Brussels: The European Union has put its flagship carbon market on the table for its biggest overhaul in years. On 17 July 2026 the Commission proposed the rules for a fifth trading phase running from 2031 to 2040, the stretch of years that will decide whether the bloc hits its target of cutting net emissions 90 percent by 2040 against 1990 levels.

The Emissions Trading System works by capping the pollution that power plants, factories and airlines may emit, then forcing them to buy allowances for every tonne they release. The cap falls each year, the supply of allowances shrinks and the price of carbon is meant to rise until cleaner options beat dirtier ones on cost.

A steeper path after 2030

Phase five sets the trajectory for that shrinking cap through the 2030s. Aligning the market with a 90 percent target means allowances will grow scarcer faster than under today’s rules, and the carbon price is expected to climb with them. For heavy industry, that is both the point and the problem.

Steelmakers, cement producers and chemicals plants argue that a rising carbon price without competitive clean alternatives simply raises their costs against rivals in regions with no carbon pricing at all. The Commission’s answer has been the carbon border levy on imports, which is meant to level that field, but its rollout remains untested at scale.

The free allowance bargain

Alongside the phase five proposal, the Commission moved to hand industry more breathing room in the near term. A separate measure raises the free allowances tied to the heat and fuel benchmarks for 2026 to 2030, unlocking roughly 80 million extra allowances for energy-intensive sectors and easing the maximum rate at which those benchmarks tighten.

The two moves pull in opposite directions on purpose. One signals a harsher decade ahead so companies invest now in cleaner processes; the other softens the immediate blow so factories do not close or relocate before those investments pay off. Critics on the green side see the extra free allowances as a subsidy that weakens the price signal. Industry sees them as survival money during a difficult transition.

Households sit in the background of this debate but rarely at its centre. A higher carbon price feeds through to electricity and eventually to the goods that carbon-intensive industry makes. The parallel carbon market for buildings and transport, due to bite later this decade, has already drawn political fire over its effect on heating and fuel bills.

The proposal now enters negotiation between the Parliament and member states, where the fight will centre on how fast the cap falls, how generous the free allowances stay and how the revenue is spent. Countries with large industrial bases will push for a gentler slope, while those further along in decarbonising will press for ambition.

What the Commission has done is set an anchor. By defining phase five now, years before it starts, Brussels wants to give investors a predictable signal about the price of carbon in the 2030s. Whether that signal survives the coming bargaining intact will tell Europe a great deal about how serious its 2040 target really is.