changes ease the pace of tightening for industry while keeping the 2040 target intact:

• Linear Reduction Factor: slows to 3.7 percent per year (2031 to 2035) and 1.7 percent per year (2036 to 2040), down from the current 4.3 percent.
  
• Free allocation: continues beyond 2030, tied more closely to companies’ decarbonization investment; a companion benchmarks proposal would add EUR 6 billion in free allocation for 2026 to 2030.
  
• Market Stability Reserve: withdrawal rate for surplus allowances falls from 24 percent to 12 percent, keeping more allowances in circulation longer.

Together, these signal a more gradual, industry-accommodating path than the ETS has followed to date.

The €100 Billion Industrial Decarbonisation Bank and International Credits

The Commission proposed an Industrial Decarbonisation Bank with a EUR 100 billion budget to finance industrial decarbonization projects and return more ETS revenue to the sectors it covers. This responds to industry criticism that reinvestment has historically been low, with one estimate citing a rate as low as 5 percent.

From 2036 onward, high-quality international carbon credits could cover up to 2 percent of required emissions reductions, though operators would not be permitted to surrender international credits directly within the ETS.

How Does the Reform Proposal Compare to Today’s ETS Price Environment?

• July 2026 range: EUR 79.4 to EUR 81.8 per tonne (EUA December 2026 contract), peaking July 6; mid-month prices held above EUR 80, partly on speculative positioning ahead of the reform announcement, per Carbon Pulse.
  
• April 2026 comparison: EUR 74.8 per tonne, itself a seven-week high at the time following earlier Market Stability Reserve adjustments.
  
• Structural read: the proposed slower Linear Reduction Factor and reduced MSR withdrawal rate both point to more gradual allowance-supply tightening than previously expected for 2031 to 2040, a factor worth weighing in medium-term cost forecasts separate from short-term volatility.

The July 17 proposal is a legislative starting point, not a finalized rule. Co-decision between Parliament and the Council is expected to run through 2026 and into 2027, with implementation targeted for 2028.

What Is Fixed vs. What Is Still in Motion for CBAM Importers

CBAM importers should distinguish between obligations that are already locked in and elements that remain under negotiation.

Preparing Your Carbon Strategy for a Multi-Year Legislative Process

With the reform now entering a legislative process running through 2027 and beyond, CBAM importers face sustained uncertainty layered on binding deadlines. Verified, product-level embedded emissions data holds its value regardless of how the negotiations conclude.

Next steps:

• the proposal’s progress through Parliament and the Council.
• Maintain supplier-verified embedded emissions records ahead of the September 2027 surrender deadline.
• Build flexibility into internal carbon cost forecasts to account for a wider price range through 2030 and beyond.

Conclusion

The July 17, 2026 ETS reform proposal marks the beginning of a multi-year process that will reshape the EU carbon market from 2031 onward, but it does not change the compliance obligations CBAM importers face today. Certificate costs will continue to track the current ETS price, currently trading between EUR 79.4 and EUR 81.8 per tonne, and the September 30, 2027 surrender deadline remains unchanged.

As this legislative process unfolds, the one constant importers can control is the accuracy of their supplier-verified, product-level embedded emissions data. This is the moment to strengthen supply chain data collection through ASUENE SUPPLY CHAIN and to establish reliable product-level carbon footprint calculation through ASUENE LCA, both built to support CBAM data requirements, so that certificate cost exposure can be forecast and managed regardless of how the reform negotiations conclude.

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