CBAM Factor Slowed: Free Allocation Extended to 2038

The CBAM factor, the number that decides how much of your embedded emissions you actually pay for, is set to change. On 17 July 2026 the European Commission published its review of the EU Emissions Trading System, and for CBAM sectors it slows the withdrawal of free allocation and pushes the full phase-out from 2034 out to 2038.

For importers this cuts both ways. Certificate costs in the late 2020s would be lower than the current schedule implies, but the ramp continues for four extra years and the end point is unchanged: at some stage, every tonne of embedded emissions is paid for.

What the CBAM factor is

European producers in carbon intensive sectors receive part of their EU ETS allowances for free, so that they are not driven out of the market by cheaper high carbon imports. CBAM replaces that protection at the border, and the two have to be dismantled and built up in step.

The CBAM factor is the mechanism that keeps them in step. It expresses the share of free allocation that CBAM sectors still receive in a given year, and the CBAM obligation on importers mirrors it. In 2026 the factor is 97.5%, so importers surrender certificates for only 2.5% of embedded emissions. As free allocation falls, the importer's share rises towards 100%.

What the July 2026 proposal changes

The Commission proposes to reintroduce 15% of the free allocation that would otherwise have been withdrawn each year, starting in 2028, and to complete the phase-out in 2038 instead of 2034. In CBAM factor terms:

2028: from 90% to 91.5%, so the importer share falls from 10% to 8.5%;
2029: from 77.5% to 81%, so the importer share falls from 22.5% to 19%;
2030: from 51.5% to 59%, so the importer share falls from 48.5% to 41%;
2031 to 2034: increases of roughly 9 to 15 percentage points, conditional on decarbonisation investment;
2035 to 2037: the 15% buffer is maintained;
2038: the factor reaches 0% and CBAM applies to the full embedded emissions.

The years up to and including 2027 are untouched, which means the schedule that governs your current planning stays as it is.

What it means for importers

Take a company importing goods with 10,000 tonnes of embedded CO₂ per year. Under the current schedule, its 2030 obligation covers 48.5% of that, or 4,850 tonnes. Under the proposal it covers 41%, or 4,100 tonnes. At a certificate price in the range of the €75.28 per tonne recorded for Q2 2026, that is a difference of around €56,000 in a single year.

Useful, but not a reprieve. The relief is a buffer, not a cancellation, and it is spread across a longer runway. Companies that treated 2034 as the horizon for full CBAM exposure now need a model that runs to 2038, and one that can absorb further amendments while the file is negotiated.

There is a second order effect worth noting. Slower withdrawal of free allocation keeps EU producers better protected for longer, which narrows the price gap between European and imported material in the years when CBAM would otherwise have bitten hardest. Sourcing decisions taken on the old schedule may deserve a second look.

The wider ETS package

The CBAM factor change sits inside a substantial package that sets the framework for phase 5 of the EU ETS, running from 2031 to 2040 and aligned with the EU target of a 90% net emissions reduction by 2040. The main elements are:

A gentler cap trajectory. The linear reduction factor drops to 3.7% for 2031 to 2035 and 1.7% from 2036, against 4.3% today, so allowances keep being issued well into the 2040s.
Conditional free allocation from 2031. Free allowances require a verified decarbonisation investment plan, with 80% released on approval and the remaining 20% only after the investments are proven to have delivered the promised cuts.
A recalibrated Market Stability Reserve. The intake rate halves from 24% to 12% and dynamic reference points fall by 4% per year from 2029.
An Industrial Decarbonisation Bank of €100 billion, whose first phase starts in 2028 as an Investment Booster of 400 million allowances, worth roughly €30 billion.
Extra free allocation worth €6 billion for industry over 2026 to 2030, through a separate benchmarks proposal.

Because the CBAM certificate price is derived from EU ETS allowance prices, changes to supply and to the reserve feed through to CBAM costs indirectly as well. A market with more allowances for longer is, all else equal, a market with a softer carbon price.

Exports still have no rebate

European steel and aluminium producers had asked for an export rebate, on the grounds that CBAM protects them at the border but leaves them carrying ETS costs in markets outside the EU. The proposal does not provide one.

The Commission relies instead on the Temporary Decarbonisation Fund, which reimburses part of the CO₂ costs borne by exporters as free allocation falls away, focused on products with a particularly high carbon leakage risk. The European Parliament wants that fund to start earlier and cover more products, as we covered in our article on the Parliament position on downstream CBAM expansion.

What to do now

The proposal has only entered the ordinary legislative procedure, and EU leadership is aiming for agreement by the end of the first quarter of 2027. Parliament and Council will both amend it. That argues for preparation rather than reaction:

Model both schedules. Run your exposure under the current CBAM factors and the proposed ones so you can see the spread rather than a single number.
Extend the horizon to 2038. Investment cases built on full CBAM exposure from 2034 need reworking.
Do not slow down on data. None of this changes the obligations in the current cycle, including the 30 September 2027 declaration and surrender deadline for 2026 imports.

Keeping two scenarios alive by hand is exactly the kind of work that ends up in an unmaintained spreadsheet. The CBAM Desk forecasting module applies the official factors and quarterly prices automatically, so when the final text is adopted your projections update rather than needing to be rebuilt.

FAQ

What is the CBAM factor?

The CBAM factor is the share of free EU ETS allocation that CBAM sectors still receive in a given year. Importers surrender CBAM certificates only for the part of embedded emissions that free allocation no longer covers, so a higher CBAM factor means a lower certificate bill.

How does the July 2026 ETS review change the CBAM factor?

The proposal reintroduces 15% of the free allocation that would otherwise have been withdrawn, starting in 2028. The factor rises from 90% to 91.5% in 2028, from 77.5% to 81% in 2029 and from 51.5% to 59% in 2030, with the full phase-out completed in 2038 rather than 2034.

Does the ETS review reduce CBAM costs for importers?

Yes, in the years covered. Because the CBAM obligation mirrors the free allocation still granted, a higher CBAM factor lowers the number of certificates importers surrender. In 2030 the obligation would drop from 48.5% to 41% of embedded emissions. Full exposure still arrives, four years later.

Does the proposal include an export rebate?

No. Despite industry requests, the ETS review contains no export rebate mechanism. The Commission instead relies on the Temporary Decarbonisation Fund to compensate part of the carbon costs borne by exporters in CBAM sectors.

When would the ETS review be adopted?

The proposal entered the ordinary legislative procedure on 17 July 2026 and must be agreed by Parliament and Council. EU leadership is targeting agreement by the end of the first quarter of 2027. Nothing changes for the current CBAM compliance cycle in the meantime.

Key takeaway

The July 2026 ETS review softens the CBAM ramp without changing where it ends. Importers get a measurably smaller obligation between 2028 and 2033 and four more years of transition, but 2038 brings full exposure to embedded emissions all the same. Build the longer schedule into your plans now, and keep improving supplier emissions data, because that is what determines the bill in every scenario. Get in touch to model your exposure under both timelines.