Draft amendments to the EU Emissions Trading System (ETS) would change the rate at which the bloc’s emissions cap shrinks between 2031 and 2035, and again from 2036, according to a leaked European Parliament document seen by Carbon Pulse. The leak was reported by Carbon Pulse. For allowance buyers, traders and industrial compliance teams, the immediate point is not a new legal cap but a signal that the supply trajectory for the next decade is still being negotiated, with Parliament, Council and Commission not yet aligned.
What the leak says, and what it does not
The reported document points to draft amendments rather than a final Parliament position. That distinction matters because the file is still inside the ordinary legislative procedure, and the public procedure record lists the stage as awaiting committee decision in the European Parliament Legislative Observatory. A leaked text can show the direction of travel, but it cannot bind emitters, auctions or the market stability reserve.
The official context is that the European Commission published a legislative proposal on 17 July 2026 to revise Directive 2003/87/EC and the market stability reserve decision, linking the ETS to the European Climate Law objective of a net 90% reduction in EU net greenhouse gas emissions by 2040 compared with 1990 levels, as summarised by the European Parliament’s Legislative Train. The same official summary states: “The proposal reduces the LRF from 4.4 %, to 3.7% in the period 2031-2035, and 1.7% in 2036-2040 (otherwise 2.7 % if international credits do not deliver, pending a European Commission assessment by 2033).”
Those figures describe the Commission proposal tracked by Parliament’s research service. They should not be read as the final Parliament amendment unless the adopted text says so. The leak indicates lawmakers are debating a lower cap reduction rate for the early 2030s; the exact legal number will matter only once committee, plenary and Council texts converge.
Why the linear reduction factor is the market lever
The linear reduction factor, or LRF, sets how quickly the annual emissions cap falls. A lower LRF for 2031 to 2035 would mean a slower annual tightening of allowance supply than under the existing 4.4% path, while the post 2036 rate would determine how steep the next phase becomes. For covered installations, airlines and maritime operators brought further into the system, this affects hedging horizons, borrowing strategies and the expected scarcity value of EU allowances.
A softer cap path does not automatically mean weak prices, because the ETS also interacts with free allocation, carbon leakage rules, the market stability reserve and demand from power and industry. But the LRF is one of the clearest structural signals in the market. If lawmakers keep a slower 2031 to 2035 decline, participants may reassess long dated allowance needs, while developers of removal and international credit projects will watch how any flexibility is conditioned.
The wider package around the cap debate
The Commission proposal is broader than the LRF. The Legislative Train summary says it would allow up to 2% of high quality international credits compared with a 1990 baseline between 2036 and 2040, with a new facility to centralise purchases of international credits and carbon dioxide removals, subject to further details later in 2026. It also says 250 million allowances would be auctioned from 2031 to 2040 to fund purchases of carbon removal units from biogenic emissions capture with carbon storage and direct air capture with carbon storage, with a Commission report targeted by December 2034 that may expand the list of removal activities.
This matters because a lower cap reduction rate and controlled access to outside units pull in different directions. One slows the domestic squeeze; the other can create compliance demand for eligible credits or removals if integrity rules are strict. Buyers should therefore separate three questions: how fast the EU cap falls, which external units may enter, and what quality bar applies to them.
Procedure and dates to watch
The official procedure file lists rapporteur Peter Liese in the ENVI committee, with shadow rapporteurs across the S&D, ECR, Renew, Greens, Left and ESN groups, and opinion roles in ITRE, TRAN and BUDG, according to the Legislative Observatory. It records the legislative proposal on 17 July 2026, committee referral announced on 17 September 2026, a committee draft report dated 15 September 2026 and multiple amendment batches tabled in October 2026.
The Legislative Train summary adds that the draft report was presented on 15 September with an amendment deadline of 6 October, that Parliament aims to have a position ready by the end of the year, that environment ministers held a policy debate on 12 October 2026, that the Environment Council is targeting a general approach on 11 December 2026, and that Parliament and Council are targeting an agreement in the first quarter of 2027. Those are targets, not completed steps.
What market participants should do now
Compliance buyers should treat the leak as an early warning, not as a settled change in allowance supply. The prudent checklist is to map exposure to 2031 to 2035 vintages, test procurement against both a slower and a faster cap path, and track whether any final text links international credits or removals to quality conditions and a Commission assessment.
Developers outside the EU should not assume that a softer ETS cap reduces opportunity. If the final package pairs a lower domestic LRF with tightly governed use of international credits or funded removals, eligible supply could face more documentation, authorization and monitoring scrutiny rather than less. The next hard signals are the committee vote, Parliament’s end of year position, the Council’s 11 December target and any Q1 2027 compromise text.
