By Marcus Ferdinand, Chief Analytics Officer, Veyt

The European carbon market (EU ETS) is moving from being dominated by the energy complex to being dominated by policy signals. This has consequences for which signals the market acts on and what signals traders pay attention to. While it was mainly gas price fluctuation, fuel switch levels, and technical signals during the past three years, the market has lately changed focus towards policy signals. This is clearly seen in the volatility attributed to political statements and rumours about regulatory changes. It is also visible in the behaviour of the financial sector. Gradually building up since Mar. 2025, Investment Funds are holding record high net length, structurally believing that the market tightness will impact price levels.

Over the past few days, EUA prices have been tanking based on news articles suggesting a weakened ETS framework. This reportedly includes continued free allocation despite CBAM being in full swing, so beyond 2034, as well as a relaxed cap trajectory compared to the current framework, allowing for allowances to be available also after 2039.

Let’s talk about the facts

The 2040 target process resulted in a number of clear mandates for the European Commission. The provisional agreement on the 2040 target, reached on Dec. 10, 2025, noted that (i) the Commission “should timely consider a slower phase-out pathway for free allocation of allowances from 2028 onwards” and (ii) that “The current EU ETS trajectory should be revised in the upcoming review of the ETS Directive […] in a manner that would allow for a limited amount of emissions after 2039”.

The recent news reports basically build on the agreement reached and should not be a surprise to the market at all, given that the Commission is certainly not sitting on its hands until Q3/Q4, when the ETS Directive review proposal is expected. It is an indication of a functioning democracy, that the messages given by key legislators during the 2040 process are now embedded in the preparations for a legislative proposal to implement the target that was agreed.

In addition, the ETS review will be accompanied by a review of the Market Stability Reserve (MSR), a proposal on the potential inclusion of removals to the system, possible scope extensions (for maritime, aviation, municipal waste incineration, and installations below the 20MW thermal threshold), carbon leakage and much more.

Tabloid headlines act as fuel in a trigger-happy market

So what was reported with big headlines over the past few days via Handelsblatt and Bloomberg is, in a way, old news from December 2025. The market interpreted it as a significant shift in policy direction, while the actual developments in Brussels show a natural evolution where the cues from the 2040 target agreement get broken down to actual policy-making via the upcoming ETS Directive review.

Let’s face it – the way the headlines are crafted functions as a catalyst for nervous traders who might not immediately be able to get their head around the fundamental implications. Sensational headlines, combined with a rather nervous market, result in rollercoaster moves as traders are no longer able to distinguish old news from real news, as the picture is cluttered.

According to Veyt’s fundamental model, the market balance for 2026 will be 174 million tonnes short and 187 million tonnes short for 2027. This compares to a shortage of 56 million tonnes in 2025. Hence,  significant fundamental tightening is ahead. As much as the ETS review will dominate headlines during the next 1.5 to 2 years, which is the typical length for the Ordinary Legislative Procedure required to amend a Directive, the shortage in the near-term will stay and needs to be addressed by adequate price levels to balance the market.

A headline suggesting that the EU is to soften the tightness in the market is on the border of being tabloid. This does not help a rational debate on how to best prepare the EU ETS for its next big task – decarbonise Europe without destroying industry. The either-or debate is not very useful. There is no either decarbonise or deindustrialise. Decarbonisation can and must be enabled against the backdrop of a strengthened European industry in a changing world order.

In geopolitical terms, Europe has no choice but to decarbonise

While the US is pushing the green agenda aside and continues with a fossil-fuel-dominated narrative, other superpowers such as China have fully embarked on the low-carbon pathway, without stating it loudly. China now leads the world in clean energy investment, putting around $600-630 billion into clean technologies in 2025 alone (about 29% of the global total). Europe must roughly double its already record high annual clean energy investment this decade to keep pace with China’s trillion dollar-scale push.

While fossil fuel policies and subsidies can provide some short-term relief, it is very likely leading to a stranded asset economy down the road as all innovation power and production capacity for renewable technologies, batteries, and transport infrastructure develops somewhere else. If Europe wants to be part of that future, it is in its utmost interest to actively drive the transition.

Ignoring the fact that a higher carbon price will be part of this equation is naïve. I am all for a pragmatic adjustment of policy frameworks, and I do agree that prolonging the cap trajectory by a few years before it hits zero can ease the pathway. But it does not take away the necessity to accept the fact that investments are required to make this transition happen. This will, in parts, be painful, and it will be extra painful for those stakeholders who do believe in fighting the transition rather than investing in its opportunities.

Let’s all aim to find pragmatic solutions, aiming for rational discussions and exchange of arguments rather than a heated, in parts populist and tabloid debate. This creates uncertainty amongst market participants, sending the EUA price on a rollercoaster and diluting the fundamental signals that this market and its investors need now more than ever to incentivise the required capital deployment to make Europe’s trajectory future-proof.

Marcus Ferdinand is Chief Analytics Officer at Veyt. This commentary was first published to Veyt subscribers on Veyt’s EU Carbon analytics portal on 06 February 2026.

Any opinions expressed in this commentary reflect the views of the authors and not of Carbon Pulse.

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