European Commission Unveils EU ETS Phase 5 Reform With €100bn Industrial Decarbonization Bank

On July 17, 2026 the European Commission tabled its proposal to revise the EU Emissions Trading System for Phase 5 (2031-2040), aligning the bloc's flagship carbon market with its target of a 90% net cut in greenhouse gas emissions by 2040 versus 1990. The proposal sets the annual quota-reduction rate (Linear Reduction Factor) at 3.7% for 2031-2035 and 1.7% for 2036-2040, down from the current 4.3%; cuts the Market Stability Reserve intake rate from 24% to 12% to keep more allowances in circulation for stability and liquidity; and creates a proposed €100 billion Industrial Decarbonization Bank to fund large-scale industrial decarbonization projects, with its first phase expected before 2030. It also proposes extending ETS coverage to flights departing Europe for destinations up to 5,000 km away. The proposal drove EU carbon allowance prices to a six-month high of €86.6/tCO2 on July 22 amid rising speculative positioning ahead of the reform.