Brussels adopts measures to curb price volatility in EU ETS2

The European Commission adopted proposals to strengthen price stabilization measures for the EU's new carbon market covering road transport, buildings and small businesses, and heating fuels, it said Nov. 27.

This includes the introduction of the Market Stability Reserve, which is designed to ensure stronger intervention if the price exceeds a certain level, reinforce the capacity of this mechanism to operate in the longer term, and ensure earlier and smoother intervention to stabilize the supply of allowances.

The EU's second Emissions Trading System, known as ETS2, will extend carbon pricing to road transport, buildings and small businesses not covered by the existing ETS, directly impacting households through higher fuel and heating costs.

"These measures further strengthen stability and affordability within ETS2 and set us on a more predictable path toward a low-carbon future," said Wopke Hoekstra, commissioner for climate, Net Zero and Clean Growth. "We are setting the right conditions to keep prices in check and intervene swiftly if they go too high."

This comes amid lingering worries that ETS2 could lead to substantial increases in energy prices, highlighting the complex interplay between ambitious climate objectives and economic realities. These concerns also led the European Council to postpone the launch of this new carbon market from 2027 to 2028.

Top-up proposals

The proposal introduces a "top-up mechanism" that doubles allowance injections when carbon prices exceed Eur45/mtCO2e.

"With the top-up, up to 80 million allowances could be injected each year from the start of auctioning until the end of 2029. That is more than the required annual ETS2 reduction of 60 million allowances," the Commission said in a statement.

The reforms extend the validity of ETS2 allowances in the reserve beyond 2030, making all 600 million allowances available for market release if needed for price stabilization. This reserve represents about 10 years of ETS2 emissions abatement, providing long-term market confidence about supply availability during price stress periods.

An additional buffer mechanism ensures earlier intervention to stabilize allowance supply above certain price levels, complementing the Eur45 threshold trigger. The Commission will also advance the ETS2 auction timing to 2027, generating revenues for early climate investments and providing price signals before the compliance obligation begins.

The Market Stability Reserve reforms address concerns from EU member states about potential price volatility in ETS2, which will directly affect household energy costs through higher fuel and heating bills.

The measures aim to ensure a gradual and smooth launch while maintaining the carbon price signal necessary to drive decarbonization in sectors that represent significant portions of EU emissions.

The Commission also said it is proposing an earlier start to the ETS2 auctions to help generate revenues and provide early price signals.

EUA2 prices have dropped sharply following news of the ETS2 delay.

The December 2028 delivery for the EUA2 futures contract settled at Eur70.98/mtCO2e on Nov. 26, up from a record-low of Eur62.14/mtCO2e on Oct. 24, according to data from the Intercontinental Exchange. Trading on this futures contract only began on May 6, when it was launched by ICE, with the price clearing at Eur76.41/mtCO2e after five lots were traded during the session.

The Commission is also considering the development of a new ETS2 front-loading facility with the European Investment Bank to deploy up to Eur6 billion during 2026-27, providing substantial early financing for member states' climate transition programs. This facility operates independently of national ETS2 revenues and Social Climate Fund allocations, creating additional capacity for clean technology investments.