EU ETS Reform: Key Business Implications for Türkiye and International Market Participants

On 17 July 2026, the European Commission published its proposal for a revised EU Emissions Trading System ("EU ETS"), introducing significant changes to the EU's flagship carbon pricing mechanism. The proposal is part of the EU's efforts to align the ETS with its 2040 climate target, while also addressing concerns about industrial competitiveness and the cost of decarbonisation. Businesses operating in or exporting to EU markets should take immediate note of the commercial and compliance implications.

Key elements of the proposal include a slower emissions reduction trajectory, the establishment of a new €100 billion Industrial Decarbonisation Bank, the future integration of carbon removals into the EU ETS, the potential use of international carbon credits, and the revision of rules on the free allocation of allowances. The proposal will now enter the EU legislative process and may be amended before adoption.

Revised Emissions Reduction Pathway

The Commission proposes reducing the annual Linear Reduction Factor ("LRF") from 4.4% to 3.7% between 2031 and 2035, and to 1.7% from 2036 onwards. This would slow the reduction of available allowances, allowing them to remain available into the 2040s. This would give companies in carbon-intensive sectors additional time to invest in decarbonisation technologies, while carbon credit prices may moderate in the short term due to the increased supply of allowances.

Industrial Decarbonisation Bank

A central feature of the proposal is the creation of a new Industrial Decarbonisation Bank ("IDB"),which is expected to mobilise around €100 billion between 2030 and 2040. An initial 'Investment Booster', funded through 400 million ETS allowances, is expected to provide around €30 billion for industrial decarbonisation projects from 2028 onwards.  EU-based manufacturers will gain access to significant financial incentives for green investment, which could give them a competitive advantage over non-EU suppliers who lack equivalent public funding support.

Carbon Removals and International Credits

The proposal paves the way for the integration of carbon removals into the EU ETS. It would allow the Commission to purchase up to 260 million high-integrity international carbon credits, which could be used from 2036 onwards, to help achieve the EU's climate goals by 2040. This creates new market opportunities for international project developers and carbon credit originators, and could generate demand for verified removal credits from countries including Türkiye.

Changes to Free Allocation

The Commission proposes extending free allowances until 2038, making continued access conditional on decarbonisation investments. Installations would receive most free allowances upfront based on investment commitments, with the remaining portion linked to the implementation of these investments. EU operators must invest in decarbonisation plans to maintain free allocation, which increases the cost of inaction and is likely to tighten sustainability expectations in supply chains for non-EU partners.

Practical Implications for Türkiye and International Players

The proposed reforms have significant implications for businesses operating across EU borders. Turkish exporters in carbon-intensive sectors, such as steel, aluminium, and cement - many of whom are already subject to the Carbon Border Adjustment Mechanism ("CBAM”) - will face increased pressure from EU customers to provide verified emissions data and demonstrate credible decarbonisation strategies. The €100 billion in EU industrial funding could also alter competitive dynamics in sectors where Turkish and other non-EU companies hold a strong export position.

International players, including multinational suppliers, carbon credit developers, and investors, should also reassess their strategic positioning. From 2036, the integration of international carbon credits creates opportunities for project developers in jurisdictions with credible carbon market frameworks. Meanwhile, the conditionality of free allowances signals that EU purchasers will increasingly require sustainability credentials from their supply chains.

Businesses with exposure to EU markets should consider the following actions:

• Monitor the progress of the legislative proposal and any amendments during the EU co-decision process, paying particular attention to changes affecting the scope of CBAM and the timelines for free allocations.
• Assess the impact on carbon-intensive exports to the EU, particularly where CBAM reporting and financial obligations already apply, and evaluate pricing strategies accordingly.
• Review and strengthen greenhouse gas monitoring, reporting and verification (“MRV”) processes to meet evolving EU customer and regulatory expectations.
• Develop or accelerate decarbonisation roadmaps that align with EU supply chain expectations, including investment planning for low-carbon technologies.
• Explore opportunities in emerging carbon removal and international credit markets, particularly for businesses with operations in jurisdictions developing voluntary or compliance carbon frameworks.
• Assess whether EU industrial funding initiatives (including the IDB) may alter competitive dynamics in your sector and consider advocacy or partnership strategies in response.

Although the proposal is still subject to negotiation and possible amendment, it signals the EU's clear intention to maintain the EU ETS as the central pillar of European climate policy, while placing greater emphasis on industrial competitiveness and the long-term development of the carbon market. Early strategic engagement with these reforms will be critical for businesses seeking to maintain and strengthen their position in EU markets.

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