Raising the Allowance: The EU Updates Emissions Benchmarks

Cap-and-trade systems are effective ways for countries to incentivize industry to reduce emissions while also generating revenue for investment in sustainable technology. Today's ongoing energy crisis resulting from geopolitical conflicts involving Iran and Ukraine means countries are looking to use such systems to catalyze sustainable energy and achieve energy security by reducing dependence on fossil fuel supplies from potentially hostile nations.

To achieve those goals, the European Commission (EC) announced on May 10, 2026, proposed updates to the European Union Emissions Trading System (EU ETS) benchmark values for 2026–2030. The EU ETS is a cap-and-trade system that incentivizes industries to reduce greenhouse gas (GHG) emissions with limits that decrease annually in line with the EU climate target. Companies purchase allowances in auctions and can trade allowances among themselves. Companies whose allowances exceed their emissions can sell surplus allowances or keep them for later. Companies monitor and report emissions annually and surrender allowances to account for emissions. Heavy fines can result for companies that fail to meet these requirements.

The EC said that the EU ETS has contributed to emissions reductions from power and industrial plants of approximately 47% compared to 2005 levels. Revenue from the sale of the allowances flows to national budgets to support investments in renewable energy and low-carbon technologies. It has raised more than €175 billion since 2013.