Summer 2026 EU ETS reform 

The European Union Emissions Trading System (EU ETS) summer reform consists of targeted revisions to industrial benchmarks, the Market Stability Reserve (MSR), and a comprehensive review to align the carbon market with the bloc's binding 2040 climate targets. The European Commission is proposing these measures to manage price volatility and support industrial competitiveness.

Key aspects of the summer 2026 reform and pending reviews include:

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1. The Market Stability Reserve (MSR)

• Volatility Safeguards: The Commission is seeking to strengthen the rules-based MSR to better absorb allowance surpluses, protect against extreme price shocks, and adjust for future market tightness. Currently the MSR is set to delete allowances that are held within, above the number of 400 million. This likely changes. the bigger question will be if the withdrawal rate - currently 24% of last year's cumulative supply of EUAs - will fall, perhaps to 12%. Confirmation of a weaker intake rate would likely generate a bearish reaction, but there is no firm signal of this yet, and the Commission has not proposed anything to this affect so far. 

• There is also potential for the intake thresholds to be altered - currently if over 1024 million EUAs are oversupplied in the market, the MSR withdraws 24% of that number; this may be adjusted, given that naturally over time supply in the EU ETS will fall and MSR will take EUAs in from a smaller pool.

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Political positions: 

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a) The European Commission & Progressive Member States

• Position: Proposes halting the automatic invalidation of allowances in the MSR above 400 million. Instead of being cancelled, these would be retained in the reserve to serve as a market buffer against future supply shortages and excessive price volatility. 

• Allies: Supported by progressive member states (e.g., France, Germany, Sweden, Denmark, the Netherlands) who strongly oppose weakening the ETS or introducing delays.

b) Vulnerable/Heavy Industry Member States

• Position: Some seek to reopen the MSR to add allowances back into the market, thereby lowering carbon prices and protecting vulnerable consumers and sectors.

• Allies: Led by coalitions of member states (e.g., Czechia, Poland, Slovakia, Hungary) who have successfully pushed to postpone the launch of the ETS2 to 2028 due to social impact concerns.

c) Environmental NGOs

• Position: Strongly oppose any measures to water down the MSR or reintroduce allowances into the market. Organizations like Carbon Market Watch and the European Environmental Bureau argue that relaxing MSR rules increases emission allowances, undermines the EU's 2030 and 2040 climate targets, and artificially masks the real cost of pollution.

• Allies: Supported by Green factions within the European Parliament.

 

2. Industrial Competitiveness & Free Allowances

• Updated Benchmarks: The Commission has proposed updated benchmarks for free emission allowances. More benchmarks are being created - so some subsectors will benefit and others suffer. The fallback benchmarks should be weakened - for sectors that do not have their own product indicators. That provides some room for these companies to benefit from more free EUAs and slightly weaker EUA prices. 

• Investment Conditionality: Proposals indicate that continuing free allocations and flexibilities may be made conditional on companies making concrete commitments to invest and decarbonize within the EU, protecting manufacturers from carbon leakage.

• Free EUAs for CBAM covered sectors - like steel, aluminium, fertilisers, cement - are meant to be phased out by 2034. This is likely to receive pushback, so these sectors retain their free EUAs for longer - that's relatively bearish in nature for EUA prices, but it depends on whether the Commission proposes that the sectors keep more EUAs than is currently expected, or not. 

 

Political positions: 

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1. Protectionists: Conservative Politicians & Heavy Industry Associations

• Core Position: Demanding a slowdown or restructuring of the ETS to prevent severe damage to Europe's manufacturing base. They argue that the tightening cap and dropping allowance surpluses have created an "industrial crisis," making European products non-competitive globally.

• Demand to extend and increase free emission allowances beyond 2030.

• Key Allies: The European People's Party (EPP) (the largest group in the EU Parliament), BusinessEurope, Cefic (chemicals), and major steelmakers like ArcelorMittal and thyssenkrupp.

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2. Modernizers: The European Commission & Progressive Corporate Coalitions

• Core Position: Defending the ETS framework, asserting that weakening the carbon price signal would destroy investment certainty and cause clean tech projects to flee the EU. They argue that competitiveness challenges are driven by structural issues (e.g., volatile fossil fuel energy prices and global overcapacity), not climate policy. 

• Key Demands:

  • Staying the course on the planned phase-out of free allocations.

  • Utilizing the €120–€150 billion in projected ETS revenues (2026–2030) to create a "cap-and-invest" framework that explicitly funds heavy industrial decarbonization and electrification.

• Key Allies: The European Commission, green-energy heavyweights like WindEurope, and a coalition of over 100 progressive companies (including Volvo Group, Holcim, and green steel producers like SSAB and Salzgitter)

 

3. Climate Hardliners: Environmental NGOs & Green Factions

• Core Position: Completely opposing any concessions to heavy industry. They argue that historical free allocations allowed companies to delay necessary transitions and masked the true social cost of pollution. [1, 2]

• Key Demands:

  • Mandating that any company receiving transitional free allocations must legally tie those benefits to strict decarbonization milestones.

  • Denying additional flexibility or cushions within the ETS1 market cap. 

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3. Comprehensive Summer Review

• 2040 Target Alignment: Following the adoption of a 90% net emission reduction target for 2040, a broader structural review will integrate pending items from the previous revisions. That probably means the rate of reduction of EUA supply goes to around 3% rather than 4.2% - but only after 2030. This should have been expected as the EU ETS in its current format will reach zero EUAs by 2039 - ahead of the 2050 schedule. Therefore this might generate some bearish reaction, but should largely be priced in as something expected by traders and market participants. The question will be whether moderates win out and get something above 3%, or will the EU ETS sceptic member states get their way with a weaker reduction in supply than the market already expects? 

• Sectoral Expansion: potential inclusion of the waste management sectors, international aviation and smaller ships

• Revenue Utilization: Discussions are active regarding the share of ETS revenues allocated to the next Multiannual Financial Framework (MFF) and the establishment of an Industrial Decarbonisation Bank. 

  • Some countries have used EU ETS revenues to support their budgets - if money is used directly on EU ETS sectors for decarbonisation, it can be expected that there will be some pushback on this from governments who would rather keep the money. ​

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Read our EU ETS explainer for some detail on how the EU ETS is designed to reduce emissions and where the MSR, free EUAs and more are relevant to carbon prices.