ETS Review – More Phasing, More Conditionality

Research evidence excerpt

ETS Review – More Phasing, More Conditionality

Update

July 17, 2026 02:15 PM GMT

Morgan Stanley & Co. International plc+MMetals & Mining | Europe Alain Gabriel, CFA

Equity Analyst

ETS Review – More Phasing, Alain.Gabriel@MorganStanley.comAdahna Ekoku +44 20 7425-8959

Adahna.Ekoku@morganstanley.com +44 20 7425-0578

More Conditionality Rachel Fletcher, Ph.D.

Equity Strategist

Rachel.Fletcher@morganstanley.com +44 20 7677-4089

Free allocation phase-out has been slowed as anticipated, but Ioannis Masvoulas, CFA

falls short of expectations/industry demands. Moreover, free EquityIoannis.Masvoulas@morganstanley.comAnalyst +44 20 7425-0427

allowances in 2031-2035 are now conditional on decarbonisation Ferdinand Huber

investment. More funding for green capex should improve ResearchFerdinand.Huber@morganstanley.comAssociate +44 20 7677-2702

project economics.

Metals & Mining

Europe

What's changed? Industry View In-Line

# Lower than hoped for cost relief. The European Commission’s 17 July EU ETS

proposal confirms a more pragmatic post-2028 carbon-cost framework for energy-

intensive industries, without diluting the ETS as Europe’s core decarbonisation

mechanism. The most important change for metals is the slower phase-out of free

allocation for CBAM-covered sectors from 2028. Free allocation now stands at

91.5% in 2028, versus 90% previously, 81% in 2029, versus 77.5%, and 59% in 2030,

versus 51.5%. Free allocation then falls to 48% in 2031, 37.5% in 2032, 27% in 2033

and 15% from 2034 to 2037, before falling to 0% from 2038, versus 2034

previously. However, the proposal still constitutes a faster phase-out trajectory

than our current house forecasts. See Exhibit 1 and Exhibit 2 .

# Conditionality is the key change. From the 2031-35 allocation period, companies