The European Union Emissions Trading System or EU ETS is the cornerstone of the EU’s climate and energy strategy.
It is the world’s oldest and most sophisticated compliance carbon market.
Its goal is to put a price on greenhouse gas emissions. The price of one ton of CO₂ corresponds to the value of an European Union emission allowance (EUA) – a financial instrument issued by the European Commission that grants the right to emit one ton of carbon within the bloc’s carbon budget.
This mechanism allows for the rapid and significant reduction of emissions from industries subject to the EU carbon market.
Over the past twenty years, the EU ETS has become a sophisticated and liquid market, with a trading volume of €800 billion and a reduction of nearly 1 billion tons of CO₂.
To maximize its environmental impact, the EU compliance carbon market targets the most carbon-intensive sectors. After energy, steel, petrochemicals, and other manufacturing industries, the compliance carbon market was extended to maritime transport in 2024.
2025 is a year of transition for the EU ETS. The sharp drop in emissions from the energy sector increases the relative weight of industrial demand for allowances. As a result, new market dynamics will drive prices, with a progressive decoupling between european union allowance prices and natural gas prices for example. Additionally, supply of EUAs – set by the European Commission – will tighten significantly in 2026 and 2027. In anticipation, 2025 is expected to see increased demand from financial investors seeking to build long positions in the EU ETS over time and benefit from the expected rise in prices in 2027 and 2028.
What is the European Compliance Carbon Market?
The EU compliance carbon market is a political and regulatory construct that followed the Kyoto Protocol. It is Europe’s chosen tool to put a price on emissions in order to reduce – and eventually eliminate – them, and thus fight climate disruption.
In a cap-and-trade system like the EU ETS, the European Union does not set the price directly. Instead, it determines the total quantity of emission allowances available. Companies must surrender one allowance for every ton of CO₂ they emit. The price is then set by the market, based on demand (i.e. the need to emit greenhouse gases) and the fixed supply set by the European Commission.
As a result, the price of emissions can adjust freely and help decarbonize the European economy quickly and efficiently. Over the past 20 years, nearly 50% of emissions – around 1 billion tons of CO₂ – have been eliminated through the EU ETS
The Gradual Evolution of the European Compliance Carbon Market
The EU ETS is regularly updated through decisions by member states and EU institutions responding to economic, geopolitical, or climate developments.
This flexibility allows the system to evolve and improve over time. For example, the introduction of a Market Stability Reserve (MSR) in 2018 led to a rise in prices and an acceleration in emissions reductions.
At the same time, this regulatory "steering" system is both slow and predictable: European legislation involves 27 member states through the European Council and the Council of the EU, 720 members of the European Parliament, and 21 European Commissioners. This gives the EU legislative process a unique combination of stability and predictability — characteristics inherited by the EU ETS, which is the EU’s main tool for climate stabilization.
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The Evolution of the EU ETS Cap
The EU carbon market is a finite market. Its tradable unit – the European Union Allowance (EUA) – is available in a limited quantity. And that quantity decreases over time.
The rate at which the cap decreases is called the Linear Reduction Factor (LRF). The higher the LRF, the faster the cap drops — which, all else equal, drives up prices. As supply shrinks, prices rise to balance supply and demand.
And the higher the price, the stronger the economic incentive for companies to invest in decarbonization solutions.
Between 2013 and 2020, the LRF was 1.74% per year, rising to 2.2% between 2021 and 2023. At the beginning of 2024, it jumped to 4.3%, reflecting a more aggressive stance on emissions reductions and a desire to strengthen the carbon market. It's already planned to increase again to 4.4% from 2028.
This planned decline in available allowances also underscores the strong political commitment to climate action. Even in a context of inflation, energy crisis, and land war at Europe’s borders, climate remains a central pillar of EU strategy.
What Changed in the EU Compliance Carbon Market in 2024
Several changes were implemented in 2024, in addition to the increase in the LRF.
The most important evolution was the inclusion of the maritime sector in the EU ETS. As of 2024, cargo and passenger ships with gross tonnage over 5,000 are included in the system. All emissions from voyages between EU member states must be accounted for. For journeys between the EU and non-EU countries, 50% of emissions are covered by the EU ETS.
Also in 2024, revenues from allowance auctions – amounting to nearly €40 billion – must be used to finance national climate objectives.
Finally, there was a one-time cut to the total cap by 90 million allowances – a change to the system’s baseline – increasing compliance pressure on regulated sectors and reinforcing EU-wide climate commitments.
EUA Prices in 2024
The average price of European Union Allowances, or EUA, in 2024 was €65.22, starting at €73.17 on January 2nd and closing at €70.95 on December 31st. The price ranged from a low of €50.50 to a high of €74.57, with an annual volatility of 36.83%, making 2024 a notably volatile year.
This volatility was partly driven by a surge in supply via the RePowerEU program — the EU’s response to Russia’s invasion of Ukraine — which temporarily pushed prices downward. Weak industrial activity also weighed on EUA prices. The June 2024 European elections created short-term uncertainty in the market.
Lastly, EUA prices showed strong correlation with gas prices, suggesting that energy companies remained dominant buyers and that long-term positioning remained fragile.
What to Expect from the EU ETS in 2025
2025 is a transition year ahead of major changes planned for 2026, 2027, and 2028. While there are no major regulatory updates expected this year, the market structure is evolving: the relative weight of energy producers is decreasing while that of heavy industry is rising — and supply is expected to tighten.
A Shift in Demand Composition
Historically, energy producers have dominated the market. This is because they do not receive free allocations and are heavy emitters. However, the EU ETS has worked — energy sector emissions have dropped sharply, and with them, the sector’s share of demand.
Meanwhile, free allowances to heavy industry are being phased out.
This changing composition is likely to bring new price formation dynamics. The gas-coal switching behavior of utilities will play a smaller role, weakening the correlation between EUA and gas prices. At the same time, the marginal abatement cost is higher for industry than for power, which should support EUA prices.
Anticipation of a Tighter Supply
To support energy independence and reduce dependence on Russian gas, the European Commission revised the auction schedule for EUAs. Under the RePowerEU strategy, future allowances (from 2027–2028) were brought forward into 2023–2024 to fund clean energy infrastructure.
As a result, 2025 will see a contraction in supply.
Anticipating this, financial investors and funds are building long positions in EUAs by steadily accumulating allowances — providing sustained demand that may even become self-reinforcing.
EUA Price Outlook for 2025
The EU carbon market opened 2025 at €71.52, peaked at over €81 in mid-February, and then dropped below €60 in early April. The projected average price for the year is around €75, up 15% from 2024.
Key Takeaways
- 2025 is a strategic transition year to build a long position in the EU ETS.
- No major regulatory changes are expected this year.
- The energy sector has significantly cut emissions, so demand will increasingly come from heavy industry.
- Financial players are anticipating a tightening of supply by stockpiling allowances.
- Analysts forecast an average EUA price of €75 in 2025.
