Where allowances come from, where they trade, how fast the cap is tightening, and what ETS2 adds when it launches in 2028.
The thing that stands out about the market today is how fast the cap is falling. For 2026 roughly 1,185 million allowances are being issued for power, heat, industry and shipping, with a separate aviation cap of around 25 million. That number already has “Fit for 55” baked into it: a Linear Reduction Factor of 4.3% a year for 2024 to 2027, rising to 4.4% from 2028, plus the one-off cut of 27 million allowances that landed in 2026.
In practice that means the supply of new allowances drops by tens of millions of tonnes a year, on a track meant to bring covered emissions 62% below 2005 levels by 2030. The shipping cap actually ticked up a little in 2026, by about 2.4 million allowances, to account for methane and nitrous oxide being added to its scope. Set against the broader squeeze, though, that is a rounding adjustment.
The big picture
A 4.3% LRF takes far more allowances out each year than the old 1.74% factor did in Phase 3. The direction is hard to mistake: less supply, year after year, all the way to 2030.
Auctioning is now the main way allowances first reach the market. The European Energy Exchange (EEX) runs the shared auction platform for most member states, holding regular sales of general allowances through the year, with separate auctions for aviation. EEX publishes the calendar of dates and volumes ahead of time, and the revised calendars for 2026 came out in late 2025.
The money raised goes to national governments, which have to put a good chunk of it toward climate and energy. Two things are pulling on auction supply in 2026. The MSR is taking volume out of the auctions, which we get to below. At the same time, the EU has been front-loading some sales to raise money for its REPowerEU programme, a temporary bulge in near-term supply that partly offsets the tightening cap.
| Channel | Who Gets It | Direction of Travel |
|---|---|---|
| Auctioning | Power sector (all); others buy the balance | Default and growing |
| Free allocation | Carbon-leakage-exposed industry, by benchmark | Phasing out as CBAM phases in |
| MSR | Withheld from / released to auctions | Currently absorbing surplus |
Once allowances have been auctioned or handed out, they trade on in a deep secondary market. The benchmark is the EUA futures contract, and the December contract for each year is the one most people trade. Most of that activity sits on ICE Endex, with spot, futures and options also offered on EEX. In May 2026 the December-2026 contract moved between roughly €74 and €77, averaged about €74 over the month and touched its highest level since April near €77.5.
The people trading range from compliance buyers, the utilities, industrials, airlines and shipping firms that actually have to surrender allowances, to financial players like banks and hedge funds. Because allowances can be banked, the futures curve and the leftover surplus tie today’s price to what the market expects scarcity to look like later. Lately the price has been pushed around by swings in energy and gas prices, geopolitical risk and the wait for the next round of policy changes, among them the updated ETS reference values for 2026 to 2030 that the Commission put out for consultation in May 2026.
Two of the sharpest short-term movers don’t show up in the cap or the auction calendar at all: the weather, and the relative price of coal and gas. Take weather first. A cold snap lifts demand for heating, a still week cuts wind output, a cloudy spell trims solar, and a dry year leaves hydro reservoirs low. Each of those gaps has to be filled by burning more gas and coal, which means more emissions and more demand for allowances, so the EUA price tends to firm up. Mild, windy, sunny weather does the reverse: renewables and nuclear cover more of the load, thermal plants run less, and the pull on allowances eases. Heat waves work in the same direction as cold spells, through the extra power that air-conditioning draws.
The second mover is which fossil fuel generators actually choose to burn, and that is where the “spreads” come in. The clean dark spread is the profit from running a coal plant once you have paid for the coal and the carbon allowances; the clean spark spread is the same sum for a gas plant. When the clean spark spread is wider than the clean dark spread, gas is the more profitable way to make a megawatt-hour, so generators lean on gas and emissions fall. A higher EUA price tends to widen that gap, because coal throws off roughly twice as much CO₂ per unit of power as gas and so carries a heavier carbon bill. Traders watch the “fuel-switching price”, the carbon level at which gas overtakes coal, and it shifts constantly as coal and gas prices move.
How it fits together
Weather decides how much power has to come from fossil plants; the clean dark and clean spark spreads decide which fossil fuel does the work; and the EUA price sits in the middle of both, rising when cold or low-renewable conditions force more burning, and in turn nudging that burning from coal toward gas.
The MSR is still the market’s automatic supply valve. Whenever the total number of allowances in circulation tops 1,096 million, the reserve pulls 24% of that surplus out of the auctions over the next twelve months. The Commission puts out the circulation figure each May, with the 2025 number published on 29 May 2026, and that figure sets how much the reserve takes in over the year ahead.
For the year running from September 2026 to August 2027, about 190 million allowances will move into the reserve. That is noticeably less than the roughly 276 million taken in the year before, a sign that the long-standing surplus is steadily shrinking as the tighter cap takes hold. The MSR held around 400 million allowances at the start of 2026, and anything above its ceiling is cancelled for good, which trims total supply permanently.
Why the smaller intake matters
A smaller intake is a sign the market is shifting from mopping up a surplus toward real scarcity. As the cushion of bankable allowances wears down, the price starts to react more directly to each year’s cut in the cap.
Another shift well underway is the slow removal of free allowances from the carbon-leakage industries, timed to match the phase-in of the Carbon Border Adjustment Mechanism, or CBAM. Under its full regime, CBAM puts a carbon price on imports of goods like steel, cement, aluminium, fertilisers, electricity and hydrogen, so that importers pay roughly what EU producers pay. As CBAM ramps up through the late 2020s, the free allowances that used to shield those EU industries are taken away at the same pace.
For industrial buyers this is probably the change worth planning for most carefully. A larger and larger share of their emissions will have to be covered with allowances they buy rather than receive for free, so their real carbon bill climbs even if the headline EUA price doesn’t move.
The biggest expansion of carbon pricing in Europe is ETS2, a separate system that covers the CO₂ from burning fuel in buildings, road transport and the smaller industry the main ETS doesn’t reach. Monitoring started in 2025 and verification in 2026. In the December 2025 trilogue on the 2040 climate target, Parliament and Council formally postponed full compliance from 2027 to 2028 to give member states more time to prepare, while the Commission proposed bringing early auctions forward to January 2027 to put a price signal in the market sooner. The cap is meant to cut those sectors’ emissions 42% below 2005 levels by 2030, starting from a year-one cap of around 1,036 million tonnes.
Because ETS2 lands directly on home heating and motor fuel, it is politically sensitive in a way the main system isn’t. To keep prices from spiking it has its own rule-based Market Stability Reserve and a soft ceiling: if the allowance price goes above roughly €45 (in 2020 money), extra supply is released. A Commission proposal in November 2025 looked to strengthen that, including a “top-up” that would double the allowances released above the trigger, and to start auctions earlier so there is a price signal and some revenue sooner. A Social Climate Fund is meant to channel revenue back to households that would struggle with the extra cost.
| Feature | ETS1 (main) | ETS2 (new) |
|---|---|---|
| Covers | Power, industry, aviation, shipping | Buildings, road transport, small industry |
| Trading starts | 2005 | 2028 (early auctions Jan 2027) |
| 2030 target vs 2005 | −62% | −42% |
| Price control | MSR (quantity-based) | Dedicated MSR + ~€45 soft ceiling |
Put it together and the 2026 picture is of a tightening, grown-up market. The cap is coming down at its fastest rate yet, the MSR is steadily absorbing the surplus, auctioning carries most of the supply while free allocation winds down behind CBAM, and a whole new system for buildings and transport is nearly here. The price sits in the mid-€70s for now, but the bigger forces at work, a steeper LRF, a shrinking surplus and a widening scope, mostly pull in the same direction for the rest of the decade.
If you have to comply, the job is to budget for a carbon bill that rises as free allowances disappear. If you build projects or invest, the signal is a carbon price that looks durable, has policy behind it, and now reaches across a steadily wider part of the European economy.
Part 1 explains the cap-and-trade mechanics from scratch. Part 2 walks the history that shaped today’s prices. Together they unpack every number in this article.
Part 1 — EU ETS Primer · Part 2 — History of the EU ETS · Canadian Carbon Pricing Series
Primary sources for the 2026 cap, auction calendar, MSR figures, CBAM rules and ETS2 design cited above.
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