Get ready, because the EU carbon market is about to undergo some significant changes! The supply of allowances is expected to tighten considerably in 2026, which could have a major impact on prices. Let's break down what's happening and what it means for you.
Allowance Supply: A Closer Look
While the initial auction calendar for 2026 might not seem to reflect this tightening, it's crucial to remember that several adjustments are coming into play.
- Market Stability Reserve (MSR): Expect a reduction in volumes as allowances are placed into the MSR between September 1, 2026, and August 30, 2027.
- Maritime Sector: Some maritime allowances will be canceled in 2026, reducing auction volumes. This cancellation will be equivalent to the difference between the number of allowances surrendered and verified emissions for the sector.
- REPowerEU: Although 93.3 million allowances are slated for auction in 2026 for REPowerEU, it's believed that the full volume might not be needed to meet the Commission's EUR20 billion revenue target.
Key Changes in the Horizon
- Phasing Out Free Allowances: The transition away from free allowances is accelerating. This includes the complete phase-out for the aviation sector and a gradual reduction for Carbon Border Adjustment Mechanism (CBAM) sectors.
- Aviation: The aviation sector will no longer receive free allowances, increasing its demand for auctioned volumes.
- Maritime: The maritime industry will see 100% of its emissions covered, up from 70% in 2025, potentially boosting hedging demand.
CBAM: A New Era Begins
The Carbon Border Adjustment Mechanism (CBAM) will be in full effect in 2026. This means importers of goods from CBAM sectors will gradually pay a carbon tax based on the emissions embedded in their imports. Any carbon price paid during production can be deducted. Simultaneously, domestic CBAM sectors will see a phased reduction in their free allowances from 2026 until 2034.
But here's where it gets controversial...
The Commission has made some adjustments to CBAM to ease the burden. Importers importing less than 50 tonnes of CBAM goods per year are exempt. Also, CBAM charges are delayed until 2027, meaning certificates for 2026 will be surrendered in 2027.
Controversy & Comment Hooks:
However, significant risks remain. Concerns about EU competitiveness are growing, with some member states pushing for a delay in phasing out free allowances for CBAM sectors beyond 2034. What are your thoughts on this? Do you believe the EU is striking the right balance between decarbonization and competitiveness? Share your opinion in the comments below!
MSR and Auction Volumes
Following a surplus in the EU carbon market in 2024, nearly 276 million allowances will be placed into the Market Stability Reserve (MSR) between September 1, 2025, and August 30, 2026. This marks the seventh consecutive year of MSR intakes, reflecting the market's persistent surplus since the MSR's introduction in 2018.
And this is the part most people miss...
The total number of allowances in circulation (TNAC) is expected to stay above the 833 million allowance threshold for the MSR. This suggests a further reduction in auction volumes between September 1, 2026, and August 30, 2027. The exact amount will be clearer in the second quarter of next year, potentially leading to reduced auction volumes in the latter part of 2026.
REPowerEU Revenue Targets
The European Commission has already raised EUR14.3 billion through allowance auctions for REPowerEU. To reach the EUR20 billion target, only EUR5.7 billion more is needed by the end of 2026.
If we assume a price of EUR80/t, the full auction volume might not be necessary to meet the revenue target. This could mean a tighter supply than anticipated, further supporting EUAs.
Investment Fund Positioning and Market Risks
Investment funds have significantly increased their holdings in EUAs, reaching a record net long position. This positioning carries risks, particularly if there's any easing in the bloc's climate ambitions.
Downside Risks
There are clear downside risks. Concerns over EU competitiveness could lead to delays in decarbonization efforts, potentially impacting the bullish outlook for EUAs. The delay in implementing ETS2, which covers road transportation and buildings, from 2027 to 2028, highlights these concerns.
In conclusion, the EU carbon market is at a pivotal moment. The interplay of allowance supply, policy changes, and market dynamics will shape the future. Stay informed, and let's discuss what lies ahead!
