On July 17th, the European Commission released its highly anticipated EU ETS proposal package. Comprising a dense 141-page ETS Directive Proposal, revised heat and fuel benchmarks proposal and an Electrification Action Plan, the package sets the stage for the next decade of European carbon markets.
The overarching theme of the proposal is a balancing act: aligning the EU ETS with a 90% greenhouse gas reduction target for 2040, while providing essential relief to ensure Europe’s industrial competitiveness and energy security. As Climate Commissioner Wopke Hoekstra highlighted in his speech, the review will transform the ETS into a "genuine engine for innovation and investment".
ClearBlue Markets characterized the immediate market reaction as a "relief rally".
Why the Market Moved Higher
Following the announcement, EUA prices surged by roughly EUR 7, rebounding to as high as EUR 86 on July 22. While a proposal that loosens supply might typically soften carbon pricing, the market climbed because the confirmed details, particularly around the gradual release of Investment Booster allowances, were far less bearish than previous worst-case fears. ClearBlue provides long term modelling scenarios for supply, demand and pricing in the EU ETS. Compared to a scenario with the current legislation, the ‘July 17’ scenario accounting for the proposal shows that the ETS price will be 22% lower in 2030. The price impacts are, however, much less pronounced in the later years of phase 5 (2031-2040) of EU ETS due to the strengthened design of the MSR. For 2035, price is expected to rise to EUR 138.5 in the ‘July 17' scenario, only EUR 7 lower than the scenario with the current ETS set-up extending to phase 5, with the rest of the assumptions unchanged.
ClearBlue’s Updated Market View
Notably, ClearBlue’s ‘July 17’ scenario is less bearish than our forecast from June that took into account expectations for the proposal, aligned with the relief rally seen in the market response. ClearBlue’s EU team has tracked the ETS review debate closely. Following the proposal, we published a Live Update on July 17 with key takeaways and modelled price impacts from the proposed revisions, and held a client webinar with a more detailed look into the comprehensive package which will set the direction for EU carbon market until 2040.
The Core Structural Changes in the Review
To align the ETS with the EU’s legally binding net 90% emissions reduction target for 2040 while preserving industrial competitiveness, the review proposed several major structural changes which also came with compromises. It proposes to lower the Linear Reduction Factor (LRF) of the Cap to 3.7% for 2031–2035 and 1.7% from 2036 onward. This compared with the current level of 4.3%, will effectively avert the zero-cap "ETS Endgame" in 2039 to around 2048. It plans to set up a EUR 100 Billion Industrial Decarbonisation Bank with its phase 1 kicking off in 2028 as ‘Investment Booster’ consisting of 400 million allowances, equivalent to EUR 30 billion funding support to decarbonization projects. For heavy industry, the free allowances will be prolonged to after 2030 and until the 2040s, complemented by an immediate €6 billion (additional 80 Mt allowances) allocation boost via revised 2026–2030 fallback benchmarks. The phase-out of free allocation for sectors under the CBAM is postponed from 2034 to 2038. Further revisions to the 2031-2040 free allocation rules were also proposed, including conditionality of ‘Invest in EU Decarbonization Plan’ on free allowances.
Additional Changes to Market Design
Additional structural updates include lowering the Market Stability Reserve (MSR) intake rate to 12% from 2028 alongside dynamic thresholds and release volumes, recalibrating the 2027 TNAC downward by 173 Mt to account for historical aviation demand, extending scope to more international departing flights and municipal waste incineration with gradual phase-in. Finally, the proposal introduced flexibility mechanism including integrating permanent domestic carbon removals and international credits into the EU carbon market. This essentially connects with EU ETS more broadly with the global carbon market especially the CORSIA and Article 6 framework, which were closely followed by ClearBlue Markets Market Intelligence team.
Why the Investment Booster Matters
Among the proposed measures, the 400 million-allowance Investment Booster has become a key focus for EU carbon market observers, as the pace of its release will shape market balances. The ETS proposal provides an overview of the Booster’s design and operation, with further details on Terms and Conditions expected in the coming months. In some respects, it resembles the Manufacturing Decarbonization Incentive (MDI) under the WCI (California-Québec) cap-and-invest program, which grants additional no-cost allowances to eligible industrial facilities. There is also significant uncertainty around how the MDI will be implemented. More broadly, the Booster signals a shift in the EU carbon market toward using the ETS as a
catalyst for unlocking industrial decarbonization projects and accelerating transition.
What Comes Next in the Legislative Process
Nevertheless, it will be a busy autumn ahead for the European legislators. The July 17 ETS review proposal is just the start of the EU legislative process. Different stakeholders and member states have already expressed their views on the review, so there will be intense rounds of negotiations ahead. Currently, co-legislators have expressed that they aim to finalize the legislative process by the first quarter of 2027.
ClearBlue analysts will closely monitor the process and the debate, and provide timely updates to clients and market observers. Contact us for information about our Market Intelligence services.