EC tables ETS reform that risks flooding carbon market with allowances

EC tables ETS reform that risks flooding carbon market with allowances Brussels put forward revised EU carbon rules on Wednesday, but analysts warn the package could depress ICE EUA prices by 13% and generate oversupply lasting through 2040. The European Commission tabled updated EU emissions trading rules on Wednesday (2026-07-15), moving to align the carbon market with the bloc's 2040 climate goal — and immediately drawing warnings that the reform may produce the opposite of its intended effect on allowance scarcity. ICE EUA Dec-rolling stood at €78.48 per tonne on Friday (2026-07-17).² The legal trigger is straightforward. EU law requires the ETS to be realigned every time the bloc sets a new emissions target. The 2040 objective — a 90% reduction from 1990 levels, compared with the 55% cut required by 2030 — is a step change steep enough to require recalibrating how allowances are issued and how the Market Stability Reserve operates. In practice, that recalibration is where the near-term price risk concentrates.² A senior analyst at Veyt told Montel on Wednesday (2026-05-20) that the adjustment under consideration could cut carbon prices by around 13% over the next two years. The mechanism runs through the Reserve's automatic stabilisers: once total quotas in circulation exceed 833 million tonnes, auction volumes are reduced by 24%. Any reform that pushes supply higher — even temporarily, to accommodate industrial transition needs — risks tripping that threshold in reverse, loosening the market before tighter post-2030 rules kick in.¹ Research group Oeko Institut put the risk in starker terms. In a study published in May (2026-05-19), it warned that the proposed reforms pose a "major risk" of persistent oversupply through 2040 if allowance availability built into the new architecture outpaces actual industrial absorption. The design challenge is that Brussels is simultaneously trying to tighten the long-run trajectory and offer near-term relief to energy-intensive industry — two objectives that pull in opposite directions on the supply curve.⁴ Industrial competitiveness has become the dominant political variable. The commission's simultaneous simplification of the carbon border adjustment mechanism signals how far that balance has shifted. By exempting all cross-border shipments under 50 tonnes from CBAM requirements, Brussels removes 90% of firms originally in scope — though it argues 99% of the emissions targeted by the instrument remain covered. The change reduces compliance friction for smaller importers, which at the margin softens demand for domestic allowances as a relative cost advantage over foreign competitors narrows.³ On timeline, analysts are sceptical. In late April (2026-04-30), multiple commentators told Montel the commission's target of legislating the review by the first quarter of 2027 looked "ambitious" and "extremely challenging." Geopolitical disruption was cited explicitly, with the US-Israeli conflict with Iran among factors likely to slow the process. A Q1 2027 ratification would already require fast-tracking through the European Parliament and Council; further delay extends the period of regulatory indeterminacy that EUA traders must price.⁵ The structural read from the Oeko Institut analysis is worth taking seriously. The ETS has experienced oversupply before — the post-2008 glut that pushed allowances close to zero took the better part of a decade and two rounds of structural reform to clear. If the new architecture introduces enough additional supply in the 2026-2030 window to satisfy industrial lobbying while nominally keeping the 2040 target intact, the market could find itself long for years before Phase 5 tightening absorbs the excess.⁴ For traders, the immediate question is what the July 15 (2026-07-15) proposal actually says at the level of specific supply parameters — details the advance draft agenda did not contain. Until those numbers are public and stress-tested by analysts with access to the full text, the Veyt estimate of a 13% downside over two years represents the clearest market-facing signal in the packet. Whether the commission has engineered enough tightening to neutralise that risk, or has produced a reform that tilts long on allowance supply into the late 2020s, is what the market will be working through now.^2,1,4