Policy briefs on the revision of the European Emission Trading System (ETS)

Revision of the EU ETS: Four policy briefs on the impact of proposed changes

On 15 July 2026, the European Commission is expected to publish its revision of the EU Emissions Trading System (EU ETS). Among the expected proposals are changes to the Linear Reduction Factor (LRF), the phase-out of free allocation for industry, the introduction of conditionalities for free allocation, and amendments to the Market Stability Reserve (MSR).

At the request of Natuur & Milieu, CE Delft assessed the expected impacts of these proposals on CO₂ emissions, ETS prices and auction revenues, both at EU level and for the Netherlands. The findings are presented in four policy briefs.

Policy brief 1: Lowering the Linear Reduction Factor (LRF)

This policy brief assesses the impact of lowering the LRF after 2030 on emissions, ETS prices and auction revenues.

Key findings

• Lowering the LRF from 4 to 3.4% would result in an estimated 1,100 Mton of additional cumulative CO₂ emissions in the EU27 and 69 Mt in the Netherlands over the period 2031-2050. A stronger reduction to 2.4% would increase additional emissions to around 3,200 Mton (195 Mt for the Netherlands).
• These additional emissions could take up to one-third of the carbon budget for 2040 now available to the non-ETS-1 sectors such as built environment, mobility and agriculture. Delaying the lower LRF until 2036 would significantly reduce the additional emissions under the ETS, preserving more of the remaining carbon budget for the non-ETS-1 sectors.
• A lower LRF increases the number of auctioned allowances but is expected to reduce ETS prices, resulting in mixed effects on auction revenues.

Policy briefs 2 and 3: The future of free allocation

Two policy briefs examine different proposals concerning free allocation under the EU ETS.

Policy brief 2: Delaying the phase-out of free allocation

Key findings

• Delaying the phase-out of free allocation would reduce cumulative auction revenues by up to € 3.4 billion for the Netherlands and € 90 billion for the EU27 over the period 2026-2040.
• Combined with the Carbon Border Adjustment Mechanism (CBAM), delaying the phase-out may result in windfall profits for industry.
• Delaying the phase-out is unlikely to have a significant impact on ETS prices, investment decisions or CO₂ emissions. As a result, delaying the phase-out provides substantial financial support to industry while delivering limited additional climate benefits.

Policy brief 3: Introducing conditionalities for free allocation

Key findings

• Making free allocation conditional on reinvesting its value in CO₂ emission reductions would strengthen climate effectiveness and would bridge the gap between ETS prices and higher marginal abatement costs, enabling otherwise uneconomic emission reduction investments.
• The cumulative value of free allowances is estimated at € 331 billion for the EU27 and € 24 billion for the Netherlands over 2026-2040. Requiring full reinvestment could cover a substantial share of the investment needed for ETS sectors to achieve the 2040 climate target.
• Additional conditionalities, such as requiring emission reduction plans or introducing performance-based allocation, could further strengthen the effectiveness of free allocation.

Policy brief 4: Revising the Market Stability Reserve (MSR)

This policy brief examines how changes to the MSR could affect the functioning of the EU ETS.

Key findings

• Removing the invalidation clause would increase the size of the MSR from around 400 million to 800 million allowances, resulting in an estimated 400 Mt of additional CO₂ emissions.
• While a larger reserve could reduce short-term price shocks, it also increases the risk of future allowance surpluses and price instability. A more balanced approach would be to retain the invalidation clause while increasing the threshold, allowing the reserve to grow in a controlled manner.
• The current fixed outtake rate of 100 million allowances per year is not well suited to an ETS with increasing allowance scarcity. A dynamic outtake rate, linked for example to the Total Number of Allowances in Circulation (TNAC), would better reflect future market conditions.