ETS2 futures prices dropped sharply following the European Commission’s proposals to reinforce the Market Stability Reserve – 28% below the last trade in early September and 23% lower than the settlement price on 21 October. The EUA2-EUA spread has widened to -€20/t, and we expect this premium to deepen as the ETS2 price increasingly reflects its own fundamentals. While the proposals have already reshaped price expectations, the real turning point for liquidity will come with the start of auctions. Until then, trading will remain sporadic, but once auctions begin, we anticipate a more robust and transparent market to emerge.

European Commission’s proposals would reduce the ETS2 price and volatility

On 21 October, Commissioner Hoekstra addressed the Environment Council in Luxembourg, outlining adjustments to ETS2 aimed at keeping prices within a politically and economically acceptable range.

As outlined in our previous analysis, the proposed redesign of the Market Stability Reserve (MSR) would significantly alter market dynamics. Our modelling confirms these measures would achieve the Commission’s stated objective to reduce both the price level and price volatility.

As Figure 1 illustrates, under the proposed framework, the EU ETS2 price in 2027 would fall to below €40/t, more than halving compared to current expectations. Although prices would rise from then onward, they would do so gradually, reaching around €150/t in 2040. In contrast, under the current rules, the EU ETS2 price would climb sharply to more than €200/t by 2033.

Market reaction: Futures drop 28%, EUA2-EUA spread turns negative

The market responded quickly. As Figure 2 shows, on 22 October, one December 2028 futures contract traded at €74.50/t – the first trade since early September and only the sixth since the ETS2 futures market launched in May. The following day, three more contracts were traded, with a settlement price of €65.25/t.

This represents a 28% drop compared to the last trade in early September and 23% below the settlement price on 21 October (the day of Hoekstra’s remarks).

The price impact is also evident in the spread between the price of EUA2s and EUAs. In the run-up to Commissioner Hoekstra’s remarks, the spread narrowed from a peak of €9/t in August to -€2/t on 21 October. Since then, it has turned further negative to -€20/t, meaning EUAs now trade at a significant premium to EUA2s. We expect this premium to rise and the spread to become more negative as the EU ETS2 price increasingly reflects its own fundamentals.

Liquidity will remain thin until auctions begin

While the price impact has been substantial and trading activity has picked up, liquidity will likely remain limited until auctions begin – when the first volumes are issued by the European Commission and offered on behalf of member states. Until then, selling futures carries significant risk: potential sellers have limited ability to hedge positions. When asked more specifically about the planned start date of the early auctions, Hoekstra replied that “mid-point next year would be both ambitious and decent”.

In short, the proposals have already reshaped price expectations, but the real turning point for liquidity will come when auctions begin. Until then, trading activity will remain sporadic. Once auctions start, we expect a more robust and transparent market to emerge.