EU carbon allowances (EUAs) reach €90/t by December 31, 2026 in the base case, €98/t in the bull case and €74/t in the bear case. The mechanism is arithmetic, not sentiment: the Market Stability Reserve (MSR) intake beginning September 1, 2026 draws the EU Emissions Trading System (EU ETS) surplus to exactly 833,000,000 allowances — the reserve’s own threshold.

The benchmark settled at €82.87/t on August 28, 2026, so the base case needs an 8.6% move over four months. The figure behind it is exact: the European Commission will place 190,494,202 allowances into the reserve from September 1, 2026, so the residual surplus lands on 833 million precisely.

Key Levels:

• Instrument: EU carbon allowance (EUA) benchmark futures, ICE Endex — €82.87/t at the August 28, 2026 close (Trading Economics EU Carbon Permits series, updated August 29, 2026, 17:15 UTC)
• Base case target: €90/t by December 31, 2026 (+8.6%) — a retest of the January 2026 high on MSR-cut auction supply
• Bull case target: €98/t (+18.3%) — if Title Transfer Facility (TTF) gas holds above €70/MWh into winter
• Bear case target: €74/t (−10.7%) — if the ETS review front-loads the MSR intake cut into 2027
• Major resistance: €89.58/t — the ICE Endex intraday high of January 9, 2026, highest since August 2023 (Bloomberg)
• Invalidation level: weekly close below €74.00/t — the May 2026 average for the December contract, and the base of the recovery

Methodology and data sources

Prices are from the Trading Economics EU Carbon Permits series (ticker EECXM), the EU ETS benchmark contract, at the August 28, 2026 close — page last updated August 29, 2026, 17:15 UTC, retrieved August 30, 2026. Gas is the same provider’s EU natural gas (TTF) benchmark at that close. Supply figures are the European Commission’s MSR communications of May 28, 2025 and May 29, 2026, which set the total number of allowances in circulation (TNAC); market structure, the European Securities and Markets Authority (ESMA) carbon markets report of July 9, 2026; forecasts, the Reuters poll of nine analysts published July 31, 2026. Caveat: the price series is a contract-for-difference proxy that can differ by cents from ICE Endex settlement.

The data: a surplus cut to exactly 833 million

The TNAC is the EU ETS surplus indicator, and it governs the MSR mechanically: while it exceeds 833 million allowances — the upper threshold written into the reserve’s founding decision — the MSR absorbs 24% of it from auction volumes over the following 12 months. That percentage clause bound last year — the 2024 TNAC was 1,148,049,585, and 24% of it is 275,531,900 exactly, the volume withdrawn between September 2025 and August 2026. This year a different clause binds. The 2025 TNAC came in at 1,023,494,202, of which 24% would be 245,638,608; the Commission announced 190,494,202 instead, because the rule caps the withdrawal where the residual surplus meets the 833-million threshold. Subtract one from the other and the answer is 833,000,000 exactly: for the first time the reserve has drawn the surplus precisely to its own floor.

Variable	Sept 2025–Aug 2026	Sept 2026–Aug 2027	Change
TNAC surplus indicator	1,148,049,585	1,023,494,202	−124,555,383 (−10.85%)
Allowances into the MSR	275,531,900	190,494,202	−85,037,698 (−30.86%)
Residual surplus after intake	872,517,685	833,000,000	−39,517,685 (−4.53%)
Monthly auction withdrawal	22,960,992	15,874,517	−7,086,475 (−30.86%)

Sources: European Commission MSR communication, May 28, 2025; European Commission, May 29, 2026. Percentages and monthly figures calculated from published totals.

The bearish reading is correct on its own terms: the MSR removes 85,037,698 fewer allowances than last year, 30.86% less, so monthly auctions run about 7.1 million heavier. But the intake shrank because the surplus shrank faster — the TNAC fell 10.85% — and the residual 833 million, about 8.4 months of emissions, is the smallest cushion under these rules.

“From 2028 onward, the forecasts are higher than the June figures because we now expect ‘investment booster’ allowances to enter the market more gradually than previously assumed.”

— Yehor Melakh, carbon market analyst, Clear Blue Markets (Reuters)

The mechanism: why a surplus at its floor changes price transmission

A large surplus is a shock absorber: with over 1.5 billion spare allowances in 2013–2019, demand shocks were met from inventory, not from price. Pinned at 833 million, with the cap falling 4.3% a year, that absorber is the thinnest in the system’s history, and incremental demand must now be met nearer the auction clearing price.

Three demand inputs support the base case. First, gas: TTF closed at €66.47/MWh on August 28, 2026, up 9.75% on the month and 110.20% on the year. Coal emits roughly twice the carbon dioxide per megawatt-hour, so expensive gas pulls coal into the stack and bids EUAs directly — the case our TTF injection-arithmetic call makes, against the looser US picture in our Henry Hub storage-record case. Second, the Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase on January 1, 2026, cutting the free-allocation factor to 97.5%. That 2.5% turns a free entitlement into a purchase obligation for cement, steel, aluminium and fertiliser producers — demand that did not exist in 2025, on top of our aluminium warrant-scarcity case. Third, positioning: ESMA reports investment funds moved from net short to net long in EUA futures at end-2025, with financial intermediaries at about 62% of volumes in a €777 billion market.

The steelman is that supply policy moves the other way. The Commission’s EU ETS review proposal of July 17, 2026 halves the MSR intake rate from 24% to 12% from 2028; on that news the Reuters poll cut its 2026 average to €79.97/t from €80.61/t and its 2027 to €89.13/t from €93.29/t. The counter is timing: none of it bites before 2028, and the withdrawal starts September 1, 2026.

What the model misses

The most common error in EU carbon analysis right now is treating ETS2 as a bullish catalyst for EUAs. ETS2 is the separate system for buildings, road transport and small industry, delayed in November 2025 from 2027 to 2028. Its allowances are a distinct instrument: not fungible with ETS1 EUAs, auctioned into their own pool, and carrying a soft price ceiling of €45 per tonne in 2020 prices, which releases extra allowances if breached before 2029. Front-running ETS2 cannot lift the EUA benchmark.

Two further limits. Supply models fail when demand collapses: 2020 and 2022 both show emissions falling faster than the cap, rebuilding the surplus. And July’s proposed TNAC recalculation, cutting the 2027 figure by roughly 173 million, could take the TNAC below 833 million by June 1, 2027, stopping the intake. A 2027 problem, but it caps this thesis.

“After the proposed EU ETS review, we will still see prices increase, but at a slower pace than what we could have expected ahead of it.”

— Noemi Zuercher, analyst, Rystad Energy (Reuters)

What would invalidate this call

The base case to €90/t breaks if any one of these four signals fires:

• A weekly close below €74.00/t. Beneath the May 2026 average for the December contract, the market is discounting the July review into the front of the curve rather than the back — the assumption this thesis rests on.
• TTF front-month gas sustained below €45/MWh for four consecutive weeks. Cheap gas displaces coal, removing the switching demand that carries EUA consumption through winter. Gas at €66.47/MWh is the demand leg; supply alone cannot reach the target.
• Parliament or Council front-loading the MSR intake cut to 2027. Moving the 24%-to-12% halving forward a year adds roughly 95 million allowances to the 2027 auction calendar, and would be priced immediately.
• Investment funds flipping back to net short in EUA futures. Reversing the end-2025 shift ESMA identified removes the buyer that has absorbed auction supply this year, leaving compliance entities as the only bid.

What to watch next

First, EEX auction results from September 1, 2026: cover ratios above three, with auctions clearing at or above secondary, say the withdrawal is biting. Second, weekly TTF settlements through October and November, which drive switching economics and the crude complex in our Brent half-premium case. Third, amendments to the MSR intake date as the review passes through Parliament and Council. Fourth, €89.58/t: a daily close above the January 9, 2026 high confirms the base case, leaving the February 2023 record of €105.73/t as the next reference, 21.6% above spot.

Frequently asked questions

Does the smaller MSR intake mean supply is looser?

At the margin, yes: the reserve withdraws 85,037,698 fewer allowances than in the previous 12-month period — 30.86% less, about 7.1 million a month. But the intake fell because the surplus fell 10.85% year on year, and the residual 833 million is roughly 8.4 months of emissions under the 2026 cap.

Will ETS2 push EUA prices higher?

No. ETS2 covers buildings, road transport and small industry, and its start was delayed from 2027 to 2028 in a November 2025 agreement. Its allowances are a separate instrument, not fungible with ETS1 EUAs, and carry a soft ceiling of €45 per tonne in 2020 prices until 2029. A parallel market, not a demand source for the benchmark.

How does CBAM affect the EUA balance?

The Carbon Border Adjustment Mechanism entered its definitive phase on January 1, 2026, and free allocation began phasing out in step: 97.5% in 2026, 95% in 2027, zero in 2034. Each point removed turns a free entitlement into an obligation to buy allowances — a scheduled demand increase, not a supply cut.

How does this call compare with analyst consensus?

Above it for 2026, in line for 2027. The Reuters poll of nine analysts published July 31, 2026 put the 2026 average at €79.97/t and the 2027 average at €89.13/t. A €90/t print on December 31, 2026 fits a full-year average near €80, and argues the consensus 2027 level arrives 12 months early.

This article is informational analysis only and is not financial, investment, or trading advice. Foreign-exchange, commodity, and equity markets are highly volatile and can lose substantial value rapidly. Leveraged products carry total-loss risk and may exceed the initial margin posted. Past performance and historical correlations do not guarantee future results. Do your own research and consult a regulated financial adviser before making any investment decision.