Legislation News June 2026

European Commission is preparing a major revision of ETS

The European Commission is preparing a major revision of the EU ETS, expected in July 2026, to align the system with the EU’s 2040 climate target and address rising concerns over price volatility, competitiveness, and energy security. While ETS has proven effective in reducing emissions, a tighter market and geopolitical shocks have increased the need for a more stable and predictable framework.

The reform will likely adjust the emissions cap and extend the system’s scope, including the integration of carbon removals and revisions to sectoral coverage. A central component is the reform of the Market Stability Reserve (MSR), notably by stopping the automatic cancellation of allowances above 400 million and turning the reserve into a stronger buffer to manage supply and limit volatility.

Another key pillar concerns carbon leakage. The Commission will reassess the balance between free allocation and the Carbon Border Adjustment Mechanism (CBAM). While CBAM is designed to level the playing field with imports, free allowances (currently covering around 75% of emissions in key sectors) may be progressively reduced but will likely remain for sectors not covered by CBAM or still exposed to competition.

Also for ETS2, to be introduced in 2028, undergoes an reform of the Market Stability Reserve to ensure a smooth and predictable launch. The proposal of the European Commission strengthens the MSR in three main ways. First, it introduces a stronger price safeguard: if the carbon price exceeds €45/tCO₂ (in 2020 prices), the MSR can release up to 40 million allowances per trigger, and up to 80 million annually, doubling the previous volumes. Second, it removes the rule that would have invalidated unused allowances after 2030, instead keeping a 600 million allowance buffer for long-term stability. Third, it introduces a more gradual release mechanism when the market tightens, avoiding abrupt “threshold effects” in allowance supply. In June 2026, Parliament and Council reached a provisional agreement confirming most elements of the Commission proposal, including stronger price controls and extended MSR lifetime.