Global Commodities: EU ETS reform less bearish than feared, supporting €85/t EUAs

Research evidence excerpt

Global Commodities: EU ETS reform less bearish than feared, supporting €85/t EUAs

tion of 173Mt. By incorporating historical aviation demand into the

calculation, the EU Commission estimates that the 2027 TNAC would be lowered

by roughly 173Mt, broadly in line with our estimated ~200Mt. The revised

calculation only affects MSR operations from Sep'28 onwards. Moreover, the TNAC

never falls below the lower threshold in Phase 4.

The CBAM-related phase-out of free allocation is slowed to provide additional

industrial support. Although the impact on overall EU ETS balances remains

neutral, it could reduce demand for industrial hedging, at the margin. The EU

Commission’s proposal delays the full phase-out of free allocation until 2038,

compared with 2034 under the current framework, extending the transition period

for CBAM-covered industries. Because the retained allowances would otherwise

have been auctioned within the Innovation Fund, the measure changes the

distribution of allowances rather than the aggregate allowances supply available to

the market. However, by reducing future compliance exposure, the proposal could

marginally dampen industrial hedging demand. By 2030, we estimate the revised

phase-out schedule would reduce cumulative EUA shortages by around 10Mt in

the Cement sector, by 18Mt in the Metals sector, by 3Mt in the Chemicals sector,

and by a modest 1Mt in the Oil & Gas sector.

The proposed changes to the Linear Reduction Factor (LRF) soften the post-

2030 EU ETS cap trajectory, making the system less tight over the long-term,

but leaving Phase 4 balances unchanged. The EU Commission proposed lowering

the LRF to 3.7% over 2031-2035 and to 1.7% over 2036-2040, increasing the

cumulative EU ETS cap by over 1,250Mt allowances relative to the current