Commission ETS Overhaul Sends Analysts Cutting Carbon Forecasts as Supply Path Widens After 2030
Brussels proposed a sharply looser allowance reduction trajectory for 2031-2040, prompting analysts to lower EU carbon price forecasts for 2026 and 2027.
ICE EUA Dec-rolling was trading at €81.90 per tonne on Friday (2026-08-28), pricing in a market that has spent six weeks digesting the implications of a Commission proposal that would substantially slow the pace of allowance scarcity after 2030. Analysts cut their EU carbon price forecasts for 2026 and 2027 following the package, Reuters reported on 31 July 2026, a reaction that reflects concern about what the new trajectory means for medium-term supply.7,6
The trigger was the Commission's formal proposal on 17 July 2026 to revise the EU Emissions Trading System for Phases 5 and 6. The legal driver is the EU's 2040 climate goal — a 90% cut in emissions from 1990 levels, up from the 55% reduction required by 2030 — which EU law requires the ETS to reflect.1 Aligning the cap trajectory with that harder long-term target has, in practice, produced a near-term supply picture that some analysts find more generous than they expected.6
The mechanism is the Linear Reduction Factor, which sets the annual tightening of the overall allowance cap. The current LRF is 4.3%, rising to 4.4% from 2028 to 2030. The Commission's proposal would then cut it to 3.7% between 2031 and 2035, and to 1.7% from 2036 to 2040, according to JDSupra's review of the document.6
That step-down represents a meaningful deceleration. Oeko Institut, a German research group, warned in May 2026 that the reforms carry a "major risk" of renewed oversupply that could persist all the way to 2040.2 The implication is that the carbon price would carry a lighter scarcity premium through the 2030s than the pre-proposal trajectory suggested.
Observers who spoke to Montel in the week of 13 July 2026 were less categorical. They characterized the overall package as "slightly bearish" for prices — significant, but stopping short of fundamentally compromising the scheme's architecture. The Commission would likely contest any characterization of the proposal as soft on climate; it argues the ETS plays a crucial role in meeting its targets cost-effectively, and that emissions in covered sectors have already halved since the scheme launched in 2005, with roughly three-quarters of that reduction coming from the power sector, according to Carbon Brief.4,5
The proposal includes a mechanism intended to support industrial decarbonisation and partially offset the supply loosening. A new Industrial Decarbonisation Bank, with a total indicated funding envelope of approximately €100 billion, would provide around €30 billion of direct support financed through 400 million EUAs. That volume — 400 million allowances — is itself a material addition to supply and will need careful timing if it is not to weigh on the market during an already looser cap phase.6
German economists weighed in on 25 June 2026, urging Berlin to engage constructively with the ETS reform rather than pursue looser national climate targets as a pressure valve for industry. Four energy economists said at a think tank event that relaxing Germany's own commitments would backfire, and that the ETS framework is the right place to negotiate industrial relief.3
None of this is settled law. JDSupra's August 2026 review noted that important elements of the proposal require further secondary legislation before they become operational. The LRF step-downs for 2031-2040 will travel through the European Parliament and Council, where the IDB's structure and EUA allocation will attract intense attention from industrial emitters and climate advocates alike.6
The 400 million EUAs earmarked for the IDB sit at the centre of the price debate. How that volume is phased into the market — and whether legislators narrow or widen the envelope during trilogue — is the variable that matters most for whether the analyst forecast cuts made on 31 July 2026 turn out to have been conservative.6,7