The EU just agreed to double the size of its ETS2 emergency release mechanism — and called it a feature.
Last week, EU negotiators struck a provisional deal to raise the price-trigger threshold for ETS2's stability reserve to €45 per metric ton of CO2, up from a lower prior level, with the reserve now able to release 40 million permits per trigger event — twice the previous 20 million. Since the reserve can be triggered twice per year, the ceiling on emergency supply injections is now 80 million allowances annually. The scheme, which covers heating and transport fuels, doesn't even launch until 2028. The EU is already pre-engineering its pressure release valve before the boiler is lit.
The official framing is consumer protection. The unofficial reality is that governments got cold feet about what a functioning carbon price actually feels like at the pump.
A Safety Valve That Fires at €45 Is a Ceiling, Not a Floor
The mechanics here matter. ETS2 is supposed to price CO2 emissions from fuel suppliers and distributors, creating an incentive to shift toward electric vehicles and cleaner heating. The price signal is the entire mechanism. A stability reserve that dumps 80 million permits into the market whenever prices breach €45 isn't a safeguard against extreme volatility — it's a soft cap on the price level at which the policy is allowed to work.
Compare that to where ETS1 sits today. The current ETS1 price is around €76 per tonne, well below the €100 target that some industrial decarbonizers have been counting on. ETS1 has been running for over two decades and still hasn't reliably sustained the price levels that would make deep industrial decarbonization pencil out. ETS2 is being designed from the start with a trigger that fires at less than half of what serious analysts consider a meaningful long-run carbon price.
The research on this is fairly clear. A Nature Communications study published this year found that a modest auction reserve price, automatically triggered during gas price shocks, can protect consumers while preserving decarbonization incentives — but the key word is modest. The paper's framework is designed to prevent gas-to-coal switching during energy crises, not to cap the carbon price at a level that barely registers in fuel economics. There's a meaningful difference between a circuit breaker and a governor.
The ETS1 Revision Is Running the Same Play
ETS2's safety valve deal didn't happen in isolation. On the same day, Reuters reported on an internal European Commission document showing that the upcoming ETS1 revision — due July 15 — will extend free permit allocations to heavy industry in exchange for local investment commitments. The Commission is also planning a €30 billion "ETS Investment Booster" built on 400 million existing allowances, structured to stagger permit sales and avoid depressing prices during the rollout.
That last part is genuinely interesting: the Commission is worried about permit sales lowering prices too fast, while simultaneously agreeing to a mechanism that releases permits to prevent prices from rising too fast. The EU is now actively managing the carbon price from both directions — a floor on the downside, a ceiling on the upside. What's left of the market signal?
Modeling from Sandbag using the Commission's own impact assessment scenarios shows the stakes. Under the more ambitious S3 pathway, ETS emissions fall 93% and the market ends with a surplus of around 312 million allowances. Under the weaker S2 pathway, emissions fall only 89% — missing the EU's 90% reduction target — and the market runs a deficit of roughly 232 million allowances, which would push prices high enough to close the gap. The current ETS design handles that through price pressure. Every additional supply release mechanism is a way to avoid that pressure, which is another way of saying: a way to miss the target more comfortably.
What the July 15 Revision Actually Needs to Answer
The Commission's ETS revision proposal drops July 15, and the Florence School of Regulation's upcoming review frames the core questions accurately: how to handle the Market Stability Reserve redesign, whether to integrate carbon removals, and what to do about the "ETS endgame" as the cap approaches zero in the late 2030s.
Those are the right questions. But the ETS2 deal last week revealed the political answer that's already been decided: when carbon prices get high enough to actually change behavior, the EU will release supply to bring them back down. The revision can redesign the MSR all it wants — the precedent is set.
The €45 trigger isn't a floor that protects the system's environmental integrity. It's a ceiling that protects governments from their own policy. Watch whether the July 15 proposal includes any binding mechanism that prevents the stability reserve from being triggered so frequently it becomes the de facto price cap — because right now, nothing does.
