EU shifting tactic to stabilise carbon market ahead of 2026 reforms

European Commission president Ursula von der Leyen has signalled a tactical shift in how the EU manages its carbon market, urging targeted corrections to the Emissions Trading System ahead of formal revision work this year. Her intervention, circulated to EU heads of state ahead of the European Council meeting on 19–20 March, focuses on making the Market Stability Reserve more operational in order to limit sharp rises in CO2 allowance prices and ease pressure on energy costs and industrial competitiveness.

Von der Leyen’s note comes after months of mounting criticism that the ETS, the bloc’s principal tool for pricing carbon, is contributing to higher electricity prices and harming the competitiveness of energy‑intensive manufacturers. Several member states, including Italy, and senior politicians in Germany have publicly called for major relief measures, with some even pressing for temporary suspension of parts of the system. Under political pressure, the Commission now proposes to deploy the MSR actively as a short‑term stabiliser rather than leaving it largely idle.

According to the European Commission, the MSR will materially reduce auction volumes in coming years. Between September 2025 and August 2026 the reserve will remove 276 million allowances from auctions, a move intended to tackle the existing surplus and to strengthen market resilience. Commission figures show the total number of allowances in circulation for 2024 at some 1.148 billion, a baseline that has guided recent MSR operation. The Commission also opened a public consultation on the future of the ETS and the MSR in April 2025 as part of preparations for a broader review planned for 2026.

Alongside short‑term MSR activation, the Commission has signalled further, more structural tweaks. In November 2025 it proposed targeted amendments to the MSR decision to ensure the mechanism can respond earlier and more effectively to volatility arising from the rollout of the new ETS for road transport and buildings (known as ETS2). Those amendments aim to give the MSR greater capacity to operate over the long term and to smooth the initial phase of ETS2, which member states and MEPs fear could add fresh price shocks.

The proposed adjustments sit within a wider reform trajectory agreed at EU level in recent years. The December 2022 deal raised ambition for ETS sectors, setting a 62% emissions reduction target by 2030 compared with 2005 levels, introducing one‑off cuts in 2024 and 2026 and tightening the annual cap decline through 2030. It also sets the phase‑out of free industrial allowances from 2026, with elimination by 2034, and foresees creation of ETS2 for buildings and transport by 2027. The combination of accelerated cap reductions and the end of free allocation has intensified industry concern about cost exposure during the transition.

For industry and energy buyers the forthcoming package represents a balancing act between preserving the carbon price signal needed for decarbonisation and limiting near‑term economic pain. Strengthening the MSR to temper price spikes should reduce sudden allowance cost jumps for power generators and heavy industry, while preserving long‑term scarcity that incentivises investments in low‑carbon technology. At the same time, prior Commission communications indicate that MSR adjustments will be calibrated against updated TNAC indicators, the next of which is scheduled for publication by 1 June 2026.

Political dynamics across member states will shape final outcomes. Some national ministers caution against removing too much price signal too early, arguing that strong carbon pricing remains essential to steer capital towards electrification, efficiency and process change. Others, citing the need to safeguard jobs and competitiveness, have pushed for mitigation measures extending into the post‑2039 allocation horizon; in October 2025 Germany’s environment minister publicly urged consideration of allocation arrangements beyond 2039 to manage social and industrial impacts.

The ETS landscape is also being reframed by complementary policy instruments. The Carbon Border Adjustment Mechanism, still evolving since its initial proposal, is intended to level the playing field between EU producers and imports by applying an equivalent CO2 cost at the border, a development that in prior Commission planning was linked to a gradual reduction of free allowances for exposed sectors.

For participants in industrial decarbonisation the immediate takeaway is twofold. First, market interventions are now explicitly on the table as a stabilising tool to limit extreme allowance price moves, potentially lowering short‑term cost volatility for emitters and electricity consumers. Second, the broader emission cap trajectory and the removal of free allocation remain in force as the EU continues to prioritise rapid emissions reductions and the financing of clean technologies, even as the Commission seeks to temper transitional impacts through MSR adjustments and other measures.