On 17 July 2026, the European Commission published a legislative proposal to amend the EU Emissions Trading System (EU ETS) Directive and the Market Stability Reserve (MSR) Decision, aligning them with the EU's 2040 climate target of a 90% net greenhouse gas reduction. The proposal tightens the ETS reduction trajectory from 2031, establishes an Industrial Decarbonisation Bank (IDB) with €100 billion in funding, introduces an ETS Investment Booster, gradually includes waste incineration, and allows limited use of international credits from 2036. The package affects stationary installations, aviation, and maritime sectors, and aims to drive cost-effective decarbonisation while maintaining competitiveness and carbon leakage protection.
The proposal follows the adoption of the 2040 climate target in Regulation (EU) 2026/667 on 11 March 2026, and builds on the Commission's earlier MSR review proposal of 1 April 2026. The IDB, to be housed within the future Competitiveness Fund, will be financed primarily by reserving a share of ETS allowances. The ETS Investment Booster is designed to accelerate pre-2030 investments and promote solidarity among member states. The Commission also notes that while member states have been required to spend 100% of ETS revenues on climate and energy purposes since June 2023, only around 5% currently supports industrial decarbonisation, signalling a need for reallocation.
Key policy orientations include a gradual phase-in of waste incineration into the ETS to support circular economy goals, and a provision allowing high-quality international credits from 2036, capped at 5% of 1990 EU net GHG emissions, with a possible pilot period from 2031 to 2035. For aviation and maritime, which each account for about 14% of EU transport emissions, the proposal maintains existing coverage while aligning with the tighter trajectory. The Commission also considers linking agreements with Switzerland, pursuant to Council Decision (EU) 2018/219 of 23 January 2018, and ongoing negotiations with the UK.
The proposal creates several trade-offs. For EU industrial operators, the tighter ETS trajectory and inclusion of waste incineration increase compliance costs, but the IDB and Investment Booster provide new funding streams for decarbonisation. EU consumers may face higher prices for goods and services as costs are passed through, but benefit from long-term climate mitigation. National authorities gain flexibility in revenue use but are nudged to prioritise industrial decarbonisation. Environmental NGOs may welcome the strengthened ambition but criticise the allowance of international credits as potentially undermining domestic reductions. The proposal now passes to the European Parliament and Council for negotiation, where debates are expected over the pace of the trajectory, the size and governance of the IDB, and the conditions for international credit use.