EUAs reaching critical turning point

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The European Council meeting on 19th March marked the low point in the recent downturn in the EU carbon price. On that day European Commission President von der Leyen announced plans to develop a new "ETS investment booster" with a budget of "about €30 billion, financed by 400 million ETS allowances."

In the leadup to the event I wrote about two signals that could potentially mark a bottom in the market.

First, Europe's industrial base was increasingly vocal, arguing that drastic reforms "would erode investment certainty and damage Europe’s industrial future," thus undermining the narrative that industry was calling for the carbon market to be weakened or even suspended (see Signals amidst the noise: EUAs consolidate, awaiting direction from policymakers).

Second, the announcement by exchange traded fund operator KraneShares that it had closed its European Carbon Allowance Strategy ETF (KEUA). As with other thematic ETFs that have subsequently gone on to close, it has "often signalled that investors have lost their patience," and that the path of least resistance may be for price to move higher, rather than lower.

The constructive policy discussions marked a huge sigh of relief for a market roiled by concerns that the EU ETS might be delayed (a reference to Chancellor Merz's 11th February speech to representatives from heavy industry) or watered down such that its credibility would be irreparably damaged. €75 (€30 billion / 400 million EUAs) rapidly became an important marker in the sand at a time of immense uncertainty over the future of the scheme.

Now the market appears to be heading towards the €82-83 level at which the current political ructions really kicked off. On 5th February, German newspaper Handelsblatt reported that the Commission was considering a multi-year extension of free allowances for heavy industry, citing 'unnamed EU officials'. The EUA futures price fell more than €6 over the following 24 hours to around €76.

The market has been trading on political headlines ever since.

But amidst the noise different individuals and groups have begun to signal their intentions and their red lines. All that has been is merely the precursor to the real debate yet to be had. The Commission is undertaking a review of the EU ETS, with the findings expected to be published on 15th July 2026.

And so, the next 1-2 months could mark a critical turning point for the EU carbon price. Will the price kick on and move towards the €90-95 level seen towards the start of 2026? Or will it mark a retest of the political narrative, one that ultimately fails, and we see prices retreat back towards lower, more politically comfortable levels?