Quarterly update of price forecast

This quarterly update report presents Veyt’s base-case EUA price trajectory out to 2035 with our view on supply (availability of EUAs) and demand (GHG emissions covered by the EU ETS). Since the previous edition, in April 2025, we have revised up coal- and gas-based generation so far in 2025, and, importantly, adjusted down expected industrial activity in 2025 and 2026 to reflect lower GDP growth due to the US Administration’s tariff wars. Reduced industrial activity affects two key variables in our model. First, it leads to reduced direct emissions from heavy industry installations, and second, it means these installations will consume less electricity, which will in turn impact the power sector emissions.

As usual in the quarterly updates, we have also fed updated forward prices for power generation fuels (coal and gas) into our carbon price model.

Rearmament, competitiveness, and the 2040 target

Six months have passed since Donald Trump entered the White House. European policy makers are still trying to make sense of and adjust to a world in which old assumptions are no longer valid, and in which the agendas of media, politics and businesses around the world are constantly scrapped and replaced by the erratic initiatives of the US President.

Tariffs

The tariff uncertainty that began in February 2025 continues unabated. While EU-US negotiations are ongoing, the threat of a blanket 20% tariff on EU goods is still hanging over the European economy. Signals from these negotiations have not been hopeful, with US President Trump threatening to raise the blanket tariff to 50% if a deal is not reached. Unless a deal is reached, this ad valorum levy will enter into force on 1 August.

Simultaneously, the Trump administration’s tariffs on steel, aluminium, and cars are still in effect. Non-US production of steel and aluminium were targeted in February with a 25% rate that was raised to 50% in early June. Cars and car part imports continue to be charged a rate of 25%.

Our forecast reflects the near-term risk to EU growth, industrial production and EUA demand as US tariffs and tariff uncertainty reduce EU export competitiveness.

Rearmament

The whipsaw policy changes in the US have unsettled EU leaders. As a result of doubt cast on US commitment to NATO, rhetoric against European values, and cozying up to Russian president Putin, the EU has emphasized a push to take greater responsibility for its own defence.

In March, the European Commission presented a White Paper on defence with the aim of raising EUR 150 billion to rearm the continent, boosting national defence spending, and increasing the budgetary flexibility of member states to spend for defence purposes.

The German Bundestag (parliament) has approved a constitutional change to allow for more debt-financed military and infrastructure investments. EU member states and others, such as the UK and Norway, are seeking new ways to cooperate both within and outside of NATO.

The EU has adopted an approach that is both encouraging self-reliance on the continent while also appeasing the US President by encouraging members to fulfil their defence spending per GDP goals.

Increased military spending in the EU is expected to drive some additional GDP growth. Per the European Commission’s Spring 2025 Economic Forecast, the additional defence spending will result in an increase of 0.1 percentage points in 2025, rising to 0.5 percentage points compared to the baseline.

Competitiveness

Denmark took over the Council presidency on 1 July, its priorities-emphasizes the continuation of a legislative agenda centered around boosting European competitiveness.

Building on the Draghi report from 2024, Commission President van der Leyen unveiled a Clean Industrial Deal (CID) in February, a roadmap for how to revitalise and decarbonise European industry. Key elements include securing access to affordable energy, developing lead markets for European clean tech, and raising more public and private investment.

The CID wants to strengthen EU-level funding by creating, in 2026, of a EUR 100 bn Industrial Decarbonisation Bank. This element is arguably the most important one for carbon market stakeholders since much of that funding will come from the sale of EUAs. One-third of the proposed financing will depend on the outcome of the upcoming ETS review. No additional allowances will be put on the market for the purpose of the bank, and the carbon market impact is therefore indirect, depending on the success of the bank in speeding up industry emission reductions.

2040 target

The Clean Industrial Deal is presented as a “transformational plan” but also reiterates Europe’s commitment to its 2050 decarbonisation target, and a 90% emission reduction by 2040.

The EU’s 2040 climate target proposal was set to be presented in Q1 but has been postponed repeatedly. It was presented 2 July: A 90% emission reduction target, but with focus on ‘flexibilities’ in the shape of a limited use of (domestic) removals and (imported) climate credits to help count to 90. The usage of international credits to meet the 2040 target resonates well with the new German government (CDU and SPD), France, and other countries, as well as many EPP (centre-right) members in the European Parliament.

Commissioner Hoekstra is clearly hoping that flexibility is what it takes to muster a majority for the 2040 target in the Council and in the European Parliament. For more details about on the 2040 target, see our analysis here.

EU-UK linking

On 19 May, the UK and the EU agreed to work towards linking their carbon markets. We assume that linking the markets would be a strong bullish signal for UKAs while the EU market would feel a substantially more muted bearish impact. As details around the timeline have not been made clear, we have not incorporated consideration of EU/UK ETS linking into our updated price forecast. For more details on the EU-UK agreement, see our analysis here.

Demand lowered due to weaker economic growth

For 2025, we estimate total EU ETS emissions (including shipping and aviation) at 1172 Mt. This is 26 Mt higher compared to 2024, where total emissions came in at 1146 Mt (according to the data available in the registry as of 10 June). The increase in emissions can be mostly attributed to higher emissions in the power sector, where unfavourable weather conditions led to lower renewable output in the first quarter of 2025, increasing the need for emission-intensive fossil fired generation.

The industrial sector, on the other hand, is expected to decrease its emissions with lower production output resulting from trade wars.

Our aviation forecast for 2025 shows emissions at the same level as 2024, the while shipping sector is expected to increase emissions by 18%. This results in an increase in 2025 emissions of 2% for the whole EU ETS.

From 2026 we expect emissions to drop on average 5% per year until reaching 926 Mt in 2030, 19% below the 2024-level.

Post-2030, we expect an even steeper rate of emissions reductions, at an average of 8% p.a. For 2035 we estimate total EU ETS emissions at 618 Mt, which is a decrease of 46% compared to 2024. Figure 1 illustrates the emission pathways across sectors.

Power emissions

Compared to our previous forecast, we updated our power modelling assumptions to reflect the ongoing trade wars. The latest GDP forecast from IMF shows a downward adjustment by 0.4% in 2025 and 0.2% in 2026 (EU-average). We believe this should mostly impact industrial sectors and consequently electricity demand from industry. We have updated our power demand assumptions across all the modelling horizon to reflect the changes in GDP forecast. This translates into lower emissions from the power sector.

In 2025, the effect of lower electricity demand is outweighed by the weak renewable output and favourable conditions for coal power plants (as mentioned in the previous section). For the years 2026-2029 however, it leads to the total reduction of 12 Mt, followed by another 5 Mt reduction in 2033-2035.

The exception is the period of 2030-2032, where we have increased our emissions forecast in the power sector due to a reduction in offshore wind capacities. This comes because of tariff risks and some renewable projects being cancelled, most notably the already announced Hornsea 4 wind offshore project in the UK.

See our Assumptions Dashboard for the details underpinning our emission forecast.

Industry emissions

From our previous forecast industry emissions are lowered on average 2.9% per annum until 2035. The reduction in industrial activity is due to the increase in tariff and lower economic growth as reflected in GDP forecast as described above.

The yearly change in industry emissions in the period 2025-2035 is on average 14 Mt. In our modelling horizon from 2025-2035, emissions will be reduced by 154 Mt in total. There is difference in how the various industry sectors are hit, where metal sector is especially targeted by tariff and is hit hard resulting in a 4.3% yearly reduction in emissions.

Market balance

With the change in emission outlook, the market balance outlook is laxer compared to our previous forecast in April. However, as Figure 2 illustrates, the cumulative balance continues to shrink year on year due to the stringency of the EU target and the yearly reduction of the cap combined with the extra tightening due frontloading of REPowerEU volumes from the years 2027-2030 and an active Market Stability Reserve continuing to absorb allowances until 2028 before the surplus falls below the upper threshold.

Veyt EUA price forecast

Averaging EUR 72.51/t in H2 2025, Veyt expects the trajectory of forecast carbon prices to remain largely in line with the previous forecast. The exception is in the medium term, where the growth impact of trade turbulence will reduce industrial demand for EUAs.

Our updated price curve is lowered compared to our previous forecast in April, from an average of EUR 153/t to EUR 150/t over 2025-2030. The remainder of the price curve is consistent with our earlier estimates, averaging EUR 263/t from 2031-2035.

2026-2028

A slowdown in GDP growth will reduce industrial demand for EUAs, with the impact being felt until 2028. However, with the EU ETS market balance on course for deficits from 2026 onwards, the price of EUAs will tick sharply upward – though at a slightly slower rate than in our previous forecast. As the macroeconomic impact of the trade turbulence plays out, we cut our 2026 forecast by EUR 13/t to EUR 115/t. For 2027 and 2028, we forecast the EU carbon price to reach EUR 158/t and EUR 169/t, EUR 7/t and EUR 2/t than our previous report.

2029-2030

For the years 2029-2030, our forecast sees no change from the previous report. During this period, industrial abatement becomes the key price setter for EU carbon as cost exposure for non-power emitters increases year-on-year. With no relief from the Market Stability Reserve, supply will be squeezed further, with prices reflecting the higher cost menu of abatement options available to industry. Through these years, we forecast prices to rise to EUR 180/t (2029) and EUR 195/t (2030).

2031-2035

Through this period, we expect EUA scarcity and high prices to trigger additional abatement across the EU ETS. Low-carbon technologies needed for industrial emissions to remain beneath the cap will not be cost competitive with conventional processes within this time horizon. A higher EUA price will be required to make the investment case for abatement tech viable. Pending clarity on the next phase of the EU ETS, we assume that the existing issuance trajectory will continue into phase 5. The release of some allowances from the MSR will provide a modicum of supply relief from 2033, but on a wider scale, abatement is not expected to keep pace with the rapidly declining cap which is set to reach 0 by 2039.

With fast approaching scarcity and slower abatement, we expect prices to rise to EUR 290/t by 2035.