Transition

CO₂, how the market works and why the price has started to rise again

Following the slump at the start of the year, European permits have rebounded by almost 30 per cent. The reasons for this are temporary shortages, financial activity and the role of the reform of the system

by Gianluca Brazzioli

5 August 2026

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4' min read

Translated by AI

Versione italiana

4' min read

Translated by AI

Versione italiana

CO₂: the European price has risen again in recent months. The futures contract for emission allowances (EUAs) for delivery in December 2026 exceeded 86 euros per tonne on 22 July; it now stands at just over 81 euros. On 20 March, the price had fallen below €67, before recovering 30 per cent over the following four months.

Market characteristics

To understand the reasons behind this trend, we need to start by looking at how this market works. CO₂ emission allowances are allocated both free of charge (based on benchmarks) and through public auction; they can then be traded on a secondary market, which determines their current price. The value depends on several factors: ‘The biggest factor is what is known as regulatory risk,’ explains Andrea Ronchi, founder and managing director of the consultancy firm CO2 Advisor. ‘Unlike oil, gas and coal, emission allowances do not come from mines or deposits. They depend on the number of allowances the Commission allocates and on the legislation that gives value to this commodity by creating scarcity.’

The scheme was launched in 2005 and, for many years, the scarcity of allowances remained more theoretical than real. In the first two phases, too many allowances were distributed – via the free allocation mechanism – without adequate corrective measures: ‘The 2008 economic crisis also led to a significant reduction in emissions due to the decline in industrial production, rather than as a result of decarbonisation initiatives,’ recalls Ronchi. At the start of 2017, an EUA was worth around five euros, but the market has changed and the price has settled firmly above 70 euros since 2022.

The rebound following the crash

In January 2026, the price of a European Emissions Allowance (EUA) had risen above 90 euros. Then came the statements by German Chancellor Friedrich Merz, who had indicated he was willing to review or even suspend the ETS system, and the price has fallen by almost 20 per cent since the start of the year.

According to Ronchi, ‘the slump in the first quarter of 2026 was an anomaly caused by the increased weight of regulatory risk, within a long-term upward trend’.

The recovery seen in the following months can also be explained by other factors. The first is a delay in the allocation of free allowances. The majority of companies covered by the ETS operate in industrial sectors at risk of relocation, and for this reason they still receive free allowances, which are calculated using various sector-specific benchmarks.

The new quotas for the period 2026–2030 were only finalised at the end of June; in the meantime, the 2026 allocations have not yet been received: ‘They are three months behind schedule,’ says Ronchi. “The market is now without the allowances that many operators would use to meet their 2025 obligations, which expire in September.”

Funds’ participation in auctions

Another factor driving up the price is financial investors: “In June and July, there was significant participation in the auctions by funds,” says Ronchi, who explains: “In Italia, there are 680 entities involved in the ETS, representing around 1,200 installations. However, there are only 25 participants in the auctions, and almost half of them are financial operators.”

Finance is not a problem in itself: ‘Speculation can be an ally of the market because it creates liquidity’. Ensuring that there is always a buyer and a seller means that market participants can always find a counterparty. “At auctions, however, only operators covered by the regulations should be allowed to participate, either directly or through financial intermediaries acting on their behalf.”

The reform proposal

On 17 July, the European Commission presented its long-awaited proposal to revise the ETS system. The proposal includes a number of changes, including a delay in the phasing out of free allowances (extended to 2038) and a requirement for industry to invest in decarbonisation in order to remain eligible for them.

According to Ronchi, the proposal ‘extends free allocations without restoring the system to its original functioning’. Under the original model, allowances were allocated free of charge, and a company better able to decarbonise would use fewer allowances and sell the surplus to a competitor: ‘The money remained within the industrial system, and one company’s cost became another’s revenue’.

Since 2013, allowances have been allocated by auction: ‘This system lacks an incentive; there is simply a cost that one can try to reduce, which is why the ETS is gradually becoming a carbon tax.’

The proposal is to be discussed by the European Parliament and the Member States, and the institutions have set the first quarter of 2027 as the target for reaching an agreement. Timing, Ronchi concludes, is crucial when considering the political calendar: ‘In Germany, the September state elections in the eastern Länder risk seeing the AfD sweep the board, whilst in France, forces opposed to carbon pricing are leading in the polls. Add to this the pressure from industry associations in the main Member States, and we have reform negotiations set to begin under political conditions very different from those in which the Commission drafted the proposal.”