The Council of the European Union and the European Parliament reached a provisional agreement on October 20, 2026, announced on October 21, to raise the threshold for permanently invalidating allowances held in the EU ETS market stability reserve. The threshold will increase from 400 million to 700 million, if the formal adoption process is completed. The change is designed to allow a larger volume of permits to remain available within the reserve.
The compromise does not release an additional 300 million allowances into the market immediately. Instead, it modifies the conditions under which allowances in the reserve are permanently cancelled. This preserves a larger potential buffer against future supply imbalances.
Market stability reserve invalidation mechanism and buffer size
The EU ETS market stability reserve was established to address excessive allowance supply by adjusting auction volumes based on indicators of allowances in circulation. Since the invalidation mechanism began operating in 2023, more than 3 billion allowances have been permanently removed, according to the Council. The reserve rules govern how any subsequent release would work.
Keeping a larger stock of allowances could increase capacity to respond to future scarcity conditions. Any later release remains subject to the established market stability reserve framework rather than discretionary decisions by national governments or ministers. The provisional agreement therefore changes the invalidation threshold without creating an immediate supply injection.
The European Commission had proposed ending allowance invalidation indefinitely. In September, the Council’s negotiating mandate favoured suspending invalidation temporarily until 2030, followed by an 800-million-allowance threshold from 2031. The European Parliament supported continuing invalidation under a 650-million threshold from March 2027.
The agreed 700-million level maintains the invalidation mechanism while increasing the size of the reserve buffer. The text still requires endorsement, legal review and formal adoption before it becomes law. Until then, it remains part of the legislative process.
Implications for EU ETS pricing and industrial demand
The agreement changes the framework for potential future allowance supply but does not set an automatic reduction in near-term EU ETS prices. A larger reserve may affect market expectations about scarcity over longer investment horizons, particularly during the 2030s. It does not directly alter how many allowances are available for immediate trading.
Allowance demand continues to depend on industrial production levels, fuel choices in electricity generation, weather conditions, investment in emissions abatement and broader energy prices. Proposed EU ETS reforms under discussion, including changes to free allocation, add uncertainty that is not resolved by the reserve threshold decision alone.
Sectoral conditions vary across industrial activities. Steelmakers face excess global production capacity, weak automotive demand and competition from imported products. Aluminium smelters remain dependent on electricity contracts and long-term power supplies, while cement manufacturers continue to face substantial process emissions even when fuel consumption declines.
As a result, movements in EU ETS prices can affect industrial operators differently based on production processes, energy exposure and emissions profiles. A change in allowance supply policy does not translate uniformly into lower costs across European manufacturing operations. Industrial hedging decisions also depend on timing across different policy and investment cycles.
CBAM certificate pricing linked to EU ETS auctions
For goods covered by CBAM, certificate pricing is tied to the weighted average of EU ETS auction clearing prices. The European Commission published a CBAM certificate price of €75.36 per tonne of CO2 equivalent (tCO2e) for the first quarter of 2026, followed by €75.28 for the second quarter and €82.32 for the third quarter. The third-quarter figure was published on October 5, 2026.
The Commission calculates certificate prices quarterly for 2026 emissions, with a scheduled move to weekly calculations from 2027. Purchases through the central platform are due to begin in February 2027. The first annual declaration covering imports in 2026 must be submitted by September 30, 2027.
The reserve agreement does not directly amend CBAM pricing arrangements. Its relevance for importers runs through potential effects on future EU ETS market conditions and, via the pricing mechanism, subsequent CBAM certificate costs. However, CBAM liabilities cannot be calculated by multiplying certificate prices by all tonnes of emissions associated with an imported product.
The liability calculation depends on product-specific embedded emissions, applicable free-allocation adjustments, any qualifying carbon price already paid in the country of production that can be deducted, and compliance rules tied to the declared production route. Under existing legislation, the free-allocation factor for CBAM sectors is set at 97.5% in 2026, falling to 95% in 2027. A separate European Commission proposal issued in July 2026 would slow the subsequent phase-out of free allocation, but it has not become law.
Southeast Europe exporters and CBAM compliance responsibilities
The timing of industrial decisions influences exposure under both EU ETS and CBAM-linked pricing pathways. Companies hedging production costs for 2027 face a different policy and industrial environment than businesses developing hydrogen-based production or green-steel facilities intended to operate in 2035. Allowances held in reserve may have value as a future supply buffer only when applicable rules permit release under market conditions.
The volume held in reserve, allowances actually circulating, auction scheduling and the forward carbon-price curve therefore need separate assessment when evaluating risk timing. The forward curve reflects expectations rather than a direct measure of physical allowance stocks available for future release. Treating these measures as interchangeable can misrepresent how exposure develops under policy changes.
Sellers supplying CBAM-covered goods must continue addressing emissions documentation and compliance requirements while EU institutions complete legislative steps related to the reserve threshold. For suppliers in Serbia, Montenegro and other Southeast European countries, improving emissions records and contractual arrangements remains relevant for supplying EU customers. More reliable emissions data can reduce reliance on conservative default values used in CBAM calculations.
The proposed change to the market stability reserve affects longer-term carbon-price risk frameworks but does not create exemptions from electricity-related CBAM requirements or relax obligations concerning physical power purchase agreements (PPAs), hourly matching or verification. Exporters’ existing carbon-accounting responsibilities remain unchanged as legislative processes proceed.