Background to the EU Emissions Trading System
The European Union Emissions Trading System, commonly known as the EU ETS, stands as the bloc's cornerstone policy for curbing greenhouse gas emissions through a market-based cap-and-trade mechanism. Established in 2005, it covers power generation, energy-intensive industries, and more recently maritime transport. Installations must surrender allowances equal to their verified emissions each year, with the overall cap declining over time to drive decarbonisation.
Free allocation of allowances plays a critical role in protecting sectors at risk of carbon leakage, where production might shift to regions with less stringent climate rules. Benchmarks serve as the reference point for determining these free allowances. They represent the average emissions performance of the top 10 percent most efficient installations in each sector or sub-sector.
The Recent Update Process
In May 2026, the European Commission proposed updated benchmark values specifically for the period spanning 2026 to 2030. This revision draws on data from recent years to reflect technological advancements and efficiency improvements achieved since the previous update. The proposal underwent public consultation and scrutiny by member state experts in the Climate Change Committee.
On 15 June 2026, national experts approved the draft implementing act outlining these revised benchmarks. The vote passed with the necessary support, paving the way for formal adoption by the Commission expected before the end of June.
Key Elements of the Revised Benchmarks
The updated values adjust the emissions intensity thresholds used to calculate free allowances across 54 product benchmarks and fallback approaches for heat and fuel. Annual reduction rates for benchmarks now range between a minimum of 0.3 percent and a maximum of 2.5 percent per year, accelerating the incentive for efficiency gains compared to prior periods.
These changes aim to ensure that free allocations continue to reward best performers while aligning with the EU's overall target of reducing emissions from ETS sectors by 62 percent by 2030 relative to 2005 levels. On average, the benchmarks are designed to allow industry to receive free allocations covering around 75 percent of emissions during the 2026-2030 phase.
Concessions and Industry Concerns Addressed
Approval did not come without negotiations. Member states secured commitments from the Commission for a fast-track revision of the most contentious benchmark values. Additional flexibilities include expanded recognition of indirect emissions from electricity use, providing an estimated additional €4 billion in value to industry over the period.
Energy-intensive sectors had voiced worries that stricter benchmarks could increase compliance costs and undermine competitiveness, particularly as the Carbon Border Adjustment Mechanism phases in. The concessions help mitigate these risks while maintaining the system's environmental integrity.
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Implications for Businesses and Sectors
Industrial installations across Europe, from steel and chemicals to cement and refining, will see their free allowance entitlements recalculated based on the new benchmarks. Best-in-class facilities stand to benefit most, receiving allocations closer to their actual needs, while less efficient ones face greater pressure to invest in upgrades or purchase additional allowances.
The timing supports compliance planning ahead of the September 2026 surrender deadline for 2025 emissions. National authorities will begin processing allocations shortly after Commission adoption, with many expecting distributions to reach operator accounts by late summer.
Broader Context Within EU Climate Policy
This benchmark update forms part of the implementation of the 2023 revised ETS Directive, which tightened the overall cap and expanded coverage. It complements other tools such as the Innovation Fund and Modernisation Fund, which channel auction revenues into low-carbon technologies and support for lower-income member states.
The move also intersects with the ongoing development of the Carbon Border Adjustment Mechanism, ensuring domestic producers and importers face comparable carbon costs. Stakeholders continue to monitor how these elements interact to prevent leakage while fostering green industrial transformation.
Stakeholder Perspectives
Industry associations welcomed the approval tempered by the promised flexibilities, viewing it as a pragmatic balance between ambition and economic reality. Environmental groups have emphasised the need for continued tightening to meet long-term climate goals, while member states highlighted the importance of safeguarding jobs and investment in their territories.
Experts note that regular benchmark reviews every five years keep the system responsive to real-world progress in abatement technologies, from electrification and hydrogen adoption to process innovations.
Future Outlook and Next Steps
With benchmarks now approved at the committee level, attention turns to the Commission's formal adoption and subsequent national implementation. A broader review of the ETS is anticipated later in 2026, potentially addressing further refinements to free allocation rules and integration of carbon removals.
Market participants will watch closely for any impact on allowance prices and trading dynamics. The updated framework reinforces the EU ETS as a predictable yet evolving instrument supporting the transition to climate neutrality by 2050.
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Practical Considerations for Operators
Companies should review their sub-installation data against the new benchmark values to forecast allocation levels accurately. Engaging with national competent authorities early can help streamline the application and verification processes.
Investments in monitoring, reporting, and verification systems remain essential, as do strategies for managing any shortfall through the secondary market or internal abatement measures.
