Modelling a 3.4% LRF: Implications for the EU ETS cap and Phase V carbon prices

In a Bloomberg interview on 10 January, European Parliament member Peter Liese stated that the EU ETS linear reduction factor (LRF) could slow from 4.4% to 3.4%. The timing and basis of the 3.4% figure remain unclear, and it is uncertain how such a change would be positioned within the broader EU climate framework.

Liese has previously steered key climate files in the Parliament’s Environment Committee and is expected to be an influential voice in the upcoming ETS review. Even without a formal proposal, such statements introduce concrete design questions for the post-2030 framework.

Veyt has modelled a 3.4% LRF as one of several post-2030 scenarios. This analysis quantifies how such a change would alter the Phase V carbon budget, the EUA price trajectory, and the functioning of the Market Stability Reserve.

The analysis includes:

– The annual cap reduction under a 3.4% LRF compared to the current 4.4% pathway
– The cumulative effect on the Phase V (2031–2040) carbon budget
– The resulting EUA price path under a softer cap
– Changes in MSR intake and release dynamics
– Interaction with tight market balances in 2026–2027

Access the full article to read about the quantified cap delta, detailed Phase V price projections, and MSR dynamics under this scenario, alongside Veyt’s base case and alternative pathways.