EU ETS II Pricing Scenarios

In June 2025, 16 European Union member states issued a joint warning that despite their support for the bloc’s climate policies, they were concerned that high carbon prices in the EU’s forthcoming carbon market for road transport and buildings could impose heavy costs on communities and risk a public backlash. Finding a “sweet spot” that balances affordability for consumers with the need to advance climate action is therefore essential to this market’s success as a cornerstone of Europe’s climate infrastructure. That will require measures including more flexible supply-adjustment rules, subsidies and complementary policies such as sectoral standards.

• Under its current structure, the EU’s new Emissions Trading System II could see carbon prices reach €122 per metric ton of CO2 in 2030 and an average of €99/t between 2027 and 2030 – the highest of any carbon market globally. This would reduce emissions in the transport and buildings sectors by 40% in 2030, from 2005 levels, but increase average fuel prices in EU road transport and buildings by up to one-third. These higher prices are driven by 1) inflexible supply-adjustment mechanisms, 2) insufficient policy measures outside ETS II, and 3) costly emission-reduction options.
• BloombergNEF analysis explored three categories of potential measures to find this carbon price sweet spot, running scenarios involving nine sub-measures that focused on:

1. 1. Amending market designs on supply: Most policy levers, such as increasing the cost-containment frequency of the Market Stability Reserve, can lower prices in this decade to €78/tCO2 but also weaken emissions reductions. However, introducing a dynamic MSR supply adjustment reallocates supply rather than simply expanding it could alone lower average prices while reaching the same level of emission reductions as the base case.
   2. Recycling revenue for subsidies: While all ETS II revenue will be used for social climate investments, it is important to secure a proportion for subsidizing electrification options or rebalancing of electricity taxations This could deliver a rapid shift of consumer preferences. Utilising 50% for total revenue for such subsidy could reduce average carbon prices by 2030 to €67/tCO2.
   3. Supporting EU ETS II with other EU policies: Strengthening car and truck emissions standards and building energy performance targets would all ease pressure on EU ETS II to deliver the bulk of emission reductions, lowering carbon prices to €86/tCO2 on average in this decade . However, doubts remain about the achievability of these other targets, particularly as policymakers have already started loosening some regulations.

• A combination of the above sub-measures can bring carbon prices down to as low as €45/t on average in this decade – well below the European Commission’s reference price of €58/t during the same period. These price levels can reduce social impacts on consumers by almost 55% compared to the base case, while maintaining similar emission reductions. Such a result requires between 24%-36% of ETS II revenues to be use for subsidies, as well as dynamic MSR supply adjustments based on allowance surplus level, and expanding the MSR cost-containment rules on the soft price cap.