The package, presented on Friday, includes a lower linear reduction factor from 2031, changes to the Market Stability Reserve, extended free allocation rules and new mechanisms for carbon removals and international carbon credits. Together, the measures aim to reduce pressure on European industry while supporting investments in decarbonisation.
According to Gregor Vulturius, Lead Scientist and Senior Advisor in Climate and Sustainable Finance at SEB, the proposal marks a significant shift in the trajectory of the EU carbon market.
“The main outcome of the proposal is a somewhat weakening of the level of ambition that the Commission wants for the ETS”, he says.
The Commission proposes reducing the annual cap reduction rate to 3.7 per cent between 2031 and 2035 and further to 1.7 per cent from 2036. SEB estimates that the changes could leave around 2.5 billion additional allowances in the system compared with current rules.
At the same time, the proposal would make free allocation more conditional. Companies would need to submit decarbonisation plans to receive most of their free allowances, with a portion contingent on evidence of investments made within the European Union.
The planned phase-out of free allocations under the Carbon Border Adjustment Mechanism would also be extended from 2034 to 2038, providing more time for affected sectors such as steel, cement and fertilisers to adapt.
Another notable element is the reintroduction of international carbon credits. Rather than allowing companies to buy credits directly, the Commission proposes that the European Union procure up to 260 million tonnes of high-quality international credits from 2036 onwards. The proposal also includes purchasing up to 250 million tonnes of permanent carbon removals in Europe.
Despite the long-term implications, the carbon market remained relatively calm following the announcement. European Union Allowance prices traded around EUR 76–80 per tonne, with no major shift in short-term supply and demand expectations.
“This was a relatively uneventful day in the markets for the EUA price, despite fundamentally a strong bearish skew versus the status quo”, says Robert van Wijk at SEB’s FICC Sales unit in London.
FICC is short for Fixed Income, Currencies and Commodities.
The proposal will now be negotiated by member states and the European Parliament. SEB expects several elements to face further discussion, particularly the proposed conditionality attached to free allocations. Any final legislation is likely to shape carbon market dynamics well into the 2030s.