The European Union has agreed to retain more carbon allowances in its market stability reserve, changing the framework for managing potential supply imbalances in the emissions trading market as energy-intensive industries face weak demand, decarbonisation costs and uncertainty over future carbon prices. The agreement also affects the longer-term pricing environment for imports covered by the Carbon Border Adjustment Mechanism (CBAM), although it does not directly change CBAM obligations.
The Council of the European Union and the European Parliament reached a provisional agreement on October 20, 2026, which was announced on October 21, to increase the threshold for permanently invalidating allowances held in the EU Emissions Trading System (EU ETS) market stability reserve from 400 million to 700 million. The proposed increase of 75% would allow a larger volume of permits to remain available within the reserve if the agreement completes the formal adoption process.
The compromise does not release an additional 300 million allowances into the market immediately. Instead, the higher threshold changes the conditions under which allowances held in the reserve are permanently cancelled, preserving a larger potential buffer against future market imbalances.
Market stability reserve retains a larger allowance buffer
Established to address excessive allowance supply, the EU ETS market stability reserve adjusts auction volumes according to indicators of the number of allowances in circulation. Since the invalidation mechanism began operating in 2023, more than 3 billion allowances have been permanently removed, according to the Council.
Retaining a larger stock of allowances could give the system greater capacity to respond to future scarcity. However, any subsequent release remains subject to the established market stability reserve rules rather than discretionary trading decisions by national governments or ministers.
The provisional agreement reflects a compromise between different institutional positions. The European Commission had proposed ending allowance invalidation indefinitely. The Council’s negotiating mandate in September favoured suspending invalidation temporarily until 2030, followed by an 800-million-allowance threshold from 2031. The European Parliament, meanwhile, supported continuing invalidation under a 650-million threshold from March 2027.
The agreed 700-million threshold preserves the invalidation mechanism while allowing a larger reserve. The text still requires endorsement, legal review and formal adoption before it becomes law.
Future carbon prices remain exposed to industrial and energy conditions
The agreement changes the framework for potential future allowance supply, but it does not establish an automatic reduction in near-term EU ETS prices. A larger reserve may influence market expectations about scarcity over longer investment horizons, particularly during the 2030s, without directly changing the number of allowances available for immediate trading.
Allowance demand will continue to depend on industrial production, fuel choices in electricity generation, weather conditions, investment in emissions abatement and broader energy prices. Proposed EU ETS reforms under discussion, including changes to free allocation, introduce additional uncertainty that cannot be resolved by the reserve agreement alone.
Industrial conditions differ significantly across sectors. Steelmakers face excess global production capacity, weak automotive demand and competition from imported products. Aluminium smelters remain heavily dependent on electricity contracts and reliable long-term power supplies. Cement manufacturers continue to face substantial process emissions even when they reduce fuel consumption.
Consequently, movements in EU ETS prices affect industrial operators differently, depending on their production processes, energy exposure and emissions profiles. A change in allowance supply policy does not translate uniformly into lower costs across European manufacturing.
CBAM certificate prices continue to follow EU ETS auction results
For companies importing goods covered by CBAM, certificate pricing is linked to the weighted average of EU ETS auction clearing prices. The European Commission published a CBAM certificate price of €75.36 per tonne of CO₂ equivalent (tCO₂e) for the first quarter of 2026, followed by €75.28 for the second quarter and €82.32 for the third quarter. The third-quarter figure was published on October 5, 2026.
Certificate prices are calculated quarterly for 2026 emissions and are scheduled to move to weekly calculations from 2027. Purchases through the central platform are due to begin in February 2027, while the first annual declaration covering imports in 2026 must be submitted by September 30, 2027.
The reserve agreement does not directly amend these CBAM arrangements. Its relevance to importers lies in the potential effect of the revised allowance framework on future EU ETS market conditions and, through the pricing mechanism, subsequent CBAM certificate costs.
Actual CBAM liabilities cannot be calculated by multiplying the certificate price by every tonne of emissions associated with an imported product. The calculation depends on product-specific embedded emissions, the applicable free-allocation adjustment, any qualifying carbon price already paid in the country of production that can be deducted, and the compliance rules applicable to the declared production route.
Under existing legislation, the free-allocation factor for CBAM sectors stands at 97.5% in 2026 and is scheduled to fall to 95% in 2027. A separate European Commission proposal issued in July 2026 would slow the subsequent phase-out of free allocation, but that proposal has not become law.
Product-level emissions determine the financial exposure
At a certificate price of €82.32/tCO₂e, an illustrative additional 0.5 tCO₂e of net chargeable emissions per tonne of imported product would generate a carbon cost of €41.16 per tonne of product, before other applicable adjustments.
This calculation is an arithmetic example rather than an EU default emissions value for steel, cement or aluminium. The net chargeable emissions must be established separately for each relevant case.
Importers and their suppliers therefore need to assess multiple price scenarios, including higher and lower EU ETS auction-price paths and potential changes to applicable benchmarks. The financial exposure depends on the interaction between certificate prices, embedded emissions, adjustments and the rules governing the relevant production route.
Allowance holdings and circulating supply remain distinct measures
The timing of industrial decisions is another factor in assessing the reserve agreement. Companies hedging production costs for 2027 face a different policy and industrial environment from businesses developing hydrogen-based production or green-steel facilities intended to operate in 2035.
Allowances retained in the reserve have potential value as a future supply buffer only to the extent that the applicable rules permit their release when market conditions warrant it. The volume held in reserve, the number of allowances actually circulating, the auction schedule and the forward carbon-price curve therefore need to be assessed separately.
The forward curve also reflects market participants’ expectations, rather than providing a direct measurement of the physical stock of allowances available for future release. Treating these quantities as interchangeable risks misrepresenting the implications of the agreement for carbon-price exposure.
Industrial policy continues to balance decarbonisation and cost predictability
The reserve compromise forms part of a wider EU policy debate over the competitiveness of energy-intensive industries. Industrial installations have called for greater predictability in carbon costs while the bloc expands clean-power infrastructure and considers changes to industrial free allocation.
Policymakers face the task of maintaining incentives to reduce emissions while limiting the risk of price spikes that could destabilise investment decisions or prompt political intervention. A larger reserve can provide an additional buffer against extreme supply conditions, but it does not remove the underlying costs associated with replacing blast furnaces, electrifying industrial facilities or constructing energy storage networks.
The next regulatory milestones are the formal adoption of the provisional agreement and the detailed review of the EU ETS. Neither step, by itself, establishes that allowance prices will immediately move in a particular direction.
Southeast European exporters remain responsible for CBAM compliance
For suppliers in Serbia, Montenegro and other Southeast European countries, improving emissions records and contractual arrangements remains an important part of supplying EU customers. More reliable emissions data can reduce unnecessary dependence on conservative default values in CBAM calculations.
The proposed change to the market stability reserve affects the longer-term framework for carbon-price risk, but it does not establish an exemption from electricity-related CBAM requirements or relax obligations concerning physical power purchase agreements (PPAs), hourly matching or verification.
The provisional agreement therefore leaves exporters’ existing carbon-accounting responsibilities unchanged. Companies supplying CBAM-covered goods to the EU must continue to address applicable emissions documentation and compliance requirements while the EU institutions complete the legislative process governing the reserve threshold.
