On July 20, 2026, the European Commission presented its legislative proposal for a weakened ETS Phase 5 (2031–2040). Key points of the ETS Reform are:
- More free certificates through a conditionalized, longer-term free allocation for industry.
- Upper limit of the tradable ETS certificates should sink slower.
- Relaxed Market Stability Reserve (Admission rate drops from 24 to 12 percent starting in 2028).
- Expansion of the ETS system to short-haul flights and waste incineration.
What the Commission is proposing on the ETS reform
Responsible for the proposal is the Dutch EU Climate Commissioner Wopke Hoekstra, who drafted the legal framework for the fifth trading period of the EU ETS I. The reform proposal is intended to align the system with the new weakened climate target. Accordingly, the EU is aiming 90 % less Net greenhouse gases by 2040 compared to 1990. One of the reasons for this is growing concern over the exodus of energy-intensive industries from Germany, France, and Italy, which have been warning for months about rising CO₂ costs. Rather than relying solely on supply constraints, the draft bill links financial relief to new decarbonization obligations.
Free certificates: longer, but tied to conditions
Starting in 2031, the entire free allocation will depend on a verified, annual Decarbonization Investment Plan. Companies receive 80 % the free certificates according to the approved plan – the remaining 20 % only once the promised emission reductions have actually been verified at the end of the respective five-year period. Starting in 2036, companies will also be allowed to offset up to 2 % of their obligations through decarbonization projects in third countries.
This is not merely a slowdown of the phase-out, as was originally [intended/expected] in the context of the carbon border adjustment (CBAMwas intended for the affected sectors, but a reconditioning. Whoever proves climate protection gets free certificates longer. Whoever does not deliver loses part of them.
Market stability reserve is being relaxed
Also regarding the central supply-side control mechanism of EU ETS I, the Market stability reserve, the reform takes effect: Starting in 2028, the absorption rate for surplus allowances is set to decrease from 24 to 12 %. This means that in the event of a surplus in the future, significantly fewer certificates per year into reserve hiking and correspondingly more in the market remain. In addition, the plan is for allowances to be able to remain in the reserve permanently in the future, rather than being canceled as has been the case so far—a step intended to increase the system’s flexibility while also maintaining a greater potential supply in the market.
Expansion to aviation & waste incineration
While the burden on industry is being noticeably eased, the ETS is expanding in other areas. The Commission proposes to include flights to airports in a radius of 5,000 kilometers to include the geographical center of the EU – which in future would also cover transport hubs in Turkey and the Middle East, while North America remains excluded. The phase-out of free allowances for intra-European aviation is being maintained: the allocation will expire at the end of 2026, starting in 2027 Do airlines pay in full for every tonne of CO₂? Newly added is waste incineration, whose emissions are also to be subject to emissions trading in the future. The ETS will thus, similar to recently postponement of the launch of ETS II to 2028 gradually expanded to further areas – only this time within the existing ETS I instead of via a new subsystem.
Relief for industry & criticism of the ETS reform
Commission President Ursula von der Leyen describes the proposed ETS reform as „adapting our carbon market to changing global realities.” Experts from the political sphere and civil society, as well as representatives of the renewable energy sector, see it differently and speak of a weakening of the system. The affected sectors—the fossil fuel industry, energy-intensive industries (steel, chemicals, cement, paper, glass), air and maritime transport, and, in the future, waste incineration—account for approximately 40 % of total EU greenhouse gas emissions.
What this means for CO₂ prices and flexibility marketing
For battery storage operators, the MSR easing is particularly relevant. A lower intake rate structurally keeps more certificates in circulation, which tends to have a dampening effect on the CO₂ price – similar to already the Analyses on the current certificate high As we have shown, the balance of supply and demand in the CO₂ market indirectly affects electricity prices and, consequently, the price spreads that BESS operators pay for Arbitrage and Flexibility Trading use.
| ETS reform effects | direction of impact on CO2 price | Relevance for BESS flex trading |
| MSR enrollment rate 24% → 12% (starting in 2028) | Dampening (more certificates in the market) | Indirectly: lower CO₂ price pressure can reduce the generation costs of marginal fossil-fuel power plants and thus narrow spreads |
| Certificates remain in reserve instead of being deleted | Slightly cushioning, but more flexibly controllable | Indirect: potentially more stable, more predictable price trend |
| Conditional free allocation from 2031 | Tending to be neutral to slightly price-driving (incentive for decarbonization remains) | Low direct impact, but an investment signal for decarbonizing industrial customers |
| Expansion to waste incineration & short-haul flights | Additional demand for certificates | Sector-specific, hardly any direct BESS reference |
Important: These effects are trend statements based on the current reform proposal, not a reliable forecast—the actual CO₂ price depends on significantly more factors (economic conditions, energy prices, actual negotiation outcome).
Outlook on the ETS reform proposals
The European Parliament and member states are now deciding on the ETS reform proposal. Given the compromise between climate action and industrial protection, the trilogue negotiations are unlikely to be brief. Until final adoption, individual details—in particular the specific percentages for the MSR and free allocation—may still change.