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ARTICLE · 23 JULY 2026

The Revision Of The EU Emissions Trading System

A&O Shearman
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The European Commission has unveiled a comprehensive proposal to revise the EU Emissions Trading System Directive, introducing significant changes including alignment with 2040 climate targets, integration of carbon removal mechanisms, and establishment of a EUR100 billion Industrial Decarbonisation Bank. The proposal extends the ETS scope to additional aviation routes, smaller maritime vessels, and municipal waste incineration while reforming free allocation rules and the Market Stability Reserve to balanc

European UnionEnvironment
Gauthier van Thuyne
Gauthier van Thuyne
Alexander Pirard
Alexander Pirard
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The European Commission (“Commission”) has published its proposal to review Directive 2003/87/EC (“EU ETS Directive”) under the title “proposal for a directive amending Directive 2003/87/EC and Decision (EU) 2015/1814 as regards driving competitiveness and cost-effective decarbonisation”1, with document reference 2026/0212 (COD). 

The key elements of the proposal are: 

  1. alignment of the Emissions Trading System (ETS) cap with the 2040 climate target by reducing the linear reduction factor (LRF) to 3.7% for 2031–2035 and 1.7% for 2036–2040, allowing continued issuance of allowances into the 2040s
  2. the introduction of a mechanism under which up to 260 million allowances may be set aside for the Commission by which the Commission may fund its purchase of up to 260 Mt of high-quality, high-integrity international credits, contributing to ETS-sector ambition from 2036 to 2040, while complementing domestic action and resulting in a domestic reduction target of -85% compared to 1990 

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