EU ETS Reform and Carbon Prices Adjust to a New Reality

On July 17, 2026, the European Commission released its long anticipated review proposal for the EU Emissions Trading System.

The proposal represented a comparatively less restrictive version of the anticipated policy changes, although many analysts expected further changes during the legislative process. The growing emphasis on competitiveness, influenced by political developments following the 2024 elections and broader concerns regarding industrial resilience, was expected to result in softer market balances than originally anticipated.

Key proposal elements:

Linear Reduction Factor: A proposed 3.7 percent LRF for 2031 through 2035 and 1.7 percent from 2036 through 2040 would add approximately 275 million tonnes to total supply during 2031 through 2040 compared with previous assumptions.

Free allocation: Free allocation would remain at 15 percent until 2038. However, companies would need to demonstrate that they are implementing energy efficiency audits and formal Climate Transition Plans to receive allocations.

Market Stability Reserve: The total number of allowances in circulation, a key factor determining the operation of the MSR, would be considerably reduced. This would allow the MSR to begin returning allowances to auctions more rapidly.

Carbon price implications:

Energy Aspects revised its carbon price forecast to €124 per tonne for 2031 through 2035, down from €136, and €95 per tonne for 2027 through 2030, down from €97.