Free allocation to 2038: the ETS reform that would slow CBAM's phase-in
CBAM and free allocation are two halves of one mechanism. As EU producers in CBAM sectors lose their free allowances, importers pay for a matching share of embedded emissions. Under the law as it stands, that handover runs from 2026 to 2034. A proposal now before Parliament and the Council would stretch it to 2038, and several governments are pressing to go further.
What the Commission proposed
On 17 July 2026 the Commission published its proposal to revise the EU Emissions Trading System, COM(2026) 616. For sectors covered by CBAM, it would reintroduce 15 percent of the free allocation already scheduled to be withdrawn, starting in 2028, and move the end of the phase-out from 2034 to 2038. From 2031, free allocation would depend on operators investing in decarbonisation under a verified plan.
Nothing changes for 2026 or 2027. The CBAM factor, the share of benchmark free allocation still in place, is 97.5 per cent this year and 95 per cent next year. Under current law it falls to 90 per cent in 2028 and reaches zero in 2034. The proposal would flatten that path from 2028 onwards.
Why importers should care
A slower withdrawal of free allocation means a slower rise in the CBAM charge. The free allocation adjustment deducted from an importer's bill would stay larger for longer, and the full charge on embedded emissions would not apply until 2038. For a business forecasting CBAM costs into the 2030s, that is a material change to the later years of the model.
It does little to the case for actual emissions data. Mark-ups on default values still rise to 30 per cent for most sectors from 2028, and the certificate price still follows the carbon market.
The pressure to go further
The proposal has opened a wider argument. At the Competitiveness Council on 24 September, Austria circulated a paper arguing that 2038 is too early an end date for free allocation in CBAM sectors. A joint paper from Italy and Czechia, dated 29 September and prepared for the European Council on 15 and 16 October, asks for the phase-out to be suspended as part of a package of relief for industry facing high energy costs.
On the other side, companies that have already invested in low-carbon production argue that prolonging free allocation weakens the case for those investments. The Commission attributes high energy prices to dependence on imported fossil fuels and has defended the carbon market.
Russia's WTO challenge, which we covered in September, also targets free allocation, so any extension will be watched closely in Geneva.
Timetable
The Irish presidency of the Council is aiming for a common position among member states by 11 December, and Parliament plans to vote on its position at the plenary session of 14 to 17 December. Negotiations between them would follow, with a target of concluding by the end of March 2027.
What to do
Keep 2026 and 2027 budgets on current law. For later years, run two versions of the forecast: one with free allocation gone by 2034 and one with it lasting to 2038. Treat the proposal as a possible reduction in future cost, and do not bank it until the text is adopted.
CBAM-Assured helps importers build CBAM cost forecasts that separate gross charges from net liability after free allocation; contact us to test your assumptions.