Liquidity in the EU ETS2 futures market remains thin. Since our ETS2 August Wrap-Up, only one trade has been recorded: On September 8th, one Dec-28 futures contract traded at 90.75 EUR (on ICE Endex), the highest price observed to date.

That brings the total number of trades since the launch of the ETS2 futures market in May to five, all in the Dec-28 contract.

Figure 1 illustrates the volume and price development of the ICE Endex EU ETS2 Dec-28 future since inception.

In late September, Beatriz Yordi, head of the European Commission’s carbon market and clean mobility unit, said she expects the ETS2 price to be around 30 EUR/t in 2027, around a third of the price of the September 8th trade. According to Yordi, the market and independent forecasters are not sufficiently factoring in the (abatement) effect of complementary policy instruments. In short, the Commission expects much lower emissions, hence less demand for emission allowances in the EU ETS2.

In our own forecast, we account for announced national subsidies and assume abatement costs to improve over time in line with technology development and maturity. We project the ETS2 price to be around 85 EUR/t in 2027, before surging to 147 EUR/t in 2030, and 211 EUR/t in 2034.

For liquidity to increase and price discovery to mature, political clarity is essential.

In June, a group of 16 member states, including heavyweights such as Germany, Italy, Spain and Poland, published a non-paper (Carbon Pulse uploaded a copy here) warning the European Commission that the current setup creates market uncertainty, and, more importantly, about the risk of eroding public support for ETS2.

The non-paper included five reform suggestions, most notably to increase the volume and extend the lifetime of the ETS2 Market Stability Reserve (MSR). The paper also asks the Commission to consider including early start of EUA2 auctions (2026 instead of 2027 as foreseen in Chapter IVa of the ETS Directive) and to strengthen price control mechanisms.

The Commission received the non-paper with no public misgivings seems to take the view that if the market is better informed about the likely future drop in transport and heating emissions, the supply-demand balance will loosen up and the price forecasts could come down significantly. It promised to come up with concrete proposals to address the member states’ concerns.

In mid-September, the European Commission said it would present an analysis on the non-paper proposals for lowering price expectations ahead of the environment council on 18 September (a meeting of the member states’ environment ministers), but so far, nothing has been shared publicly.

Stakeholders and policy makers are growing impatient and pushing the Commission to at least indicate a date when the proposals can be expected.

What seems increasingly clear is that the ETS2 discussion will be kept out of the general ETS review. Instead, the Commission seems set to proceed with secondary legislation with minimal involvement of the European Parliament and Council.

That would allow for a much faster processing, but it leaves a big question how and MSR revamp or early auctions could be implemented through this avenue. It would appear that early auctions require amending the ETS Directive’s Article 30d, which states that auctions “shall start in 2027”.

Similarly, it seems logical to expect changes to the ETS2 Market Stability Reserve to be done in the ETS Directive and/or the MSR Decision, both of which are primary-level legal texts enacted by the European Parliament and the Council.

If draft delegated acts are presented shortly, they could be adopted after two months of scrutiny. For example, if a draft delegated act to start early auctions or to adjust the MSR lifeline is presented in October, it could theoretically be adopted by the Commission by late 2025.

The proposed redesign of the MSR could have a substantial impact on market outcomes. Most strikingly, as Figure 2 illustrates, removing the clause that cancels all allowances initially placed into the reserve from 2031 onward could drive the carbon price down to just under one-half of our base-case projection in the early 2030s.