The European carbon market (EU ETS) has navigated an exceptionally turbulent period through the first eight months of 2026. Pulled between aggressive political pushback against rising energy costs and structural supply tightening, the price of European Emission Allowances (EUAs) has once again proven to be the primary barometer of European energy transition policy and regulatory risk. As the EU balances its long-term decarbonization ambitions with preserving industrial competitiveness, carbon market has tracked the shifting sentiment in policy discussions and recovered from a severe first-quarter sell-off to a policy-driven relief rally during the summer months. This heightened volatility reflects a complex transitional phase as the market shifted its primary focus away from natural gas prices and general macroeconomic sentiment toward intense regulatory headlines. As of 31 August 2026, the benchmark front-December EUA contract averaged €78.27/t in 2026, traversing a wide trading channel between €63.07/t and €93.80/t.
The year began on a strong footing, with EUA price surging above €90/t in January as market participants braced for tighter ETS balances with the Cap declining and Market Stability Reserve curbing supply. However, this momentum quickly evaporated as a wave of political opposition mounted across Europe. Facing elevated energy costs exacerbated by geopolitical tensions in the Middle East, several Member States launched direct attacks on carbon costs, calling for price caps, supply increases, or temporary market suspensions. This political rhetoric triggered a massive liquidation by speculative funds, which aggressively unwound their positions and trimmed net-long length from a peak of 126 Mt in mid-January to a low of 32.77 Mt by late March. Consequently, front-December prices plummeted by nearly 25 percent, bottoming out at below €65/t in late March. The market found a firm floor following the European Council meeting on March 19, where Commission President Ursula von der Leyen strongly defended the system as a vital engine for energy independence and homegrown clean energy investment. Crucially, she outlined four measures to modernize the EU ETS, including updating free allocation benchmarks to address industry concerns and increasing the Market Stability Reserve’s firepower to curb volatility.
The market then became calmer during the second quarter as regulators and policymakers debated the direction of the upcoming ETS review package in July. EUA prices recovered and steadily climbed through May and June as investment funds rebuilt their net-long positions to 62.05 Mt by June 26, reflecting growing confidence that the upcoming ETS review would be less bearish than previously feared. Regulatory developments dominated ETS market mood and EUA price has largely decoupled from gas prices. On April 1, the European Commission formally proposed removing the Market Stability Reserve invalidation clause, ensuring that allowances held in the reserve above the 400 Mt threshold are retained rather than cancelled. In May, the 2025 Total Number of Allowances in Circulation was published at 1,023.49 Mt, falling below the 1,096 Mt threshold for the first time and triggering a substantial reserve intake of 190.49 Mt scheduled between September 2026 and August 2027. On June 26, the Commission finalized the 2026 to 2030 free allocation benchmarks, adopting the lower bound of the decline rate and introducing an exchangeability of fuel and electricity provision to add more free allocation to shield heavy industry.
The defining moment of the year occurred on July 17, when the Commission unveiled its comprehensive 2026 EU ETS review package. Ahead of the noon press conference, front-December EUAs dipped to an intraday low of €76.92/t on policy anxiety. However, as details emerged, prices staged a sharp relief rally, eventually climbing toward €86/t by July 22. The market moved up because the proposal struck a pragmatic balance between aligning with the EU’s 2040 climate target and providing substantial industrial relief. Most importantly, the headline €30 billion, 400-million allowance Investment Booster was confirmed to be drawn from repurposed existing reserves rather than new supply and will be disbursed ex-post over a 10-year period upon verified emissions avoidance. Because the Booster’s allowances will not be dumped through primary auctions, the immediate supply impact was digested as far less bearish than anticipated. ClearBlue Markets’ EU ETS model shows that EU carbon price is still expected to rise to EUR 138.5 in the ‘ETS Review July 17' scenario, only EUR 7 lower than the scenario with the current ETS set-up extending to phase 5, with the rest of the assumptions unchanged.
Through August, market participants continued to digest the ETS review package and the reactions from various stakeholders. EUA prices consolidated comfortably in the €82/t to €85/t on the back of thin holiday trading, taking support from summer heatwaves, increased power sector coal burn, the reduction in daily auction volumes with the completion of REPowerEU auction volumes, and last-minute buying heading into the annual September compliance deadline.
However, more storms still lie ahead throughout the rest of 2026. ETS policy developments are likely to drive market sentiment with co-legislators aiming to finalize the legislative process by the first quarter of 2027. Participants will closely monitor negotiations in the European Parliament and Council on the ETS review package, weighing potential changes to key parameters and further details on supply injections from the Investment Booster and Industrial Decarbonisation Bank. While debates over the Linear Reduction Factor and free-allowance phase-out as well as conditionality rules may trigger headline volatility, the clearer long-term framework and the outlook of ETS balances remaining tight in 2027 should keep EUAs supported in the €80/t to €90/t range into year-end.
