The EU Emissions Trading System is supposed to make pollution expensive enough that companies stop doing it. Right now, it's not doing that job as well as the people who design it hoped.
EU carbon allowances are trading between EUR 74 and EUR 77 per tonne in May, according to ICE futures data. That's a 5.7% increase from March — fine, directionally — but it's well below where analysts thought prices would be at the start of the year. In January, a survey of ten analysts projected 2026 average prices at EUR 92.65 per tonne. The current consensus has dropped to EUR 80.61, with 2027 forecasts cut from EUR 107 to EUR 93. That's not a rounding error — it's a 13% downward revision in four months, driven by policy changes that are actively loosening the market.
The mechanism doing most of the loosening: free allowance allocation. On May 11, the European Commission released updated ETS benchmarks for 2026–2030. The proposal would have free allowances cover approximately 75% of industrial sector emissions on average, saving companies an estimated EUR 4 billion in compliance costs. That's not a small carve-out — it's a structural cap on how much price pressure the market can actually generate.
Competitiveness Anxiety Is Driving the Giveaway
The political logic here isn't hard to follow. Member states are worried about carbon leakage — the risk that European industrial producers relocate to jurisdictions without carbon pricing, exporting emissions rather than reducing them. The Commission's CBAM (Carbon Border Adjustment Mechanism) was supposed to address this by pricing imports at the border. I wrote two weeks ago about how CBAM's early operation is creating its own distortions. The free allowance expansion suggests the Commission doesn't fully trust CBAM to hold the line — so it's hedging by keeping compliance costs manageable for domestic industry.
The problem is that "manageable compliance costs" and "sufficient abatement incentive" are in direct tension. If 75% of your emissions are covered for free, your marginal cost of carbon is applied to only 25% of your actual footprint. The price signal that's supposed to drive capital allocation toward cleaner processes is being diluted before it reaches the investment decision.
What a Price Floor Would Actually Fix — and What It Wouldn't
The assigned topic this week is Phase 6 price floor mechanics, and the honest answer is: the sources don't confirm that a formal price floor is on the table for Phase 6. What the sources do show is a market that keeps undershooting analyst expectations whenever policy uncertainty rises — which is exactly the problem a price floor is designed to solve.
The case for a floor is straightforward. Carbon investment decisions — new industrial processes, fuel switching, CCS infrastructure — require multi-year payback horizons. If a company can't be confident that carbon will still cost EUR 80 in 2030, the investment case for abatement weakens relative to just buying allowances and waiting. Price volatility doesn't just hurt forecasting; it actively subsidizes inaction.
The case against is also real. A price floor constrains the Market Stability Reserve's ability to respond to genuine demand shocks. It creates a two-sided asymmetry: if you set a floor but no ceiling, you've protected investment incentives on the downside but left industrial competitiveness exposed on the upside. And any floor set below the actual abatement cost curve for hard-to-decarbonize sectors is just a number on paper.
The broader ETS review is scheduled for July 2026. That's the moment to watch. The Commission is simultaneously expanding CBAM's scope — including a review of whether to extend carbon pricing to flights departing the EU — while handing EUR 4 billion in relief to domestic industry. Those two moves are pulling in opposite directions. The July review will reveal which instinct wins.
My read: the free allowance expansion is a political concession that will make the price floor debate harder, not easier. You can't simultaneously argue that carbon prices are too high for industry to bear and that prices need a guaranteed floor. The Commission is going to have to pick a lane. Right now it's straddling both, and the market is pricing in the uncertainty accordingly.
Watch the July review for any language on minimum reserve prices or corridor mechanisms. If the Commission punts on price stability architecture while expanding free allocations, the EUR 80 consensus for 2026 may turn out to be optimistic too.