Brussels proposes ETS flexibility overhaul as scarcity looms, but removal quality rules remain fuzzy
EU carbon market faces a structural shift from surplus to scarcity, but the removal procurement rules are still undefined.
ICE EUA Dec-rolling held at €83.13/tCO2 as of Wednesday (2026-07-23), as traders absorbed the European Commission's draft ETS reform unveiled the previous Friday (2026-07-17), which aims to prepare the market for a shift from surplus allowances to scarcity.4
The reform package includes changes to the market stability reserve (MSR) to make it more dynamic and responsive, plus an "investment booster" of 400 million EU allowances worth an estimated €30bn directed at industry decarbonisation projects.4 Together they are designed to defend price levels as the current surplus clears — but the legislation leaves a significant procurement gap open.
A report published on June 12 (2026-06-12) identified that gap: if carbon capture, storage, and hydrogen rollout falter, the ETS could face a price surge that only a "safety valve" of integrated CO2 removals could manage.3 The Commission's flexibility proposals do not address the quality standards such a safety valve would require.
The commission's 90% emissions-reduction target for 2040, proposed on July 2nd, stipulates that three percentage points could be achieved by paying for carbon dioxide removals.1 That carve-out means the market will eventually need to price removal credits alongside conventional allowances, and the quality of those credits will determine whether they support or undermine the ETS price signal.1
A major carbon removal registry announced on Tuesday (2026-06-02) that it would evolve to issue three different classes of credits under the EU's Carbon Removal Certification Framework (CRCF).2 The tiered structure is designed to address exactly the verification concerns that ETS integration will demand, distinguishing between durable geological sequestration and shorter-term biogenic storage.
Yet the commission's draft rules remain light on technology-specific safeguards. Without strict standards for permanence, additionality, and leakage risk built into the implementing regulations, low-quality credits could dilute the market rather than complement it.3
The UK is moving on a parallel track. Its government has proposed an 87% emissions reduction target for 2038-2042 under the seventh carbon budget.2 If Brussels and Westminster adopt different quality thresholds for removal credits, the spread between UK Carbon Allowances and EUAs could be pulled in directions that go beyond current supply and demand dynamics.
Three signals on ICE EUA Dec-rolling register bullish, with no bearish weight in the consensus.4 The risk not yet reflected in price is that the removal certification framework could introduce new supply before MSR tightening fully bites, pushing the scarcity trajectory back further than the current reform calendar implies.
The CRCF implementing regulations, expected before year-end, will set technology-specific floors for what qualifies as a compliant removal credit.3,2 Until those rules are published, carbon traders are pricing the MSR story without visibility on the removal supply that will eventually run alongside it.