Raising the Allowance: The EU Updates Emissions Benchmarks

Cap-and-trade systems are effective ways for countries to incentivize industry to reduce emissions while also generating revenue for investment in sustainable technology. Today's ongoing energy crisis resulting from geopolitical conflicts involving Iran and Ukraine means countries are looking to use such systems to catalyze sustainable energy and achieve energy security by reducing dependence on fossil fuel supplies from potentially hostile nations.

To achieve those goals, the European Commission (EC) announced on May 10, 2026, proposed updates to the European Union Emissions Trading System (EU ETS) benchmark values for 2026–2030. The EU ETS is a cap-and-trade system that incentivizes industries to reduce greenhouse gas (GHG) emissions with limits that decrease annually in line with the EU climate target. Companies purchase allowances in auctions and can trade allowances among themselves. Companies whose allowances exceed their emissions can sell surplus allowances or keep them for later. Companies monitor and report emissions annually and surrender allowances to account for emissions. Heavy fines can result for companies that fail to meet these requirements.

The EC said that the EU ETS has contributed to emissions reductions from power and industrial plants of approximately 47% compared to 2005 levels. Revenue from the sale of the allowances flows to national budgets to support investments in renewable energy and low-carbon technologies. It has raised more than €175 billion since 2013.

Free allowance allocations are derived from the cleanest 10% of organizations in each sector. Companies emitting more than the benchmark must purchase additional allowances to cover the shortfall.

The updated benchmark values extend the free allocation of allowances to indirect emissions from electricity use, which the EC expects will produce an impact of approximately €4 billion for the period of 2026–2030. Industry will continue to receive free allocations covering approximately 75% of its emissions.

The proposal is open for feedback on the Have Your Say site until June 8, 2026.

Wopke Hoekstra, commissioner for Climate, Net Zero, and Clean Growth, said that the proposed updates deliver on President Ursula von der Leyen’s commitment to reinforce Europe’s carbon market.

“Strengthening the Market Stability Reserve as proposed on 1 April will improve resilience to volatility, while updating the benchmarks further incentivises investments into the clean transition,” said Hoekstra in a press release. “This ensures the EU ETS continues to drive decarbonisation, competitiveness and clean investment.”

Boosting Investment and Reviewing the ETS

In a statement from March 18, 2026, President von der Leyen touted the success of the ETS while noting the need for change.

“The Emissions Trading System is working,” she said. “It has massively reduced gas consumption. Because of that, it has reduced our dependency on imports of fossil fuels, and it has reduced our vulnerability. And it has driven major investments in the energy transition in the low-carbon energy sources like renewables and nuclear that are homegrown and give us independence. But we need to modernise it and make it more flexible.”

The modernization efforts will address concerns raised by industries in impacted sectors and will include the introduction of sector-specific fallback benchmarks to calculate free allowances for industry. This will form part of the larger ETS review that is scheduled for July 2026.

In the same statement from March, Von der Leyen also announced an ETS investment booster of €30 billion to finance projects for decarbonization. It will be financed by 400 million ETS allowances, with guaranteed access for lower-income member states.