EU Carbon Policy Pulls in Two Directions as Commission Plans 17% Benchmark Tightening While Floating a 13% Price Cut

The leaked draft slashes iron casting free allocations by 42%, but a parallel ETS reform proposal could add three years of allowance supply, sending mixed signals on EUA pricing. The European Commission is considering tightening benchmarks governing the free allocation of carbon allowances to industry by an average of 17% for the 2026-2030 period, according to a leaked draft seen by Montel. Iron casting faces the steepest cut, with its benchmark proposed to fall 42% to 0.164 allowances per tonne from 0.282/t in the current period. The coke benchmark would drop 34% to 0.143/t. The EU Carbon Policy / EUA Supply factor is the mechanism that makes this consequential for every energy-intensive producer in Europe. Tighter benchmarks mean fewer free allowances. Fewer free allowances mean more demand at auction. More auction demand, all else equal, supports ICE EUA Dec-rolling prices. The signal chain runs from EUA prices through German baseload front-month to API2 coal, since higher carbon costs shift the relative economics of coal-to-gas switching. But Brussels is simultaneously considering a reform that could cut carbon prices by about 13% over the next two years, a senior Veyt analyst told Montel. The adjustment would effectively slow the pace at which supply falls under the ETS cap. Carbon Market Watch, an NGO, estimated that a looser cap could add allowances equivalent to three additional years of supply to the market. The two proposals pull in opposite directions. European industries will continue to receive free allocations covering around 75% of their emissions under the new benchmarks, according to the latest published framework. The aim is to incentivise industrial electrification while preventing carbon leakage to jurisdictions without equivalent pricing. The 75% coverage rate means the 17% tightening applies to the remaining quarter of exposed emissions, but for energy-intensive sectors like iron casting, even marginal increases in compliance costs matter. Italy has urged the EU to scrap the benchmark revision entirely. Rome warned that proceeding now could raise compliance costs and weaken European industrial competitiveness. The Italian position reflects anxiety across southern Europe about decarbonisation policy running ahead of what manufacturers can absorb, particularly when gas-fired plants set power prices in 89% of hours in Italy so far in 2026, according to Ember. In Spain the figure is 15%. The gap explains why the same carbon policy creates vastly different cost pressures across member states. European carbon prices recovered after an initial decline following the US rejection of Iran's latest peace proposal. ICE EUA Dec-rolling made strong gains in the afternoon as positive fundamental sentiment spread among traders. UKAs also jumped to a three-month high. The carbon market is responding to both policy signals and geopolitical risk simultaneously. The ICAP ETS status report provides context on how carbon capture and storage interacts with emissions trading globally. If CCS deployment accelerates and generates credits within the ETS framework, the effective supply of allowances would increase regardless of benchmark tightening. The policy interaction is complex enough that industry lobbyists can make plausible arguments on both sides. The July review is the hard deadline. The Commission must decide how far to go on benchmark tightening while managing the separate proposal that could loosen the cap. If both proceed, the net effect on EUA prices depends on timing: benchmark tightening bites immediately at the start of 2026-2030, while cap loosening would phase in gradually. Traders pricing ICE EUA Dec-rolling need to weigh a 17% average tightening against a potential 13% price cut and three years of additional supply. The two numbers do not cancel out neatly, and the market will need to see final legislative text before it can price the net impact.