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Electrification Action Plan and ETS review
27
July
2026
27 July, 2026

Electrification Action Plan and ETS review

The package at a glance

On 17 July 2026, the European Commission proposed a major overhaul of the EU ETS for Phase 5 (2031–2040). The reform aims to balance industrial competitiveness with the EU’s 90% net emissions reduction target by 2040, while supporting electrification and investment in low-carbon technologies.

  • Still a proposal: Parliament and Council negotiation is expected to run into 2027, and details will move
  • Paired with a target to double electrification’s share of final energy demand
  • Framed as the foundation for the EU’s 2040 target of a 90% net emissions cut

3.7%

Annual cap reduction factor 2031–2035, down from 4.4%

+4 years

Free allocation extended beyond the current phase-out

12%

Proposed MSR intake rate (down from 24%)

The cap slows, free allocation persists with new strings attached

Annual cap reduction rate (linear reduction factor)

Compares with a current Fit-for-55 baseline of 4.3% (2024-27) then 4.4% (2028+): a materially more gradual decline that eases near-term scarcity but stretches the path to 2040.

  • Slower cap reduction could ease EUA scarcity after 2030.
  • Free allocation would continue until 2038, four years longer than under Fit-for-55.
  • Companies would need to demonstrate credible decarbonization investments to retain full allocation.
  • Sector benchmarks will continue to determine allocation volumes.

New flexibility mechanisms

1. Carbon removals

CRCF-certified permanent removals enter the cap via a 250 million allowance increase, ramping to 48 Mt a year by 2040 (an estimated €50bn market). Only BioCCS and DACCS qualify initially, other pathways are excluded for now. Three integration models remain under review: central public purchase, operator-led procurement and surrender, and a one-in-one-out mechanism.

2. Market Stability Reserve

The MSR is repositioned as a standing strategic reserve rather than a mechanical valve. The automatic invalidation of allowances above the current threshold is being scrapped in favour of retaining them as a stability buffer.

Тhe ETS ecosystem in Phase 5

Scope expansion

Municipal waste incineration is proposed to become a permanent part of the EU ETS from 2028.

Industrial Decarbonisation Bank

A new EU financing mechanism from 2028, directing ETS revenues towards industrial decarbonisation and carbon removals. Its first phase (2028–2031) reserves 400 million EUAs for an Investment Booster paying fixed carbon premia, first-come first-served, with a share reserved for lower-income states.

Revenue use

Channelling is simplified through the Industrial Decarbonisation Fund and the Innovation Fund, with a stated aim of directing industry-linked revenue back to industry.

ETS1–ETS2 interaction

The proposal strengthens coordination between ETS1 and ETS2 to ensure a more coherent carbon pricing framework.

What this means for you

1

Free allocation isn’t disappearing, conditionality is the new compliance risk to plan around.

2

Carbon removals are becoming a real compliance lever; early positioning is an advantage, not just a hedge.

3

The Industrial Decarbonisation Bank and Innovation Fund, create new opportunities to finance electrification, CCS and fuel switching.

4

If you’re covered by ETS2, watch the ETS1/ETS2 coordination signal closely, it may reshape scope timing.

What should you do next?

Recommended next steps

1

Map your own free allocation exposure against the proposed conditionality criteria.

2

Put removals procurement on your 2026–2027 watch list if you’re in a hard-to-abate sector.

3

Screen planned electrification, CCS, fuel-switching and efficiency projects for potential support through ETS funding mechanisms.

4

Revisit your plan once Parliament and Council positions emerge.

Questions on how this affects you?

For support and guidance as these proposals develop, we’re here to help you plan!

Inside Nvalue UK: Nathalie’s hands-on internship experience