Brussels carbon collar plan drives sell-side forecast cuts for 2026 and 2027
Analysts have trimmed EU ETS price projections after the Commission proposed reforms that could reduce auction supply when the market is already long.
Sell-side analysts cut their EU allowance price forecasts for 2026 and 2027 after the European Commission proposed reforms designed to ease the cost of the scheme, Reuters reported on 2026-07-31.5 The revisions came before any collapse in the spot contract, suggesting the market absorbed the news as a ceiling on upside rather than a new floor.
For anyone running a fossil generation book, that distinction carries weight. EUA prices set the point at which gas displaces coal and lignite in the merit order. Compress the allowance price and you compress the switching level too, keeping older coal capacity profitable for longer and pulling gas demand out of the power stack.1
Veyt's senior analyst put a number on the softer outcome back in May, estimating the adjustment under consideration could cut carbon prices by about 13% over two years — a call made on 2026-05-20.1 The mechanism behind that estimate: when total quotas in circulation exceed 833m tonnes, auction volumes are reduced by 24%.1 Supply-side brake, not demand-side subsidy.
Montel reported on 2026-09-15 that the reform plan could collar prices, citing experts, though the full analysis remained behind a paywall.7 What the earlier reporting established is the architecture: a volume trigger that tightens supply automatically when the market is long. The Commission has not yet published a formal proposal.
The timing is uncomfortable for Brussels. The EUA is meant to be the marginal cost signal that drives decarbonisation, yet the political pressure is now to stop that signal from becoming too costly for industry and households. A collar does both jobs imperfectly — it caps the pain, and it caps the incentive.
The same tension is running through European gas. Rome has spent much of 2026 trying to narrow the gap between its domestic PSV hub and ICE Endex TTF front-month, which closed at €79.54/MWh at the 2026-09-19 session. The Oxford Institute for Energy Studies warned on 2026-09-09 that Italy's scheme risks distorting the PSV hub and neighbouring markets.6 Earlier, on 2026-06-15, analysts told Montel that regulatory reform was unlikely to achieve its aims because hub differentials remained wide.3
Carbon sits downstream of gas prices. TTF sets the fuel cost, the fuel cost sets the switching level, and the switching level determines how much gas versus coal clears in the merit order — which in turn sets EUA demand. Loosen the link between the gas price and the carbon price and you change market design, not just price levels.
Power desks face a second-order consequence. If the allowance is prevented from rising through expensive periods, the marginal plant that sets the clearing price in high-demand hours shifts. Ember calculates that gas plants set the price in 89% of hours so far in 2026 in one European market, against just 15% in Spain, which carries a different generation mix.2 Italy's average power price hit €142/MWh in March, versus €59/MWh in Spain — a spread that gas and carbon costs alone cannot fully explain.2
The debate is unlikely to produce major reforms to the market-based system.2 The more likely outcome is exactly this kind of collar: a technical adjustment to the cap-and-trade mechanism that leaves the architecture intact while blunting peak cost.
Network costs sit alongside this as a parallel pressure. A report cited by RenewEconomy on 2026-06-17 said volumetric network charges are no longer fit for purpose because electricity flows are now two-way.4 Those charges already account for around 20% of household bills, according to Christoph Maurer of Consentec, who argues the system is shifting from variable fuel costs to largely fixed ones.2
Collar the EUA and the variable signal — the one a gas or coal trader hedges and trades around — becomes narrower even if the direction of the energy transition does not change. The mechanics that matter most are the 833m tonne threshold and the 24% auction reduction.1 If the trigger is calibrated loosely enough to bite during a mild winter, when emissions fall and the surplus grows, the collar binds more often than the headline 13% estimate implies. Set it tight, and the forecast cuts look premature.