On 17 July 2026, the European Commission published its review of the EU ETS Directive and MSR Decision. On 11 September, EU ETS rapporteur MEP Peter Liese published a preliminary draft report of the EU ETS review. Both the Commission and Mr. Liese’s proposals increase free allocation, channel revenues from the sale of emission allowances to industry, and decrease the system’s ambition.
During a public press briefing, Mr. Liese justified this approach with the need for industry to receive those subsidies to fund its decarbonisation. However, this approach fails to acknowledge the key role of the CBAM as provider of long-term revenues for EU manufacturers in EU markets, thanks to the protection it provides against carbon leakage, making those subsidies (at least partly) redundant.
Ambition
Ambition is not damaging for industry. For the first time ever, both imports and goods made in the EU face carbon costs. The CBAM provides EU plants with pricing power, allowing them to increase their selling prices, as illustrated in Figure 1. On this figure, the price of a CBAM good (steel hot rolled coil (HRC)) increases from P0 to P1 as the supply curve shifts upwards. This has been observed in EU markets, with steel market analysts MEPS International reporting a price increase in January 2026 of 13 euros per tonne of flat steel and 9 euros per tonne of long steel [1], well superior to the increase of net carbon costs (emissions – free allocation) for steelmakers this year[2].
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Figure 1: supply-demand curves of steel HRC in 2025 and 2026, including carbon costs for EU installations and imports
The price increase of steel attributed to the CBAM and EU ETS likely exceeds net carbon costs for EU manufacturers because carbon costs are relatively higher for imports than for EU plants. This effect is illustrated in Figure 2, where imports that were near the low-cost end of the merit order before the CBAM are relegated to higher-cost parts, including outside the profitable area, whereas previously unprofitable EU production becomes profitable, and the price climbs up further, to P2.
Figure 2: supply-demand curve with some imports priced out of the EU market
Installations covered by the EU ETS also benefit from EU ETS funding through the Innovation Fund. In the steel sector, 776 million euros were received by iron and steel projects and 2.8 billion euros by hydrogen projects (some of which contribute to the iron and steel industry).
By comparison, the amount of free allocation removed by the CBAM from iron and steel installations in 2026 is only worth about 230 million euros.
Read the full position paper for our analysis and overview of Sandbag’s proposal as well as of the proposals by the Commission and MEP Peter Liese. Our position paper covers amendments pertaining to:
- ambition,
- the New Entrants Reserve,
- free allocation, price stability,
- aviation,
- domestic permanent removals,
- indirect cost compensation,
- transparency,
- the Market Stability Reserve.
Footnotes:
[1] MEPS International (2026), Subdued start to CBAM era for EU steel industry
[2] Source: Sandbag (2026), The EU ETS money is coming!
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