A marathon meeting led member states’ ministers to agree a Council position on Europe’s 2040 climate target. A key element in the deal is postponing the full operation of ETS2 from 2027 to 2028, a demand made by Poland and other eastern European countries.
Many ETS2 watchers had expected the recent European Commission initiative to reduce price and price volatility – in line with the non-paper supported by a majority of member states – would be sufficient to keep the new emission trading system on track to become fully operational 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. They also wanted more room for using international carbon credits (well beyond the 3% limit proposed by the European Commission).
In the end, the text that was approved this morning by a qualified majority (Poland, Slovakia, Hungary and others abstained) kept the 90% headline target, increased the credit share to 5% and added a revision clause that might allow for further watering down of the target. See the official press release on the Council website and Veyt’s initial take here (more to follow).
It has long been known that several countries would not accept a new, 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 car restrictions.
ETS2 was always seen as one of the most controversial elements of Europe’s climate legislation package, especially in countries with a limited share of electric vehicles and/or a high share of fossil-based heating.
This morning, after long hours of negotiations, Danish minister Lars Aagaard observed that there was finally a qualified majority of member states ready to support his latest 2040 compromise proposal. He highlighted the ETS2 postponement as one of the key elements in the final text. Climate Commissioner Hoekstra confirmed this during the ensuing press conference. The final text was made available on the Council website this evening.
The European Council’s decision to postpone the launch of ETS2 to 2028 adds another layer of uncertainty and further undermines market liquidity. While the European Commission’s earlier proposals to strengthen the Market Stability Reserve (MSR) had already driven ETS2 futures sharply lower, the delay will prolong the period of uncertainty and keep trading sporadic. We are currently updating our base case to incorporate both the Commission’s proposed MSR adjustments and the revised 2028 start date, which will likely reinforce our view of a subdued price trajectory in the near term.
The Council meeting outcome had little impact on ETS1 prices today. This suggests the result was largely in line with expectations. It could even reflect relief that the member states were able to decide on a 2040 target at all.
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 today’s 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 today’s council 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 late November or early December. By default – unless the Council or Parliament actively objects – they will enter into effect two months later.
Germany has its own national emission trading system (n-EHS), which largely covers the same scope as the now-postponed ETS2. German legislation foresees that in the case of a one-year delay due to high gas or oil prices (reference to Article 30k (2)), n-EHS prices during the bridge year should be referenced to ETS1 prices. These are foreseen to be much higher than the current n-EHS price corridor of EUR 55-65/t. As of now, it remains unclear whether German n-EHS market participants will see a year of high prices ahead.
Europe’s upstream fuel providers – the entities targeted by ETS2 – will still need to proceed with the same preparations. They need to monitor inherent emissions, have their emission reports validated by independent consultants, and submit them by 30 April every year.
As for the surrender of allowances, the delay implies that the first deadline is now set to be on 31 May 2029, for 2028 emissions.
The delay does imply that the cost increase, which will ultimately be shouldered by households, will hit one year later. Yet, for fuel providers, there is little reason to lower their guard. They must continue to monitor regulatory developments, and many of them will still want to hedge their exposure upfront.
For that, given the low liquidity in the ETS2 futures market, much hope is pinned on the upcoming ETS2 auctions. From what has been communicated today, there is no indication of backtracking on the plan to advance auctions, from January 2027 to sometime in the second half of 2026, as announced by Climate Commissioner Hoekstra in October.
Although there was always a theoretical possibility that the ETS2 start could be delayed to 2028 in the event of high energy prices – subject to a Commission review in July 2026 – that risk was minimal. The decision to delay the ETS2 adds a new layer of uncertainty for market participants, weighing on confidence and liquidity. However, if we see meaningful progress from member states in transposing the ETS2 into national law and once auctions commence, the foundations for a more robust market could begin to take shape.
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