The European carbon market (EU ETS) has experienced a highly dynamic 2025, with the price of allowances (EUAs) being pulled between the structural tightening mandated by the "Fit for 55" package and the counter-pressures of global trade tensions. As the bloc progresses toward its ambitious climate targets, the carbon price remains the most sensitive barometer of both regulatory certainty and macroeconomic risks. Rising concerns over affordability and industrial competitiveness have cast shadow over the climate target discussions and will likely lead to delaying the start of the new EU ETS2 by one year until 2028. Yet it is clear that the EU ETS is the cornerstone of EU climate policy and remains as a key policy instrument to help EU to decarbonize.
In the first eleven months of 2025, the benchmark EUA contract averaged €73.5, after trading between €60 and €85. The price development has been characterized by heightened volatility compared to previous years, reflecting a transitional phase where new demand streams and structural supply cuts clash with immediate external economic shocks. The EU ETS remains well-supported by several key long-term drivers. First, the Accelerated ETS Cap Reduction under the "Fit for 55" reforms ensures a continuously shrinking cap, fundamentally restricting supply. Second, 2025 marks the first year when the Maritime sector needs to surrender allowances for its 2024 emissions, adding a substantial new source of compliance demand. Third, the Carbon Border Adjustment Mechanism (CBAM) transitional phase concludes at the end of the year. Industries anticipate the phase-out of free allowances starting in 2026, compelling early strategic buying or withholding of surplus allowances.
In spite of these bullish foundations, the market has had to contend with significant headwinds, reacting to energy market signals and external trade shocks. The first quarter of 2025 saw a strong start in EU ETS price driven by a surge in European gas prices, linked to the end of the Russia-Ukraine gas transit agreement). Speculative buying ahead of maritime compliance also contributed. The correlation between gas and carbon then turned lower with tariff war being the main driver. On 2 April, after U.S. president trump announced the Liberation Day tariffs, the benchmark EUA contract plunged to five-month low at around €65. Throughout most of the second quarter, general market bearishness and fears of a global trade war, leading to a potential economic slowdown and decreased industrial activity in Europe, put downward pressure on EUA prices. After the summer months when the trade war headlines began to calm down, the market found a floor and rallied slightly, supported by buying compliance ahead of the September annual compliance deadline. Additional support came from the slight recovery in industrial production driven by the decline in gas prices.
Further, speculative funds started accumulating long positions in anticipation of the structural supply shortage expected in 2026. In the month of October, EU ETS price recovered substantially and back above the €80/t mark on forward-looking price support. Investment funds continued pilling long positions over October, reaching record high of 125.11 Mt by 31 October. The net long positions reached record high of 96.53 Mt by the end of the month as long positions proved sticky and funds were seen piling positions ahead of the halved auction supply in December. On one hand, the vast net long positions by Funds means that EU ETS price will remain well supported throughout the November month. Forecasts of cold and less windy weather in western Europe will lend further support to fossil-fired generation and EUA demand. On the other hand, some liquidation in net longs is anticipated in the second half of December, due to end-of-year profit-taking. Thus, the remaining one and half months of 2025 will likely see continued volatility in the EU carbon market. Key events to watch out for are the changes in Funds’ EUA positions, the expiry of December-2025 EUA options and futures contracts and the pause in auction supply from mid-December. Nevertheless, the structural tightness in EU carbon market will support the EU ETS price rising into the range of €80 to €90/t in 2026.
2026 will be a year full of important policy events for the carbon markets. On the policy front, the focus will be on the 2026 review of the EU ETS and Market Stability Reserve, with various proposals due to be presented in autumn 2026. The CBAM will also enter definitive phase. At the same time, affordability and industrial competitiveness concerns have undeniably impacted the speed of EU climate policy implementation. Most notably, a critical political compromise was reached on November 5th. While the EU environment ministers agreed to a legally binding 2040 target to cut net greenhouse-gas emissions by 90% from 1990 levels, the deal included a significant concession: the delay of the new EU ETS 2 for road transport and buildings by one year, until 2028. This delay signals a willingness to prioritize political consensus and manage cost-of-living impacts, even while maintaining the long-term decarbonization trajectory.
