The European Commission’s proposal for the EU Budget 2028–2034 marks a significant shift in how the Union will fund its future priorities. In an era of mounting climate urgency and shifting geopolitical landscapes, Brussels is redefining its financial strategy by anchoring the next Multiannual Financial Framework (MFF) in climate-related revenues—especially through mechanisms like the EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM).
This new direction not only ensures sustainable funding for the EU’s green ambitions but also strengthens the Union’s position in global climate governance. Here’s how carbon pricing tools are becoming pillars of the EU’s future financial resilience.
Linking Climate and Budget: The Rise of “Own Resources”
Under the Commission’s proposal, carbon revenues are being formally categorized as “own resources” of the EU budget—meaning the Union no longer needs to rely entirely on national contributions to fund its operations. This innovative approach reduces financial pressure on member states while aligning climate, trade, and fiscal policy.
Two new streams of revenue will be particularly important:
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ETS-based resources, generated through the auctioning of carbon allowances in the EU carbon market.
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CBAM-based revenues, collected from importers of carbon-intensive goods outside the EU, who are required to purchase CBAM certificates mirroring the ETS carbon price.
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Together, these mechanisms are expected to bring approximately €11 billion annually to the EU budget starting from 2028—€9.6 billion from ETS auctions and €1.4 billion from CBAM, according to Commission estimates based on a reference carbon price of €88 per tonne.
CBAM: A Climate Policy with Budget Power
The Carbon Border Adjustment Mechanism, formally introduced by Regulation (EU) 2023/956, is no longer just a climate instrument—it is a budgetary cornerstone. CBAM ensures that carbon-intensive imports, such as cement, aluminium, steel, fertilisers, hydrogen, and electricity, are subject to the same carbon costs as goods produced within the EU. This eliminates the risk of carbon leakage, where production is outsourced to countries with laxer climate rules.
From 2026, importers will be obliged to purchase CBAM certificates that reflect the average ETS price. The system will be fully operational by 2034, coinciding with the complete phase-out of free ETS allowances currently granted to EU industries. This gradual transition means that both EU and foreign producers will compete under a uniform carbon cost regime.
By 2028, CBAM will not only level the playing field in trade but also become a steady revenue source for the EU budget. This connection of climate compliance with fiscal independence is a hallmark of the new MFF strategy.
ETS Reform: Ending Free Allowances, Boosting Budget Autonomy — Now Including ETS2
A central pillar of the EU’s future budgetary strategy is the expansion and reform of its carbon pricing framework. The EU Emissions Trading System (ETS) is not only being reshaped internally—with the phase-out of free allowances—but is also being extended through the introduction of a parallel system known as ETS2.
Phasing Out Free Allowances (ETS1)
The existing ETS—often referred to as ETS1—has covered power generation, heavy industry, and aviation since 2005. Under the reformed system, free emission allowances for industries covered by CBAM will be gradually phased out starting in 2026, declining until their full elimination by 2034. This shift ensures that both domestic and imported carbon-intensive goods face equivalent pricing through ETS auctions and CBAM certificate obligations.
The resulting increase in auction volumes under ETS1 is expected to yield approximately €9.6 billion per year for the EU budget by 2028, assuming an average carbon price of €88 per tonne. This makes ETS1 a primary source of new “own resources” that reduce dependence on direct national contributions.
Introducing ETS2: A New Stream of Carbon Revenue
Complementing this evolution is the launch of ETS2, a separate emissions trading system targeting the buildings and road transport sectors, as well as smaller industrial emitters not previously covered under ETS1. Starting with a price cap during the initial years, ETS2 will become fully operational in 2027, with auctioning of ETS2 allowances contributing additional revenue to the EU budget from 2028 onwards.
While ETS2 revenues will primarily finance the Social Climate Fund—aimed at supporting vulnerable households during the green transition—the Commission’s new budget framework proposes channeling a portion of ETS2 revenues directly into the EU budget as of 2028. This marks a critical expansion of the EU’s fiscal base and carbon pricing reach.
Strategic Objectives: Climate, Competitiveness, and Resilience
The integration of CBAM and ETS revenues into the EU budget is about more than just numbers—it is a strategic move to underpin the European Green Deal, strengthen economic sovereignty, and reinforce climate diplomacy.
From a policy perspective, the use of carbon-related revenues addresses three key goals:
1. Ensuring a level playing field between domestic producers and foreign competitors.
2. Securing long-term funding for climate and innovation initiatives, including Just Transition investments and energy infrastructure.
3. Driving global adoption of carbon pricing, as countries exporting to the EU are incentivized to implement similar systems to avoid CBAM costs.
This budget framework also allows the EU to react to crises more flexibly—be it geopolitical shocks, trade disputes, or natural disasters—thanks to a more predictable and independent source of income.
What Lies Ahead
The proposal still requires unanimous approval from the European Council and consent from the European Parliament. Yet, it already signals the Commission’s intent to embed climate action at the heart of EU finances, institutionalizing carbon pricing as not just a tool for environmental policy, but as a foundational pillar of European economic strategy.
In parallel, discussions continue over how CBAM revenues will be reinvested—especially in industry decarbonisation and export rebates, which are crucial for preserving the competitiveness of EU manufacturers in global markets.
