In July 2026, the European Commission presented a package to reform the EU Emissions Trading System (the “EU ETS”). The reform would amend Directive 2003/87/EC (the “ETS Directive”) and the rules governing the market stability reserve (COM(2026) 616 final), the heat and fuel benchmarks for the period from 2026 to 2030 (COM(2026) 619 final), and the maritime reporting requirements (COM(2026) 620 final). This article provides an initial overview of the key proposed amendments and – subject to the outcome of the legislative process – an assessment of the potential implications for distributors of synthetic fuels, shipping companies and operators of installations.
Background
The package stems in part from the 2023 EU ETS reform, which required the Commission to review in 2026 whether the EU ETS rules for aviation, maritime transport and stationary installations and the market stability reserve should be revised. It is also driven by the European Climate Law, which requires the regulatory framework for climate and energy to be adapted to the recently adopted 2040 climate target of a 90% reduction in net greenhouse gas emissions compared with 1990 levels. The package expressly excludes the EU ETS2. Under the EU ETS1, responsibility generally lies with the operator of the installation that generates the emissions. By contrast, the EU ETS2, the separate emissions trading system for fuels used in buildings, road transport and small industrial installations, applies at the level of the supplier that releases the fuels for consumption. The EU ETS2 nevertheless remains relevant for distributors of synthetic fuels since, from 2031, the EU ETS1 is set to cover the distribution of synthetic fuels containing captured carbon, potentially bringing such distributors within the scope of both systems.
Slower decline in the number of allowances issued
Proposal COM(2026) 616 final envisages a slower reduction in the emissions cap from 2031 onwards. The cap refers to the total quantity of allowances issued annually across the EU, with each allowance entitling the holder to emit one tonne of CO₂ equivalent. The key parameter is the linear reduction factor which, in accordance with Article 9 ETS Directive, determines the percentage by which this total quantity is reduced each year. That factor is currently 4.3%, rising to 4.4% from 2028. Under current legislation, no new allowances would be issued after 2039. In order to achieve the 2040 climate target whilst at the same time providing businesses with planning certainty, the Commission proposes to adjust the trajectory by setting the factor at 3.7% between 2031 and 2035 and at 1.7% from 2036 onwards. This would mean that allowances would continue to be issued into the 2040s. As a precaution, companies concerned should review whether their procurement and hedging strategies assume a more rapidly declining cap.
Restructuring the MSR – new assumptions for reserve forecasts and pricing
The package would also change two key parameters of the market stability reserve (“MSR”). The MSR transfers allowances from auction volumes to a reserve when the total number of allowances in circulation exceeds an upper threshold and releases them back to the market when that number falls below the lower threshold (currently 400 million allowances). Not only would the reserve absorb surpluses more slowly under the ETS package, but the thresholds and release quantities would decline annually from 2029 onwards. Both these factors can alter market expectations of scarcity and thus influence prices within the EU ETS.
Broader scope of allowance surrender obligations – new rules on waste incineration, maritime transport and synthetic fuels
Under the ETS package, allowance surrender obligations would be extended to the following activities:
- Waste incineration: Operators of waste incineration installations should monitor Annex I of Directive 2003/87/EC. Under the proposal, incineration and co-incineration of non-hazardous waste would be added to Annex I as a separate activity. This would cover installations with a capacity exceeding three tonnes per hour (Recital 72 COM(2026) 616 final in conjunction with Annex I, point 5.2(a) Directive 2010/75/EU). Installations for the incineration of hazardous waste would remain excluded. The surrender obligation would be phased in as follows: allowances would have to be surrendered for 25% of the verified emissions reported for 2031, 50% for 2032, 75% for 2033, and 100% from 2034 (Article 12a Directive 2003/87/EC (new version)). Member States with equivalent measures would be permitted to opt out temporarily at national level (Article 12b Directive 2003/87/EC (new version)). The cap would be increased correspondingly by 10.2, 19.5, 28.1 and 36 million allowances (Article 9 Directive 2003/87/EC (new version)).
- Maritime transport below 5,000 gross tonnage (GT): Shipping companies and charterers with fleets in this segment should check which of their ships may be affected. Under the ETS package, allowance surrender obligations would be extended to further ship types from 2029, namely oil tankers, chemical tankers, gas carriers, LNG carriers, Ro-Pax ships (ferries that transport both vehicles and passengers), and passenger ships with a minimum gross tonnage of 400 and a maximum of 5,000.
- Distribution of synthetic fuels: In view of the proposed changes, companies that distribute or plan to distribute synthetic fuels should check whether, from 1 January 2031, they will need to obtain a greenhouse gas emissions permit (Article 4 in conjunction with Article 6 Directive 2003/87/EC (new version)), to surrender allowances, and to document the origin of the CO2 used. Article 3, letter (al) Directive 2003/87/EC (new version) defines synthetic fuels as renewable fuels of non-biological origin within the meaning of Article 2(2), point (36) Directive (EU) 2018/2001 (RED III) and as low-carbon fuels within the meaning of Article 2, point (13) Directive (EU) 2024/1788. Carbon chemically bound in synthetic fuels would be deemed to be emitted by the distribution of those fuels (Article 14(1) Directive 2003/87/EC (new version)).
Free allocation conditional on investment plan – installation operators should start planning early
Installation operators wishing to continue receiving free emission allowances from 2031 should start preparing an Invest in EU decarbonisation plan (Article 10a(3b) Directive 2003/87/EC (new version)) well in advance and allow sufficient time for its verification and approval by the competent authority. This is because, in addition to adding three new activities, the proposed package would make the already limited free allocation of allowances to industrial installations subject to certain conditions. Free allocation is intended to continue providing protection against carbon leakage from the EU, while also strengthening incentives to invest in decarbonisation. From the allocation period beginning in 2031, 80% of the free allocation amount would be issued in annual tranches only upon submission of an Invest in EU decarbonisation plan that has been verified in accordance with Article 15 Directive 2003/87/EC and approved by the competent authority. The remaining 20% would be allocated only once the competent authority has confirmed, no later than two years after the end of the relevant five-year period, that the investments have been made in the EU, that the eligible costs amount to at least 100% of the value of the free allocation and that significant emission reductions have been achieved at installation level (Article 10a(3c), subparagraph 3 Directive 2003/87/EC (new version)).
Single MRV report – less administrative burden for shipping companies
The proposed consolidation of reporting requirements under COM(2026) 620 final would reduce the administrative burden on shipping companies. Currently, the MRV Maritime Regulation (Regulation (EU) 2015/757) and the FuelEU Maritime Regulation (Regulation (EU) 2023/1805) provide for two parallel reporting systems, each requiring a separate monitoring plan and report. In future, these would be replaced by a single “MRV report”. Companies would then only need to submit one monitoring plan per ship (Article 6 Regulation (EU) 2015/757 (new version)). Verification and accreditation would be subject to a single framework. Shipping companies would be required to hold a valid document of compliance under Article 18 Regulation (EU) 2015/757 (new version) by 30 June of the following year.
New SMAP funding mechanism – additional source of revenue for eligible fuels
The proposed package would introduce the Sustainable Maritime Alternative Propulsion (“SMAP”) support mechanism, providing shipping companies with an additional source of revenue that could also indirectly affect fuel suppliers – provided that the fuels or propulsion technologies used meet the strict eligibility criteria. The mechanism is intended to support early movers, as the significant price differentials between fossil and sustainable maritime fuels and the slow deployment of zero-emission propulsion technologies have hampered the transition. The legal basis would be the new Article 3gaa Directive 2003/87/EC (new version). Under this provision, up to 110 million allowances would be reserved and allocated to shipping companies on a transparent, equal and non-discriminatory basis. The allocation would cover part of the price differential between fossil fuels and eligible sustainable maritime fuels, as well as all or part of the additional costs for deploying and using eligible zero-emission propulsion technologies and the technologies required for sustainable fuels.
The amount of allowances allocated would depend on the fuel used and would generally be calculated as follows: 55% of the price differential compared with fossil fuels for biogas and advanced biofuels, 90% for renewable fuels of non-biological origin (RFNBOs), 80% for low-carbon hydrogen and low-carbon fuels, and 90% of the additional costs for zero-emission propulsion technologies.
SMAP to cover FAME only if produced from certain feedstocks – proof of origin essential
Fatty acid methyl ester (“FAME”) is the chemical name for conventional biodiesel and the most widely used biofuel product in shipping. However, FAME would not automatically qualify for support under SMAP: It would only be eligible if produced from feedstocks listed in Part A of Annex IX to RED III. This is because Article 3gaa(2), letter (a) Directive 2003/87/EC (new version) would restrict the definition of “sustainable maritime fuels” for the biogenic pathway to biogas and advanced biofuels within the meaning of Article 2(2), points (28) and (34) RED III; under point (34), only biofuels produced from feedstocks listed in Part A of Annex IX to RED III qualify as advanced biofuels.
Conclusion and recommended action
The 2040 climate target (a 90% reduction in net greenhouse gas emissions compared with 1990 levels) remains unchanged; the ETS package instead focuses on the mechanisms through which emissions trading is intended to help achieve this target. The proposals would create both new obligations and opportunities for the companies concerned. Even if the details change during the legislative process, companies that are or may be affected by the new rules should already be taking steps to (i) adapt their procurement and hedging strategies to a more gradual decline in allowances issued and the revised MSR, (ii) assess whether they would become newly subject to surrender obligations as a result of waste incineration, maritime transport involving ships below 5,000 GT or the distribution of synthetic fuels, (iii) prepare to draw up an Invest in EU decarbonisation plan as a condition for receiving free allocation and (iv) assess whether the fuels they use are eligible under SMAP, including whether they can provide the necessary proof of origin.
Forward
