EU Carbon Prices Hit Fresh Lows Amid ETS Political Pressure

Carbon market prices fall to nine-month lows

European carbon prices have dropped sharply in recent weeks. The cost of European Union Allowances (EUAs) fell below €71 per tonne of CO2 equivalent in mid-February 2026. This represents the lowest level since late summer 2025.

The decline follows comments from several EU heads of government. They expressed concerns about industrial competitiveness. Consequently, markets are pricing in potential changes to emissions trading rules.

For UK businesses with European operations or supply chains, these developments matter. Carbon costs feed through to energy prices, manufacturing expenses, and procurement contracts. Moreover, the political debate signals a broader tension between climate policy and industrial strategy that may affect UK decision-making too.

How the EU emissions trading system works

The EU Emissions Trading System launched in 2005. It covers approximately 40% of the bloc’s total emissions. Power stations, heavy industry, aviation, and maritime transport all participate in the scheme.

Companies must surrender one allowance for each tonne of CO2 they emit. The system sets a cap on total emissions. This cap tightens each year to drive decarbonization. Firms can trade allowances among themselves, creating a carbon price that reflects supply and demand.

The scheme has delivered results. Emissions from covered sectors have fallen nearly 40% since the system began. During the same period, industrial output from participating sectors grew by around 70%. Revenue from allowance sales has funded clean technology investment across member states.

However, the system is tightening significantly. Free allowance allocations will reduce after 2030. Caps are becoming stricter. For energy-intensive industries such as cement, steel, and chemicals, this creates mounting cost pressure. These sectors face competition from producers in countries without comparable carbon pricing.

A second emissions trading system, known as ETS2, was planned to cover buildings, road transport, and smaller industries. Member states delayed this scheme last year. Poland, Estonia, Bulgaria, and Slovakia opposed the expansion amid concerns about energy costs and public affordability.

February 2026 price collapse triggered by political statements

Carbon allowance prices tumbled during the second week of February 2026. The European Industry Summit took place on February 11th. An informal meeting of EU leaders followed in Belgium on February 12th. Political statements from both events moved markets significantly.

German Chancellor Friedrich Merz made particularly notable comments. He stated the emissions trading system “should be revised or at least postponed” if it cannot cut emissions while supporting industrial transition. Merz acknowledged the scheme’s achievements, noting emissions reductions and industrial growth. Nevertheless, he argued adjustments are needed.

His remarks triggered an immediate market response. Allowance prices dropped 7-8% on February 12th and 13th. EUAs traded between €70.59 and €72.80 during this period. Over four weeks, prices fell between 19% and 23%. Year-on-year, the decline reached 6-11%.

Other European leaders echoed similar concerns. French President Emmanuel Macron called for “concrete” solutions by March. Belgian Prime Minister Bart De Wever urged “intelligent” adaptations to what he described as “too high” CO2 costs. Czech Prime Minister Andrej Babiš claimed the system is “destroying” industry. Slovak Prime Minister Robert Fico cited “enormous economic damage.”

Market positioning shifted accordingly. Investment funds reduced their long positions to 94 million allowances. This represents a three-month low. Trading volumes increased sharply as participants sold to reduce risk exposure.

The price gap between EU and UK carbon markets widened substantially. The spread reached €22 per tonne, up from €7-10 in previous weeks. UK allowance prices also declined, though less severely, reflecting domestic political pressures on environmental policy.

Industrial sectors push back against tightening rules

Energy-intensive manufacturers bear the heaviest burden from rising carbon costs. Cement producers, steelmakers, and chemical companies compete globally. Their rivals in many countries face no equivalent carbon pricing.

These industries argue that current ETS rules threaten their viability. Free allowance allocations are decreasing. Carbon costs add to already high European energy prices. Investment is flowing to regions with lower operating costs. The European chemical industry association Cefic has been particularly vocal. Director General Marco Mensink questioned whether “after 20 years in the ETS we might have gone in the wrong direction.”

The political response reflects these pressures. Member state governments face competing demands. They must meet climate commitments under the European Green Deal. Simultaneously, they want to retain industrial jobs and prevent carbon leakage. This occurs when production moves to countries with weaker environmental standards.

European Commission President Ursula von der Leyen defended the emissions trading system. She committed to redirecting more auction revenues to industrial support. This forms part of a broader review scheduled for the third quarter of 2026. However, von der Leyen also signaled openness to adjustments that protect competitiveness.

Several reform options are under discussion. These include slowing the phase-out of free allowances, introducing supply controls to support prices, and creating flexibility mechanisms for specific sectors. The chemical industry has called for targeted relief. Steel and cement producers want extended free allocation periods.

The International Emissions Trading Association urged caution. It warned against “ad hoc political interventions” that could undermine investor confidence. Carbon markets depend on policy certainty. Frequent rule changes make long-term investment decisions harder.

Summary of key developments

• EU carbon allowance prices fell below €71 per tonne in mid-February 2026, reaching the lowest level since late summer 2025, following statements from political leaders about potential ETS reforms.
• German Chancellor Friedrich Merz called for the system to be “revised or at least postponed,” triggering a 7-8% price drop over two days and a 19-23% decline over four weeks.
• Investment funds reduced long positions to a three-month low of 94 million allowances as markets priced in the possibility of looser policy settings.
• The spread between EU and UK carbon prices widened to €22 per tonne from €7-10 previously, reflecting diverging policy expectations in the two markets.
• The European Commission plans to propose ETS revisions by July 2026, with options including slower free allowance phase-outs and sector-specific flexibility measures.
• Energy-intensive industries including cement, steel, and chemicals are pushing for changes, citing competitiveness concerns and high energy costs compared to global competitors.

European policy review scheduled for mid-2026

The European Commission will propose revisions to the emissions trading directive by July 2026. This review was already planned as part of the system’s regular policy cycle. Political pressure has now raised expectations of more substantial changes.

Several policy instruments intersect with this debate. The Clean Industrial Deal aims to boost European manufacturing competitiveness. The Competitiveness Compass sets out priorities for industrial strategy. The Carbon Border Adjustment Mechanism (CBAM) began its implementation phase in January 2026. This applies carbon costs to imports of certain goods, addressing concerns about carbon leakage.

However, CBAM has created international tensions. Trading partners view it as protectionism. China, India, and the United States have raised objections through the World Trade Organization. Some European leaders worry about retaliation affecting export-dependent industries.

The policy review must balance multiple objectives. Climate targets remain legally binding under EU law. The bloc committed to cutting emissions by at least 55% by 2030 compared to 1990 levels. Net zero by 2050 is enshrined in the European Climate Law. Any weakening of the ETS risks these goals.

Conversely, industrial competitiveness concerns are legitimate. European energy prices remain structurally higher than in North America and parts of Asia. Manufacturers need predictable policy frameworks to plan investment. Excessive short-term cost pressure can trigger facility closures and job losses.

Think tank Bruegel has proposed evolving the system toward a “cap-and-invest” model. This would direct more carbon revenue toward industrial decarbonization support. Such an approach might address competitiveness concerns while maintaining environmental ambition. Implementation details would prove crucial.

What this means for UK businesses

UK companies face both direct and indirect effects from EU carbon market developments. Businesses with European operations participate in the EU ETS directly. They must manage allowance costs and compliance obligations. Price volatility creates budgeting uncertainty.

Supply chain impacts spread more widely. UK importers source components and materials from European manufacturers. Carbon costs feed through to input prices. If EU rules change significantly, this affects procurement costs and contract terms. Similarly, UK exporters to Europe compete with EU-based suppliers whose cost structures may shift.

The widening price gap between EU and UK carbon markets creates complexity. UK allowances traded at roughly €22 per tonne less than EU equivalents in mid-February 2026. This differential affects competitiveness between UK and European producers. It also complicates discussions about linking the two carbon markets more closely.

Policy uncertainty poses challenges for investment decisions. Companies planning decarbonization projects need stable carbon price assumptions. If European prices fall due to looser rules, the business case for low-carbon technology weakens. Conversely, if reforms prove temporary, early movers gain advantage.

UK policy is not immune to similar pressures. Domestic industrial sectors face comparable competitiveness concerns. Political debate about the pace of net zero measures has intensified. What happens in Europe influences UK policy discussions, particularly regarding energy-intensive manufacturing.

For businesses tendering for public contracts, carbon reporting and reduction commitments remain important. The net zero program requirements in UK procurement have not changed. Supplier selection still favors companies with credible environmental strategies. European policy uncertainty does not reduce the need for robust carbon management.

Companies should monitor developments closely. The July 2026 Commission proposals will clarify the direction of EU policy. Member state negotiations will follow, potentially extending into 2027. Actual rule changes might not take effect until 2028 or later. However, market prices respond to expectations, creating immediate impacts.

Businesses can take several practical steps. Review exposure to EU carbon costs across operations and supply chains. Assess contract terms for pass-through clauses related to regulatory costs. Consider scenario planning for different policy outcomes. Maintain flexibility in sourcing strategies where feasible.

Training on emissions measurement and reduction remains valuable regardless of policy changes. The SBS Academy offers courses on carbon accounting and Scope 3 emissions that help businesses understand their full carbon footprint. This knowledge supports better decision-making whether carbon prices rise or fall.

Long-term decarbonization trends continue despite short-term policy uncertainty. Customer expectations, investor requirements, and technological change all push toward lower emissions. Companies that build genuine low-carbon capability will be better positioned regardless of specific regulatory outcomes.

Where to find additional information

The European Commission’s climate action website provides comprehensive information about the EU Emissions Trading System, including current rules, reform proposals, and consultation documents.

Market data and analysis are available from ICE Futures Europe, which operates the main trading platform for EU carbon allowances. Price information and trading volumes help track market sentiment.

The International Emissions Trading Association publishes regular analysis of carbon market developments and policy debates. Its members include businesses, financial institutions, and service providers across the carbon trading sector.

For UK-specific carbon pricing information, the UK government’s ETS pages explain current rules and future plans. This includes details about potential linking with the EU system and domestic policy development.

Businesses needing support with carbon reporting compliance and ESG requirements can find guidance on regulatory obligations and practical implementation approaches. Understanding these requirements helps companies prepare for policy changes and meet existing commitments.