EU ETS mid-July review set to leave market design flaws intact, consultant warns
A carbon market consultant says the Commission's upcoming ETS review will sidestep core problems with auction access and free allocation, leaving the scheme's price signal structurally weakened.
The European Commission's review of the EU emissions trading system, due in mid-July, will fail to address the scheme's most persistent design weaknesses, an Italian carbon market consultant told Montel on Wednesday (2026-07-01). The warning focused on continued problems with auction access and a potential expansion of free allowances to heavy industry — both long-standing fault lines in a market built around progressively tightening scarcity. ICE EUA December contracts traded at €80.84 on Wednesday (2026-07-01) morning.5
The free allocation question has acquired fresh momentum. A Reuters report published on Friday (2026-06-19) noted that heavy industry lobbying groups had been pressing for expanded access to free permits under the revised scheme. The ETS currently covers around 40% of EU greenhouse gas emissions across aviation, heavy industry and energy generation. Any material expansion of free allowances would reduce the effective cost burden on the largest emitters and inject additional supply into a market that already faces credibility questions.4
The supply overhang concern is documented. Research published by the Oeko Institut on Tuesday (2026-05-19) warned that proposed ETS reforms carry a "major risk" of renewed oversupply persisting until 2040. The study found that changes under consideration would substantially increase allowance availability beyond what current emissions trajectories require, eroding the price pressure the scheme exists to create.3
For carbon desks, that assessment goes to the core of the scheme's commercial logic. A market structurally long on allowances cannot sustain the price levels that justify industrial abatement investment. Buyers and sellers face difficulty hedging when the long-run clearing price is unclear, and a review that adds supply at the margin makes that ambiguity worse.3
Timeline is a compounding factor. Analysts told Montel on Thursday (2026-05-21) that the Commission's target of finalising reforms by the first quarter of 2027 is "ambitious" and "extremely challenging." The ongoing US-Israeli conflict with Iran was identified as one force likely to crowd out political bandwidth for EU climate legislation in the second half of this year.2
The pace matters because a separate debate — how carbon offsets interact with the EU's carbon border adjustment mechanism — cannot be cleanly resolved until the ETS review clarifies whether offsets will be incorporated into the core scheme. Sarah Hay, climate policy lead at Norsk Hydro, told Montel on Thursday (2026-05-21) that international offsets should remain outside any CBAM expansion until that sequencing is settled. "There shouldn't be anything new coming in under CBAM that you don't have under the EU ETS now," she said. A draft report from the European Parliament's environment committee was circulating on the same question.1
CBAM's charge structure relies on the integrity of the ETS price as its reference point. If the review produces looser scarcity — through expanded free allocation or a slow cap trajectory — the implied carbon cost embedded in CBAM charges would weaken accordingly, diluting the mechanism's function as a leakage deterrent for exposed industry.1,4
Market positioning already reflects a downbeat assessment of what mid-July will deliver. The consensus signal on ICE EUA Dec-rolling contracts was fully bearish on Wednesday (2026-07-01), with no measurable bullish weight in the positioning data. The market has, in effect, already moved to price in a reform outcome that disappoints on ambition.5
What the Commission's draft proposals will reveal is the detail behind the headline framing. For traders, the operative point is whether free allocation expands, holds at current levels, or is placed on a new phase-out schedule. A meaningful extension of free permits would add to allowance supply at the margin and could push EUA prices below levels implied by physical emissions scarcity. The mid-July publication is the first hard test of whether the Commission is willing to accept that trade-off.5,4