EU Emissions Trading System

The EU Emissions Trading System (EU ETS) is the EU’s flagship climate policy and a central pillar of the European Green Deal and Fit for 55 package. Following the 2023 reform, the EU increased the system’s greenhouse gas emission reduction target to 62% by 2030 compared with 2005 levels. It also strengthened the Linear Reduction Factor from 2.2% to 4.3% for 2024–2027 and to 4.4% from 2028 onwards.

Under the revised framework, the most efficient installations are exempt from the cross-sectoral correction factor. Installations must implement energy-efficiency measures as required by the Energy Efficiency Directive. If these requirements are ignored, free allocation can be reduced by 20%. Those performing above the 80th percentile of their benchmark curve must establish Climate Neutrality Plans to avoid a reduction in free allowances.

For steel, iron, cement, fertilisers, aluminium, electricity and hydrogen, policymakers agreed to gradually phase out free allocation while phasing in the Carbon Border Adjustment Mechanism from 2026.

A separate emissions trading system for fuel combustion in road transport, buildings and additional sectors, known as ETS2, will regulate fuel suppliers from 2028. It aims to reduce emissions by 42% by 2030 compared with 2005 levels.

Proposed post-2030 review

In July 2026, the European Commission proposed a further review of the ETS Directive for the post-2030 period. The proposal includes, among the others:

  • A review of the Market Stability Reserve.
  • An amended Linear Reduction Factor, with a slower decrease from 2031.
  • The integration of domestic permanent carbon removals and high-quality international carbon credits.
  • New conditionality requirements linking free allocation to investment plans and emission reductions.
  • A slower phase-out of free allocation for CBAM sectors than the trajectory established in the 2023 revision.
  • A revised accounting framework for carbon dioxide captured and used in non-permanent products and fuels.

FuelsEurope’s position and recommendations

FuelsEurope supports the EU ETS as a cost-effective market mechanism for reducing emissions in the power and industrial sectors. It has also consistently supported a global emissions trading system covering as many societal emissions as possible.

However, the current framework does not provide a viable investment case for the large-scale decarbonisation of trade-exposed and hard-to-abate industries. Rising carbon costs, declining free allocation, regulatory uncertainty, limited demand for low-carbon products and insufficient enabling infrastructure risk driving investment outside Europe rather than accelerating industrial decarbonisation within it.

FuelsEurope therefore calls for the following actions:

  • Ensure strong, consistent and long-term carbon leakage protection for trade-exposed industrial sectors. Avoid conditionality mechanisms that undermine the primary purpose of free allocation.
  • Include domestic permanent carbon removals and high-integrity international credits from 2031.
  • Introduce an effective and structural solution for export-related carbon leakage in the CBAM framework.
  • Preserve the integrity of the internal market and ensure equal treatment by requiring all Member States to provide indirect cost compensation.
  • Incentivise carbon capture and utilisation to produce fuels, in alignment with the Renewable Energy Directive.
  • Create demand for renewable and low-carbon products to unlock the business case for investment.

Industrial competitiveness also has a social dimension. If EU industry relocates, Europe could lose jobs, become more dependent on imports and face impacts on its trade balance and energy security.