A proposed revision to the European Union’s carbon market rules could change the pace at which imported industrial products become exposed to rising carbon costs, with implications for steel, aluminium, cement and fertiliser suppliers. The European Commission’s July 2026 ETS revision proposal would extend the free allowance phase-out for CBAM-covered sectors from 2034 to 2038, modifying the timetable used to calculate the relationship between domestic carbon costs and charges on imports.
The proposed extension would not suspend the Carbon Border Adjustment Mechanism (CBAM) or eliminate importers’ certificate obligations. Instead, it would alter the gradual withdrawal of free allocation available to European manufacturers and, consequently, the adjustments applied to CBAM calculations. For companies trading with the EU, the difference between the existing legislation and the proposed timetable could affect investment decisions, supply agreements and the financial exposure of individual production facilities.
Proposed ETS Revision Changes the CBAM Adjustment Schedule
Under the existing framework, the CBAM factor applied in ETS free-allocation calculations stands at 97.5% in 2026, declining to 95% in 2027, 90% in 2028 and 77.5% in 2029, before continuing its downward trajectory towards zero in 2034.
These percentages represent the reduction trajectory associated with benchmark-based free allocation. They do not indicate the proportion of an importer’s embedded emissions that can automatically be excluded from CBAM liability.
The calculation of CBAM certificate obligations also takes account of the product’s embedded emissions, the applicable benchmark adjustment, qualifying carbon payments made outside the EU and the relevant ETS-linked certificate price. Applying the CBAM factor as a straightforward discount to every tonne of imported material would therefore produce an inaccurate assessment of the actual liability.
The Commission’s proposal would restore part of the free allocation otherwise removed through the CBAM factor, beginning in 2028. Under the proposed schedule, the factor would reach 91.5% in 2028, 81% in 2029 and 59% in 2030.
The revised trajectory would then continue downwards, reaching 15% throughout 2034–2037, before falling to zero in 2038. The proposal therefore changes not only the final withdrawal date but also the intermediate annual adjustments compared with the timetable currently in force.
Different Emissions Intensities Produce Different Import Costs
The consequences for individual suppliers depend on their production emissions rather than the headline carbon allowance price alone.
Two manufacturers exporting the same covered steel product into the EU can face different CBAM outcomes if one operates close to the applicable European benchmark while the other records substantially higher embedded emissions. Even where both suppliers are exposed to the same ETS-linked reference price, their certificate requirements can differ because of their respective emissions performance.
A slower reduction in benchmark-related adjustments changes when these differences translate into higher carbon costs, but does not remove the underlying incentive to reduce production emissions.
The same principle applies to clinker-intensive cement and primary aluminium, although the relevant emissions boundaries and benchmarks vary between sectors. The treatment of each product must therefore reflect its specific production characteristics and applicable calculation methodology.
The financial implications also extend beyond the final years of the phase-out. Because the Commission’s proposed schedule modifies intermediate factors, industrial projects commissioned in 2029 or 2031 could operate under different carbon allocation conditions during their initial years compared with the existing legislative timetable.
Industrial Investment Decisions Depend on Annual Carbon Cost Scenarios
For energy-intensive manufacturers, the duration of the free allocation period is an important variable when assessing the economics of long-term industrial upgrades.
A process modernisation investment of EUR 50 million, used here as an illustrative assumption rather than the budget of an identified project, would require an annual assessment of expected production volumes, verified emissions reductions, maintenance downtime and contractual provisions governing carbon costs passed on to customers.
The investment calculation must also account for the commercial value of lower emissions. A manufacturer may seek to retain the financial benefit of improved emissions performance through higher margins. Alternatively, customers could demand lower delivered prices as the applicable carbon charge changes.
These competing outcomes influence project internal rates of return, borrowing capacity and the negotiating position of manufacturers and their customers.
The regulatory trajectory can therefore carry significant weight when companies evaluate investments in new burners, industrial furnaces, electrification systems and carbon capture technologies. For facilities with long operating lifetimes, the expected allocation framework over several years may be as relevant as the current allowance quotation.
Export Contracts Face Uncertainty Over Future CBAM Rules
The proposed revision also introduces a regulatory risk for companies negotiating long-term supply agreements with European customers.
An exporter could agree a multi-year delivery price based on the existing phase-out schedule, only for the EU to subsequently adopt a modified timetable. Without contractual provisions addressing such changes, the parties could face disputes over the allocation of additional or reduced carbon-related costs.
Supply agreements therefore need mechanisms capable of accommodating both the existing legislative framework and a potentially revised ETS schedule.
The availability of verified installation-level emissions information is another important commercial consideration. Suppliers with reliable production data can demonstrate changes in their embedded emissions and assess their exposure more accurately. Companies relying on default values may have limited visibility until the relevant administrative figures become available.
The quality of emissions reporting consequently affects not only regulatory compliance but also the ability of exporters to negotiate prices and allocate carbon-related risks with EU buyers.
Free Allocation Conditions Remain Relevant for European Manufacturers
European producers receiving ETS free allowances are also subject to conditions governing their allocation. Benchmark performance, production volumes, efficiency requirements and proposed future investment obligations all influence eligibility and the amount of support available.
This reflects the underlying purpose of CBAM: establishing a comparable carbon-cost framework for domestic production and imported goods, rather than guaranteeing identical carbon invoices for every tonne manufactured inside and outside the EU.
Other factors continue to influence industrial competitiveness beyond the scope of the border adjustment mechanism. These include national state aid, electricity grid tariffs and differences in the cost of capital, all of which can affect the relative economics of European and international production facilities.
For companies assessing future investments and trade exposure, the distinction between the current legal framework and the Commission’s proposed revision remains essential. The existing schedule provides for the withdrawal of free allowances by 2034, while the proposal would extend the process until 2038.
Industrial investment assessments therefore need to model both regulatory scenarios separately, incorporating realistic ETS price ranges and emissions data specific to each installation. The eventual legislative timetable will determine when import-related carbon costs increase most significantly, while the technology and emissions performance of each production facility will determine how much of that exposure can be reduced.
