3 September 2026
The EU Emissions Trading System (EU ETS) is a carbon market where price formation is fundamentally driven by the balance between emission reduction targets, the supply of EUAs (EU Allowances), and companies’ demand for EUAs for compliance purposes.
Therefore, when evaluating EU ETS prices, it is important to consider not only the current EUA price but also how tight or loose the market may become in the future.
The EU ETS revision proposed by the European Commission on 17 July 2026 introduces important changes regarding how this supply-demand balance could develop, particularly after 2030.
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The supply-demand balance in the EU ETS could change after 2030. The European Commission’s 17 July 2026 revision proposal could slow the rate of cap reduction, potentially resulting in greater long-term EUA supply and lower scarcity. All else being equal, these changes point to a new supply-demand dynamic that could create downward pressure on EUA prices.
How Is EUA Supply Determined?
Under the EU ETS, the total amount of EUAs is limited by a long-term emissions cap. This cap is gradually reduced over time to decrease the total supply of allowances in the market and create an economic incentive for companies to reduce their emissions.
The annual rate of this reduction is determined by the Linear Reduction Factor (LRF).
While the current system maintains a relatively high rate of cap reduction, the revision proposed on 17 July 2026 foresees a slower reduction of the cap after 2031.
This change is critical from a supply-demand perspective:
Slower cap reduction → slower contraction of EUA supply → lower scarcity → potential downward pressure on prices, all else being equal.
Importantly, this does not mean that “more EUAs will suddenly be released into the market.” Rather, the effect is that future supply may be less constrained compared with the current system.
MSR: The Market’s Automatic Balancing Mechanism
The second important factor in the EUA supply-demand balance is the Market Stability Reserve (MSR).
The MSR was created to prevent a structural surplus of EUAs from accumulating in the EU ETS. The mechanism operates according to the Total Number of Allowances in Circulation (TNAC), which indicates the total amount of allowances circulating in the market.
When TNAC exceeds certain thresholds, a portion of EUAs is removed from auction supply and transferred to the MSR. Under current rules, when TNAC exceeds 1.096 billion EUAs, the MSR removes allowances equivalent to 24% of TNAC under certain conditions.
In simple terms:
Surplus ↑ → MSR intake ↑ → EUA supply in the market ↓
The purpose is to reduce structural market surplus and preserve the carbon price’s long-term emission reduction signal.
At the end of 2025, TNAC in the EU ETS stood at approximately 1.023 billion EUAs, resulting in around 190.5 million EUAs being scheduled for transfer to the MSR between September 2026 and August 2027.
Why Is the 17 July 2026 Revision Important?
The European Commission’s proposal of 17 July 2026 introduces an important potential change to the long-term supply structure of the EU ETS.
In particular, slowing the rate of cap reduction after 2030 compared with the current trajectory could result in a higher amount of EUAs remaining available in the market in the future.
The main supply-demand impact can be summarized as:
Slower cap reduction
→ higher potential EUA supply
→ lower scarcity
→ greater potential for surplus
→ downward pressure on EUA prices, all else being equal
However, this mechanism does not mean that prices will automatically fall. EUA prices also depend on many factors, including the fuel mix in power generation, industrial production, economic growth, energy prices, corporate decarbonisation investments, and the operation of the MSR.
How Could Changes to the MSR Affect Supply and Demand?
Another important issue in the revision process is the future operation of the MSR.
The primary purpose of the MSR is to reduce structural surplus accumulated in the past and provide a buffer against supply-demand imbalances. In its 2026 assessment, the Commission noted that permanently invalidating allowances held in the MSR could further tighten future supply and create upward pressure on prices. The Commission therefore also proposed ending the invalidation mechanism.
This change is intended to preserve a larger reserve of allowances against the risk of excessive market tightening, particularly in the mid-2030s and beyond.
Therefore, from a long-term perspective:
Slower cap reduction + more allowances potentially retained in the MSR
could make the market less scarcity-driven compared with the current policy trajectory.
The 2027–2030 Period Is Different
An important distinction needs to be made here.
It would not be accurate to directly apply the long-term supply effects of the 17 July revision to the 2027–2030 period.
Under current rules, the LRF is 4.3% for 2024–2027 and 4.4% for 2028–2030.
Therefore, during 2027–2030, the EUA market will still face a strong structural cap reduction mechanism.
In addition, the MSR continues to actively remove surplus allowances from the market. For example, approximately 190.5 million EUAs are scheduled to enter the MSR between September 2026 and August 2027.
For this reason, it would not be accurate to state that “the 17 July revision increases supply” during 2027–2030.
The main change emerges in the post-2031 supply trajectory.
International Carbon Credits: Not to Be Confused With EUAs
The 17 July 2026 proposal also introduces a framework for the limited use of high-quality international carbon credits in implementing the 2040 climate target.
This mechanism does not automatically mean that companies could meet their current EU ETS compliance obligations as follows:
90 tonnes of emissions → 85 EUAs + 5 international credits
Therefore, international credits should not be directly interpreted as “260 million EUAs of additional supply” or “a guaranteed reduction of 260 million EUAs in demand.”
This issue relates more broadly to how the EU’s 2040 climate target will be achieved, with implementation details expected to be clarified through subsequent legislation.
Why Is the Supply-Demand Balance Critical for EUA Prices?
The basic economic logic behind EU ETS pricing is simple:
EUA demand > perceived tightness of available supply
can create upward pressure on prices.
Conversely:
EUA supply ↑ / EUA scarcity ↓
can create downward pressure on prices.
However, looking only at annual auction supply is not sufficient. Market participants also price in the future cap, the MSR, banked allowances, companies’ expected emissions, and regulatory changes.
Therefore, in the EUA market, expectations are as important as current physical supply.
Conclusion
The most important supply-demand implication of the 17 July 2026 EU ETS revision is its potential to create a less restrictive allowance supply trajectory after 2030 compared with the current system.
In particular:
- Slower cap reduction: could reduce future EUA supply less aggressively than under the current trajectory.
- Changes to the MSR: could alter how market surplus and future scarcity are managed.
- Ending MSR invalidation: could preserve a larger reserve of allowances that may be available in the future.
- International carbon credits: could provide additional flexibility toward the 2040 climate target, but should not be interpreted as a direct 1:1 change in EUA supply or companies’ EUA demand.
In conclusion, the 2027–2030 period should be distinguished from the period after 2031. During 2027–2030, the existing cap reduction and MSR mechanisms will continue to determine the main supply dynamics of the EUA market, while the proposed policy trajectory after 2031 could alter the market’s long-term scarcity profile.
The ultimate direction of EUA prices will depend not only on these supply-side changes, but also on European economic growth, power sector emissions, industrial production, and the pace of corporate decarbonisation.