This note recaps an exceptionally active two months for the ETS2, covering the political developments that led from the Commission’s proposals to the Council’s decision to delay the system to 2028, and their impact on market dynamics and our ETS2 price projection. Given the slower pace of progress and limited liquidity until auctions begin, we will move from monthly to quarterly updates, while continuing to provide timely targeted analysis on key developments.
In June, 16 member states – later joined by two more – including heavyweights such as Germany, Italy, Spain and Poland, published a non-paper (Carbon Pulse uploaded a copy here) warning the European Commission about risks associated with the ETS2. The paper highlighted concerns about market uncertainty, and, more importantly, the potential erosion of public support.
It proposed several reforms, including expanding and extending the ETS2 Market Stability Reserve, starting EUA2 auctions in 2026 instead of 2027, and strengthening price control mechanisms.
On October 21st, the European Commission, in the person of climate commissioner Wopke Hoekstra, presented its response to the non-paper, outlining measures to keep the ETS2 price within a politically and economically acceptable range. The proposals included reconfiguring the MSR so that if the EUA2 price exceeds €45 per tonne, the reserve can release up to 80 million allowances per year in 2027, 2028, and 2029, compared to the previous limit of 20 million. The Commission also proposed retaining unused volumes in the MSR beyond 2030 rather than invalidating them as stipulated in the original legislation. Finally, the European Commission proposed to start auctions in 2026 instead of January 2027. When asked more specifically about the planned start date, Hoekstra replied that “mid-point next year would be both ambitious and decent”.
Most ETS2 watchers had expected these measures – as they were in line with the non-paper supported by a majority of member states – would be sufficient to secure ETS2’s planned start in 2027. That understanding was shattered by the 4-5 November Environment Council meeting, where member states’ ministers were to finally agree on a 2040 emission reduction target. Negotiations went on well into the night, with central/eastern European countries unwilling to accept 90% as the overall target. It had long been known that several countries would not accept an ambitious 2040 climate target without obtaining concessions on separate (although indirectly related) files, most notably on the ETS2 and the plan to ban the sale of new combustion engine vehicles from 2035. At the Council meeting, the holdouts achieved both a one-year delay to ETS2 and a watering down of the fossil-fuel car restrictions.
ETS2 was always seen as one of the most controversial elements of Europe’s climate legislation package, especially in countries with low electric vehicle adoption and high reliance on fossil-based heating. Please see here for our analysis of low-carbon vehicle adoption across the EU.
On November 13th, the European Parliament approved a compromise text for the 2040 target, which aligns with the Council’s position and includes the ETS2 delay. The file will now move on to trilogue negations between the European Parliament, the Council and the Commission. The first meeting will reportedly take place on 9 December. Since the two lawmakers’ positions are already well aligned, the process might be quick, and we could theoretically see agreement on a final text by the end of this year (even so, the formal adoption would likely be in early 2026).
Even before the proposed delay, Veyt projected prices to be significantly depressed by the Commission’s proposed MSR amendments, which would effectively bring over 400 million allowances that were previously cancelled back to the market. (See our analysis of the adjusted MSR policies here.)
Compared to our pre-MSR-adjustments base-case, the delay still results in considerably lower prices. However, when compared to only the MSR-adjustments without delay (i.e. the European Commission proposals from October), the delayed start leads to slightly higher prices until 2032, and somewhat lower prices thereafter. The year 2032 marks the end of the period when front-loaded volumes are withdrawn from the cap.
With one less year of incentives but an unchanged long-term ambition, the system must deliver the same cumulative abatement over a shorter period. This means higher prices early on, as the market has to “catch up” to meet the 2030 target once trading begins.
The slightly more bearish long-term outlook reflects the fact that higher early-period prices lead to greater near-term abatement, so by the early 2030s the system will have already over-achieved somewhat, allowing prices to ease after 2032.
We updated our base case on our platform to reflect this proposed policy framework, i.e. MSR changes and delay to 2028. As a result, all charts and tables now start in 2028, rather than 2027 as before. Please see here for our full analysis of impact of the ETS2 delay to 2028.
One question many are asking now is whether the ETS2 start date change will be bundled together with the MSR tweaks and other planned adjustments, for which the concrete legal proposal(s) have not yet been published.
When asked about this during the press conference, Commissioner Hoekstra answered unequivocally that the ETS2 delay is already effective as per the Council decision and requires no further processing.
To us, as lay readers, that seems to imply that the conclusions from the Council’s meeting must effectively take precedence over the relevant stipulations in the ETS Directive.
Many analysts, including Veyt, have questioned whether all the MSR and early auction amendments can be done by the Commission through delegated acts (which would mean minimal involvement of the European Parliament and Council), or if some might require a reopening of the ETS Directive and/or the MSR Decision, the two primary legal bases for ETS2 (both are passed by the European Parliament and the Council).
Chapter IV a of the ETS Directive defines the quantity of allowances, how and when to auction them, and when the regulated fuel providers shall surrender EUA2s for compliance. That said, regarding the forthcoming MSR changes, the Commission website states clearly that “[t]he proposed measures can be implemented without amending the ETS Directive.”
If we assume that all the changes can be done through delegated acts, the process will be as follows: the Commission will present draft Commission regulations, probably in early December. By default – unless the Council or Parliament actively objects – they will enter into effect two months later.
Following the European Commission’s announcement, market activity showed a brief uptick, although liquidity remained very low. On October 22, a December 2028 futures contract traded at €74.50/t, the first since early September, followed by three more trades the next day at €65.25/t.
The Council’s decision to postpone ETS2 to 2028 has deepened uncertainty and stalled liquidity, which is unlikely to recover until auctions begin and the first volumes are issued. Until then, selling futures carries significant risk, as potential sellers have limited ability to hedge positions.
Meaningful progress on national transposition and the start of auctions will be critical to laying the foundations for a functioning market. In this environment of uncertainty, we will continue to provide insights to clients. We will shift to quarterly updates, focusing on legislative progress, complementary policies, and market signals. At the same time, we will continue to deliver targeted analyses on key developments.
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