EU ETS Phase 5: What the Commission’s Proposal Means for CBAM Importers
When the European Union makes adjustments to the Emissions Trading System, this has a direct impact on the cost calculations of CBAM importers. Since the launch of the definitive CBAM regime on January 1, 2026, the price of CBAM allowances has been directly linked to the EU ETS CO2 price—meaning that any regulatory changes in emissions trading will directly affect import costs. With the publication of the Phase 5 proposal on July 17, 2026, the Commission has opened the discussion on the long-term framework of the EU ETS. For companies with CBAM-relevant supply chains, a key question arises: What impacts does this proposal have on carbon cost planning—and which ones does it not?
Executive Summary – EU ETS: EU ETS Phase 5 at a Glance
- Time Frame: The Phase 5 proposal covers the period from 2031 to 2040. There will be no operational changes for the current compliance year, 2026, or for the submission deadline of September 30, 2027.
- Price Signal: Increased allowance availability and a slower reduction in the cap suggest a more moderate trend in EU ETS prices. However, the carbon price remains a regulatory variable with the potential to move in either direction.
- Action Required: Companies should not adjust their compliance strategy, but rather review the scenario flexibility of their cost models. Now is the right time to develop robust sensitivity analyses.
- Status: The proposal is currently going through the legislative process in the European Parliament and the Council. Implementation is scheduled for 2028. Operational decisions based on a framework that has not yet been finalized are not sound from a business perspective.
What the EU ETS Phase 5 Proposal Actually Changes
The European Commission’s Phase 5 proposal covers the period from 2031 to 2040 and makes structural changes to the mechanics of the European Emissions Trading System. Three key adjustments are shifting the supply and pricing structure of the EU ETS:
The linear reduction factor is being lowered. The annual rate at which the ETS cap is reduced will drop to 3.7% by 2035 and to 1.7% starting in 2036—down from the current rate of 4.3%. As a result, the total volume of available emission allowances will be reduced more slowly than currently projected.
Free allocations will continue beyond 2030 —subject to verifiable industrial decarbonization investments. Companies that invest in reducing their emissions will thus retain access to free allowances for a longer period.
The market stability reserve is being relaxed. The rate at which excess allowances are removed from the market will be reduced. A larger volume of allowances will remain in active trading.
All three measures work toward the same goal: increasing the availability of allowances over a longer period while slowing the rate at which supply becomes scarce. For a price-based mechanism such as the EU ETS, this means that the long-term carbon cost curve could be more moderate than a linear extrapolation of current EU ETS prices would suggest.
What Will Not Change Operationally Under EU ETS Phase 5
The proposal has no impact on ongoing CBAM compliance for the years 2026 and 2027.
In detail:
- The CBAM allowance cost formula remains unchanged.
- The filing deadline of September 30, 2027, for the 2026 reporting year remains in effect.
- The de minimis threshold of 50 metric tons remains in effect.
- The non-compliance penalty of 100 € per metric ton remains in effect.
Equally important:
This is a legislative proposal, not current law. The legislative process in the European Parliament and the Council is pending, and implementation is scheduled for 2028. Companies that adjust their compliance strategy for 2026 or 2027 based on a framework for 2031 that has not yet been finalized are making decisions on a basis that is not legally sound.
The Strategic Signal: The EU ETS Price as a Regulator-Controlled Variable
The obvious interpretation—that a slower cap reduction and greater availability of allowances mean falling carbon costs—does not tell the whole story.
The strategically relevant insight is this: The entire cost base of the CBAM—the EU ETS CO2 price—is an openly controlled regulatory variable for the next fifteen years. And the direction has not been determined.
EU ETS Phase 5 could temper the price trajectory. A future tightening of the cap, an accelerated phase-out of free allowances, or the introduction of anti-circumvention mechanisms could also push prices back up. Every participant in the European market that factors carbon costs into its calculations must take these dynamics into account.
Operational Implication: Scenario-Based Planning Instead of Static Cost Calculations
This is where the difference between a robust and a fragile compliance framework becomes relevant to the business.
A single EU ETS price is incorporated into the landed-cost model as a fixed value. The result is treated as a reliable basis for calculations. Every time there is a regulatory change from Brussels, this model is implicitly rendered obsolete—until it is manually updated.
The ETS CO2 price is modeled as a range. The CBAM cost exposure is calculated using several plausible price scenarios. And the underlying data—embedded emissions, supplier declarations, import line items—are maintained in a quality and structure that allows for the recalculation of all scenarios as part of a data refresh rather than as a separate project.
The speed of scenario analysis is determined by data quality, not by model logic. If embedded emissions figures, supplier declarations, and import line items are available in a coordinated, queryable format, responding to a Phase 5 result in 2028—or any interim regulatory shift—becomes a routine operational task. If this data is scattered across spreadsheets and email threads, every price adjustment becomes a manual reconstruction.
The proposal dated July 17 does not require any operational adjustments to ongoing CBAM compliance. It does, however, require a critical review of whether the existing cost model can even absorb regulatory changes. Companies should start building scenario planning capabilities now—at a stage when the consequences are still of a calculational nature rather than financial.
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- Looking Ahead: Incorporating the Impacts of EU ETS Phase 5 into Scenarios and Cost Models at an Early Stage
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FAQ – Frequently Asked Questions About EU ETS Phase 5
EU ETS Phase 5 refers to the European Commission’s legislative proposal for the further development of the European Emissions Trading System for the period from 2031 to 2040. The proposal, published on July 17, 2026, includes a reduction in the linear reduction factor, an extension of the free allocation of allowances, and an adjustment to the market stability reserve.
The proposed structural changes—a slower cap reduction, increased allowance availability, and a relaxed market stability reserve—suggest that EU ETS prices will follow a more moderate trajectory than if the current 4.3% reduction rate were to continue. However, the CO2 price remains a regulatory variable whose trajectory depends on future policy decisions.
No. Operational CBAM compliance remains completely unaffected: the allowance cost formula, the filing deadline of September 30, 2027, the de minimis threshold of 50 metric tons, and the non-compliance penalty of €100 per metric ton remain unchanged. The proposal covers the period beginning in 2031 and is currently going through the legislative process.
Implementation is scheduled for 2028, subject to approval by the European Parliament and the Council of Member States. The regulatory framework will cover the period from 2031 to 2040.
The annual reduction factor for the ETS cap will be lowered from the current 4.3% to 3.7% by 2035 and to 1.7% starting in 2036. This will result in a slower reduction in the supply of available emission allowances on the European market.
Ongoing CBAM compliance does not require any adjustments. However, companies should review the flexibility of their cost models: model the EU ETS price as a range, maintain emissions and import data in a structured, queryable format, and ensure that a revaluation can be carried out as a standardized process in the event of changes in the regulatory framework.