The European Commission is considering changes to the EU Emissions Trading System (ETS) that would affect allowance supply, free allocation access and the timing of the Carbon Border Adjustment Mechanism (CBAM). The proposal would include a slower reduction in ETS allowance supply after 2030, longer access to free allocations for selected energy-intensive sectors and a more gradual CBAM rollout.
Brussels is also accelerating an electrification push across industry, transport and heating. The approach combines temporary relief from carbon costs with incentives for companies to replace fossil-fuel processes with low-carbon technologies.
ETS linear reduction factor and extended free allocation period
Under the proposed framework, the ETS linear reduction factor would decline more gradually. It would fall from 4.3% to around 3.7% between 2031 and 2035, before reaching 1.7% from 2036 onwards.
Free carbon allowances for sectors including steel and cement would remain available until 2038. This extends support by four years compared with earlier plans.
CBAM transition delay and conditions for beneficiaries
The full transition period for CBAM would be delayed until 2038. The change would give companies additional time to adjust to the carbon-border regime.
The reform would also introduce stricter requirements for businesses receiving free allowances. Companies investing in EU-based decarbonisation projects would receive 80% of their free allocation upfront, while the remaining 20% would depend on completing investments and providing proof that emissions-reduction measures have been delivered.
From carbon-cost shielding to verified industrial transformation
The Commission’s proposal shifts free allowances toward investment performance and verified transformation. Free allocations would increasingly function as support for industrial modernisation rather than a permanent mechanism to shield firms from international competition.
Steelmakers, cement producers, fertiliser manufacturers, refineries and other covered industrial facilities would need to provide detailed engineering plans, secured financing, project implementation progress and measurable emissions reductions to preserve the value of carbon support.
Use of ETS auction revenues and link to electrification
The Commission is proposing that at least 50% of ETS auction revenues be directed to decarbonisation projects in covered sectors. Since 2013, the carbon market has generated approximately €260 billion.
The reform is linked with the Commission’s Electrification Action Plan, which targets a higher role for electricity in the European economy. Electricity accounts for around 23% of EU final energy consumption, while approximately 70% of electricity generation already comes from domestic low-carbon sources.
Electricity demand growth and grid-related measures
Brussels targets an electricity share of around 46% of final energy demand by 2040. The Commission argues faster electrification could reduce Europe’s fossil-fuel import costs by approximately €260 billion annually.
The proposal notes that electrification requires more than additional renewable generation capacity. Industrial electrification, electric vehicles, heat pumps, electrolysers and data centres are expected to increase electricity demand and create peak-load management challenges.
The Commission highlights grid expansion, energy storage, demand-response systems, smart meters and long-term electricity supply contracts as key components for industrial competitiveness. It also proposes flexibility on electricity taxation and network charges so electrified industries can remain competitive when electricity carries higher regulatory and fiscal costs than fossil fuels.
Regional implications for Southeast Europe exporters
The implications extend directly to Serbia, Bosnia and Herzegovina, Montenegro and North Macedonia. Companies exporting goods to EU markets may receive additional time before CBAM reaches full implementation stage, but the overall policy direction remains unchanged.
European buyers are expected to continue demanding detailed installation-level emissions data, supply-chain traceability and verified low-carbon electricity credentials. A delayed carbon-cost impact does not remove future compliance requirements.
Operational focus areas for industrial firms in Southeast Europe
For industrial companies across Southeast Europe, the source outlines three areas of action. The first is improving process efficiency to reduce emissions in the short term.
The second area is securing renewable or low-carbon electricity through contracts supported by transparent monitoring and verification systems. The third is preparing larger technology replacement projects supported by EU programmes, development banks or commercial financing.
The reform may reduce immediate pressure from rising carbon costs while increasing the importance of credible engineering solutions, measurable results and transparent verification. Companies able to demonstrate real decarbonisation progress are expected to be better positioned than those relying only on temporary carbon relief without a clear investment pathway.
