The Council of the European Union and the European Parliament reached a provisional agreement on October 20, 2026, announced on October 21, 2026, to raise the threshold for permanently invalidating allowances held in the EU ETS market stability reserve. The change would increase the level from 400 million to 700 million, with a proposed 75% rise intended to keep more permits available in the reserve if formal adoption is completed.
The compromise does not release an extra 300 million allowances into the market immediately. Instead, it modifies the conditions under which allowances in the reserve are permanently cancelled, maintaining a larger potential buffer against future supply imbalances.
Market stability reserve invalidation threshold and allowance buffer
The EU ETS market stability reserve was set up to address excessive allowance supply by adjusting auction volumes based on indicators for allowances in circulation. Since the invalidation mechanism began operating in 2023, the Council said that more than 3 billion allowances have been permanently removed.
A higher invalidation threshold is intended to preserve a larger stock of allowances within the reserve. Any subsequent release would remain governed by existing market stability reserve rules rather than discretionary decisions by national governments or ministers.
The provisional deal reflects different institutional positions. The European Commission had proposed ending allowance invalidation indefinitely, while the Council’s negotiating mandate in September supported suspending invalidation temporarily until 2030, followed by an 800-million-allowance threshold from 2031. The European Parliament backed continued invalidation under a 650-million threshold from March 2027.
The agreed 700-million threshold keeps the invalidation mechanism in place while allowing a larger reserve. The text still requires endorsement, legal review, and formal adoption before it becomes law.
Implications for EU ETS pricing and industrial demand
The agreement changes the framework for potential future allowance supply but does not create an automatic reduction in near-term EU ETS prices. A larger reserve may affect expectations about scarcity over longer investment horizons, particularly during the 2030s, without directly altering how many allowances are available for immediate trading.
Allowance demand is expected to continue depending 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 further uncertainty that is not addressed by the reserve threshold alone.
Sector-specific conditions vary across industrial activities. Steelmakers face excess global production capacity, weak automotive demand, and competition from imported products. Aluminium smelters remain reliant on electricity contracts and long-term power supplies, while cement manufacturers continue to face substantial process emissions even as they reduce fuel use.
As a result, changes in EU ETS price levels can affect industrial operators differently based on production routes, energy exposure, and emissions profiles. A shift in allowance supply policy does not translate uniformly into lower costs across European manufacturing.
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 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. Certificate prices are calculated quarterly for 2026 emissions, with a planned move to weekly calculations from 2027. Purchases through the central platform are due to start in February 2027, and 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 depends on how revised allowance conditions may influence future EU ETS market conditions and, through that pricing mechanism, subsequent CBAM certificate costs.
CBAM liability calculation and free allocation factors
Total CBAM liabilities cannot be determined by multiplying the certificate price by every tonne of embedded emissions associated with an imported product. Liability calculations depend 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.
The free-allocation factor for CBAM sectors is set at 97.5% in 2026, with a scheduled fall to 95% in 2027. A separate European Commission proposal issued in July 2026 would slow the phase-out of free allocation, but it has not become law.
An illustrative example at a certificate price of €82.32/tCO₂e, using an additional net chargeable emissions amount of 0.5 tCO₂e per tonne of imported product, yields a carbon cost of €41.16 per tonne of product, before other applicable adjustments. The example is arithmetic rather than an EU default emissions value for steel, cement, or aluminium.
Timing of industrial decisions and exporter compliance responsibilities
The timing of industrial decisions affects how companies assess policy changes related to carbon costs. Firms hedging production costs for 2027 face different policy and industrial conditions than businesses developing hydrogen-based production or green-steel facilities intended to operate in 2035.
The value of allowances held in the reserve depends on whether applicable rules allow their release when market conditions warrant it. The volume held in reserve must be considered separately from allowances actually circulating, along with auction schedules and the forward carbon-price curve.
The forward curve reflects market participants’ expectations rather than measuring physical stocks available for future release. Treating these measures as interchangeable would misrepresent how exposure relates to carbon-price developments under the revised framework.
Southeast European exporters supplying CBAM-covered goods must continue meeting existing carbon-accounting responsibilities while EU institutions complete legislative steps related to the reserve threshold. For suppliers in Serbia and Montenegro and other Southeast European countries, improving emissions records and contractual arrangements 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 but does not create exemptions from electricity-related CBAM requirements or relax obligations concerning physical power purchase agreements (PPAs), hourly matching, or verification. Companies supplying goods covered by CBAM must continue addressing applicable emissions documentation and compliance requirements throughout the legislative process.