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 threshold will increase from 400 million to 700 million allowances if the formal adoption process is completed.
The proposed change represents a 75% increase and is intended 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, but it alters the conditions under which reserve holdings are permanently cancelled.
Market stability reserve and allowance invalidation rules
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 reports that more than 3 billion allowances have been permanently removed.
Under the provisional deal, keeping a higher stock of allowances in the reserve would expand capacity to respond to future scarcity. Any later release remains governed by the market stability reserve framework rather than discretionary decisions by national governments or ministers.
The agreement reflects a compromise among institutional positions. The European Commission had proposed ending allowance invalidation indefinitely, while the Council’s September 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-allowance threshold from March 2027. The agreed 700-million level preserves the invalidation mechanism while increasing the reserve buffer, and the text still requires endorsement, legal review and formal adoption before it becomes law.
Implications for EU ETS carbon-price expectations
The provisional agreement changes the framework for potential future allowance supply but does not introduce 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 changing the number of allowances available for immediate trading.
Allowance demand is expected to remain linked to 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 cannot be resolved solely through the reserve threshold adjustment.
Sector-specific conditions are described as varying across industrial activities. Steelmakers face excess global production capacity, weak automotive demand and competition from imported products, while aluminium smelters depend heavily on electricity contracts and reliable long-term power supplies.
Cement manufacturers are reported to continue facing substantial process emissions even when reducing fuel consumption. As a result, changes in EU ETS allowance supply policy can affect operators differently depending on production processes, energy exposure and emissions profiles.
CBAM certificate pricing tied to EU ETS auctions
For imports covered by CBAM, certificate pricing is linked to the weighted average of EU ETS auction clearing prices. The European Commission published CBAM certificate prices of €75.36 per tCO₂e for the first quarter of 2026, €75.28 for the second quarter and €82.32 for the third quarter.
The third-quarter price was published on October 5, 2026. Certificate prices are calculated quarterly for 2026 emissions and are scheduled to move to weekly calculations from 2027, with purchases through the central platform 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 arrangements, but it can influence importers through potential effects on future EU ETS market conditions and subsequent CBAM certificate costs under the pricing mechanism.
CBAM liability calculation and free-allocation factor changes
The CBAM liability for an imported product cannot be calculated by multiplying the certificate price by every tonne of embedded emissions associated with that product. The 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.
The free-allocation factor for CBAM sectors is set at 97.5% in 2026, scheduled to fall 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.
An illustrative example given at a certificate price of €82.32/tCO₂e shows that an additional net chargeable emission amount of 0.5 tCO₂e per tonne of imported product would generate a carbon cost of €41.16 per tonne of product, before other applicable adjustments. The example is described as arithmetic rather than an EU default emissions value for steel, cement or aluminium.
Southeast Europe exporters and compliance responsibilities under CBAM rules
The timing of industrial decisions is also relevant when assessing how policy changes may affect carbon-price exposure across years. 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.
The value of allowances retained in the reserve as a future supply buffer depends on whether applicable rules permit their release when market conditions warrant it. The volume held in reserve, allowances actually circulating, auction schedules and forward carbon-price curves therefore need separate assessment.
The forward curve reflects market participants’ expectations rather than measuring physical stocks available for future release. Treating these quantities as interchangeable would misrepresent implications for carbon-price exposure.
Southeast European exporters supplying CBAM-covered goods remain responsible for compliance with existing carbon-accounting requirements. For suppliers in Serbia, Montenegro and other Southeast European countries, improving emissions records and contractual arrangements is described as important for supplying EU customers by reducing 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 an exemption from electricity-related CBAM requirements. It also does not relax obligations related to physical power purchase agreements (PPAs), hourly matching or verification while EU institutions complete legislative steps governing the reserve threshold.