EU Carbon Market Experts Back Revised ETS as Preserving 2040 Climate Ambition
Experts back the revised ETS framework as preserving the EU's 90% emissions target for 2040, even as a softer cap trajectory weighs on ICE EUA prices.
Experts told Montel on Thursday (2026-08-27) that the European Commission's proposed overhaul of the EU Emissions Trading System leaves the bloc's 2040 climate target intact, a judgment that complicates a straightforwardly bearish reading of the proposal that has prevailed in market commentary since July.7
The Commission published its formal ETS revision on 17 July (2026-07-17), targeting Phases 5 and 6 of the scheme, which cover the period from 2031 to 2040. A central feature is a sharp reduction in the rate at which the allowance cap tightens: the linear reduction factor (LRF), currently 4.3% and due to rise to 4.4% between 2028 and 2030, would slow to 3.7% in the 2031-35 period and then to 1.7% from 2036 to 2040, according to JD Supra's review of the proposal.6
A slower tightening schedule means more allowances in circulation through the decade — which, all else equal, reduces scarcity and the incentive for industrial emitters to invest in low-carbon alternatives ahead of the deadline. Observers told Montel in the week of 14 July (2026-07-14) that the package was likely to prove slightly bearish for ICE EUA prices but would not "fundamentally weaken" the scheme.3
The expert assessment published Thursday (2026-08-27) carries weight because it suggests the end-point ambition is not being abandoned even as the path to it is made less steep. The EU's 2040 target requires a 90% cut in emissions from 1990 levels, up from the 55% cut mandated by 2030, and EU law requires the ETS to be updated to reflect that new ceiling, as Montel reported in May (2026-05-21).7,1
But to compensate for the softer cap trajectory, the Commission has proposed a new Industrial Decarbonisation Bank (IDB) with an indicated funding envelope of approximately €100 billion. Key elements of the revision, including the IDB, require secondary legislation before becoming operational, JD Supra noted. That means the actual market impact could lag the proposal by years.6
Emissions in ETS-covered sectors have roughly halved since the scheme launched in 2005, with around three-quarters of that reduction attributable to the power sector, according to Carbon Brief and the European Commission. Heavy industry, the intended beneficiary of both the slower LRF and the new bank, has moved more slowly and now carries the bulk of the remaining abatement task.5
German economists urged a "constructive" approach to reform on Thursday (2026-06-25), warning Montel that loosening national climate targets would backfire and that industrial competitiveness is better served by a well-designed ETS than by diluted ambition. That logic sits in some tension with the LRF slowdown the Commission has chosen.2
Still, the political backdrop adds uncertainty. The EU has been reconsidering methane import rules as energy security concerns intensify, Oilprice.com reported on 25 July (2026-07-25), suggesting the Commission is prepared to moderate regulatory timelines when supply-chain anxieties and industrial lobbying align. That pattern gives pause to those who read the Thursday (2026-08-27) expert endorsement as guaranteeing the legislative outcome.4
The ETS proposal now enters co-decision between the European Parliament and the Council, both of which can amend it significantly. The LRF figure of 1.7% from 2036 onward is the mechanism most directly responsible for keeping the 2040 target reachable on paper. How much of it survives the legislative process is what ICE EUA traders will be pricing around when sessions reopen.6