EU ETS 2026-2030: Free allowance cuts and real costs for industry

Key data

European industrial companies participating in the EU ETS face a scenario of higher carbon costs for the 2026-2030 five-year period. Implementing Decision (EU) 2026/1862, adopted on 23 July 2026, determines the Cross-Sectoral Correction Factor (CSCF) applicable to this period, reducing free emission allowance allocations when the preliminary total exceeds the system's maximum limit.

The practical result is immediate: sectors with the highest carbon intensity will receive fewer free allowances than they would be entitled to without correction, and will have to acquire the difference in the European carbon market. This is not a minor change—it directly affects the bottom line of industrial plants across Europe.

What does this regulation establish?

The EU ETS (EU Emissions Trading System) operates with a global maximum emissions limit that decreases each year. Within that limit, industrial installations receive part of their allowances for free, calculated according to efficiency benchmarks by sector.

The problem arises when the sum of all preliminary free allowances calculated for installations exceeds the maximum ceiling allowed by the system. In that case, the regulation requires applying the CSCF (Cross-Sectoral Correction Factor): a proportional reduction factor that cuts all free allocations uniformly across all sectors.

Decision 2026/1862 sets exactly that factor for the 2026-2030 period, establishing the percentage reduction that will be applied to the preliminary free allocations of each industrial installation participating in the EU ETS over the next five years.

Economic and operational impact

The cut in free allocations translates directly into costs: each emission allowance that was previously received for free must now be purchased in the European carbon market. The price of carbon in the EU ETS has historically fluctuated between 60 and 100 euros per tonne of CO₂, which converts each percentage point of reduction into millions of euros of additional cost for the largest plants.

The most relevant operational and strategic effects are:

• Increase in production cost: installations that have not advanced in decarbonization will pay more for each tonne produced.
• Pressure on margins: in sectors with tight margins—such as paper or glass—the additional carbon cost can significantly erode profitability.
• Carbon leakage risk partially mitigated: the CBAM mechanism protects sectors exposed to international competition from imports that do not pay equivalent carbon prices, but its coverage is not total.
• Accelerated incentive for decarbonization: the lower a facility's carbon footprint relative to the sectoral benchmark, the lower the impact of the CSCF on its net costs.
• Need for active allowance management: companies must plan their carbon market purchases in advance to avoid acquiring allowances at times of high prices.

Who does it affect?

Decision 2026/1862 affects all industrial installations participating in the EU ETS and receiving free emission allowance allocations. The sectors with the highest exposure are:

• Steel: sector with high carbon intensity and large volume of historical free allocations.
• Cement: production process with process emissions difficult to reduce in the short term.
• Chemicals: wide variety of installations with different exposure levels depending on the product manufactured.
• Paper and pulp: sector with intensive energy consumption and relevant free allocations.
• Glass: melting process with significant emissions and tight margins.
• Oil refining: large installations with high volume of allowances at stake.

Also indirectly affected are the CFOs and operations directors of these companies, sustainability and environmental compliance managers, and advisors and consultants specialized in emission allowance management.

Practical example

Imagine a steel production plant that, according to EU ETS benchmarks, would be entitled to receive 500,000 free emission allowances per year for the 2026-2030 period. With the application of the CSCF, that allocation is reduced proportionally.

If the correction factor implies a 10% reduction on the preliminary allocation, the plant would receive only 450,000 free allowances instead of the 500,000 initially calculated. The 50,000 allowance difference would have to be acquired in the European carbon market.

At a reference price of 70 euros per tonne of CO₂—the usual range in the EU ETS—that annual deficit would represent an additional cost of 3.5 million euros per year, or 17.5 million euros over the entire 2026-2030 five-year period. For a medium-sized cement plant, the figures would be proportional to its allocation volume.

This example illustrates why reviewing decarbonization strategy and planning allowance purchases are first-order business decisions, not just environmental compliance matters.

What should companies do now?

1. Review the preliminary free allocations of each installation for the 2026-2030 period and calculate the concrete impact of the CSCF on the volume of allowances that will be received.
2. Quantify the allowance deficit resulting from the cut and translate it into economic cost using the current price of carbon in the EU ETS market as a planning reference.
3. Update the decarbonization plan for the five-year period: investments in energy efficiency and emissions reduction directly reduce exposure to the CSCF and carbon prices.
4. Design an allowance purchase strategy in the European carbon market: anticipating purchases when prices are favorable reduces total compliance costs.
5. Evaluate CBAM coverage for sectors exposed to international competition: identify which products and markets are protected by the border adjustment mechanism and which are not.
6. Coordinate with the sustainability and finance team to integrate carbon costs into operating budgets and in the valuation of industrial investment projects for 2026-2030.

Official source

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Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific decisions, consult a qualified professional. Source: https://eur-lex.europa.eu/./legal-content/AUTO/?uri=OJ:L_202601862