European Union negotiators have reached a provisional agreement to revise the rules governing the bloc’s carbon market, increasing the number of emissions allowances that can remain in reserve before being permanently cancelled.

The agreement, reached by the Council and European Parliament on 20th October and announced the following day, raises the invalidation threshold of the EU Emissions Trading System’s market stability reserve from 400 million to 700 million allowances.

The compromise reached by EU negotiators follows months of pressure from energy-intensive industries concerned about carbon prices, electricity costs and competition from manufacturers operating under less restrictive environmental regimes.

The measure requires formal approval before entering into force and forms part of a wider review of the EU’s principal carbon-pricing mechanism.

A larger reserve for future market disruptions

Established in 2019, the market stability reserve was designed to address the accumulation of surplus emissions allowances that had weakened the effectiveness of Europe’s carbon market.

Under the Emissions Trading System, companies in covered sectors must surrender allowances corresponding to their greenhouse gas emissions. The total quantity available is progressively reduced, creating a financial incentive to cut emissions.

The reserve adjusts the supply of allowances entering the market, withdrawing them when there is a substantial surplus and releasing them under specified conditions when supply becomes scarce.

Existing rules also provide for the permanent cancellation of allowances held above a threshold of 400 million.

Under the new agreement, that threshold would increase to 700 million, allowing a larger stock to remain available for potential future release.

The change does not automatically introduce 300 million additional allowances into circulation. Releases would continue to depend on the reserve’s operating rules and market conditions.

According to the Council, more than three billion allowances have been invalidated since the mechanism began operating in 2023.

The Commission initially proposed ending automatic invalidation indefinitely, while the Council’s September negotiating position envisaged a temporary suspension followed by a higher threshold.

The compromise retains invalidation but increases the amount protected from cancellation.

Industry competitiveness enters climate negotiations

The agreement follows growing concern about the cumulative cost of European climate regulation, particularly for steelmaking, chemicals, cement and other energy-intensive sectors. Manufacturers have warned that carbon costs, combined with relatively expensive electricity and industrial gas, complicate investment decisions and weaken their ability to compete internationally.

Brussels must also consider the consequences of production shifting to jurisdictions with lower emissions-related costs, a phenomenon known as carbon leakage. Earlier this year, EU Today examined the Commission’s consideration of changes to industrial protections under the ETS, including the relationship between free allowances and the Carbon Border Adjustment Mechanism.

The latest reserve agreement does not directly change the allocation of free allowances, the emissions cap or the obligations imposed on individual industrial installations. Its principal effect would be to preserve a larger buffer that could become available if future market conditions trigger the release mechanism.

For manufacturers planning investments extending into the 2030s, the availability of allowances and the future trajectory of carbon prices influence production costs and the commercial case for decarbonisation technologies.

Carbon market figures reveal changing conditions

The European Commission reported in May that the total number of allowances in circulation during 2025 stood at approximately 1.023 billion.

Its annual market stability reserve calculation provided for approximately 190.5 million allowances to be withdrawn from auctions between September 2026 and August 2027.

These withdrawals reflect the existing mechanism for reducing market surpluses. The proposed higher invalidation threshold concerns how many allowances can subsequently remain in reserve rather than being cancelled.

The overall emissions cap will continue to decline under the legislation already governing the ETS.

Consequently, preserving a larger reserve does not remove the long-term constraint on emissions or guarantee lower carbon prices for European industry.

The agreement also concerns the established ETS covering power generation, industry and certain other sectors, rather than the separate ETS2 regime for emissions associated with road transport and buildings.

The latter has generated its own political controversy, as EU Today reported following the October European Council summit.

Broader ETS reform remains unresolved

The Council and Parliament have agreed that the question of gradually reducing the invalidation threshold should be considered during the broader ETS review.

That exercise will address the carbon market’s operation over a longer period, when the declining supply of allowances could create tighter conditions.

The present agreement therefore provides an adjustment to the reserve mechanism without reopening the entire emissions trading framework. Following legal and technical finalisation, the provisional deal must be endorsed by both institutions and formally adopted.

The new 700 million threshold would apply after the legislation takes effect, while the larger review of the ETS continues through the EU legislative process.

Italy and five other member states have failed to secure a further postponement of the EU’s new carbon market for heating and transport fuels, although European leaders have ordered a fresh assessment of its impact on households and businesses.

European Union leaders have resisted demands for another postponement of carbon pricing for road transport and building fuels, exposing deep disagreements over climate policy, industrial competitiveness and the burden of energy costs on European households.

At the European Council summit in Brussels on 15–16 October, the Visegrad countries — Poland, Hungary, Slovakia and the Czech Republic — pressed for the second European Emissions Trading System, known as ETS2, to be delayed until 2030. Italy and Greece joined calls for greater flexibility over carbon costs, although Rome also sought a national exemption from aspects of the energy-price regime rather than simply a uniform delay. No further postponement was agreed.

The European Council conclusions call on the European Commission to update its assessment of ETS2, particularly its design and safeguards. Leaders also demanded action to reduce volatility in the existing carbon market and limit the effect of carbon prices on electricity costs.

The outcome stops short of the further postponement sought by several governments, but demonstrates how far energy affordability has moved towards the centre of European climate negotiations.

The growing rebellion over ETS2

ETS2 is designed to extend the principle of carbon pricing to fuels used for heating buildings, road transport and certain smaller industrial activities. Unlike the existing Emissions Trading System, which covers large industrial installations and power generation, the new mechanism reaches sectors closely connected to everyday household expenditure.

Under the scheme, fuel suppliers must purchase allowances corresponding to the emissions associated with the fuels they sell. Households and motorists will not buy allowances themselves, but suppliers may pass those additional costs through to customers.

That distinction is fundamental. A policy designed to encourage investment in cleaner heating systems and vehicles may initially appear to consumers as an increase in petrol, diesel and domestic heating bills.

The current legislative timetable provides for ETS2 to become operational in 2028, following an earlier one-year postponement. The latest demands from several Central European governments would push that date back to 2030.

Their argument is that consumers and smaller businesses cannot reasonably be expected to absorb another source of energy-price pressure while European economies continue to contend with geopolitical uncertainty, expensive fuel and comparatively weak industrial competitiveness.

Czech Prime Minister Andrej Babiš has been particularly outspoken in his criticism, arguing that carbon pricing risks weakening Europe’s industrial base and making everyday life more expensive.

Italy has supported calls for greater flexibility, with Prime Minister Giorgia Meloni presenting the discussion as part of a wider attempt to restore competitiveness and make the transition more affordable.

Why other governments opposed another delay

The initiative encountered resistance from governments concerned that repeatedly postponing established climate legislation would weaken investment certainty and reduce confidence in European policy.

The Nordic member states have been particularly reluctant to reopen the timetable. Their position reflects a broader concern that businesses investing in clean technologies need credible long-term rules, rather than legislation liable to be revised whenever political opposition intensifies.

Carbon pricing is intended to change economic incentives gradually. Higher costs for carbon-intensive fuels are supposed to make alternatives such as better-insulated buildings, electric vehicles and cleaner heating more financially attractive.

Critics of further postponement argue that delaying implementation would also delay those incentives, potentially increasing the eventual cost of reaching the Union’s emissions-reduction targets.

Yet the opposition has exposed a weakness in that argument: consumers cannot always respond quickly to price signals. A household relying on an older heating system or a worker with no practical alternative to driving may face higher costs long before affordable low-carbon options become available.

That issue has been central to earlier discussions over ETS2. EU Today reported on stronger carbon-price safeguards in June, when European institutions moved to provide additional market intervention if allowance prices rose sharply.

Commission ordered to reassess the economic impact

Rather than endorsing a new delay, European leaders have asked the Commission to review ETS2’s economic impact and safeguards.

The summit also urged faster progress on adjustments to the Market Stability Reserve, the mechanism intended to help manage the supply of carbon allowances and prevent excessive price volatility.

Under the existing scheme, market interventions can increase or reduce allowance availability in response to defined conditions. For ETS2, safeguards are especially politically sensitive because the cost of carbon allowances may ultimately be reflected in household transport and heating expenditure.

The European Commission’s updated auction arrangements already envisage auctions of ETS2 allowances beginning in 2027, ahead of the system’s operational launch in 2028.

That timetable gives governments a relatively narrow window to settle the remaining political disputes and put protective measures into effect.

A central part of the response is the Social Climate Fund, intended to support vulnerable households, transport users and small businesses through investments in energy efficiency, cleaner heating, improved transport and temporary financial assistance.

EU Today previously examined the European Investment Bank’s €3 billion advance financing initiative, which aims to accelerate support for households before the new carbon market becomes fully operational.

The central practical question is whether such assistance reaches consumers quickly enough to offset rising costs, particularly in member states where incomes are lower and households remain heavily dependent on fossil fuels.

Climate commitments meet industrial reality

The ETS2 dispute is connected to a broader argument over Europe’s existing carbon market and its effects on energy-intensive industries.

Manufacturers already face substantial costs arising from electricity, fuel, regulatory requirements and international competition. Governments concerned about deindustrialisation argue that European climate policy must account more directly for these pressures.

The summit conclusions acknowledged those concerns by demanding a predictable carbon market that limits price volatility and protects industry against the relocation of production to jurisdictions with less demanding environmental rules.

At the same time, leaders reaffirmed the importance of maintaining carbon pricing as an incentive for investment and emissions reduction.

For the governments seeking a postponement, the Commission’s new assessment offers an opportunity to maintain pressure for further concessions. For governments defending the existing timetable, it provides an alternative to another politically damaging delay.

The immediate result is therefore a compromise over scrutiny rather than a change in law. ETS2 remains scheduled for 2028, while Brussels must demonstrate that its safeguards can withstand both market volatility and political opposition.

The next phase will be determined less by arguments about long-term emissions targets than by the ability of EU institutions and national governments to show households and businesses how the transition can be financed without placing disproportionate costs on those least able to adjust.

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