EU Ministers Urge ETS Reform: 'Friends of Industry' Spark 25% EUA Price Crash

The formation of the "Friends of Industry" coalition marks the end of the EU ETS's era of technocratic invincibility. On February 26, industry ministers from thirteen member states—including heavyweights Germany, France, and Italy—issued a joint statement demanding urgent reform to curb "excessive price volatility," effectively declaring that the current carbon price trajectory is politically unsustainable.

The market verdict was immediate and brutal. EU Allowance (EUA) prices have hemorrhaged 25.1% of their value in six weeks, collapsing from a mid-January peak of €93.80/mtCO2e to trade at €70.23/mtCO2e by midday February 26.

For carbon market professionals, the signal is clear: the primary driver of EUA price discovery has shifted from fundamental scarcity to political risk. The coalition’s demands—specifically regarding the extension of free allocations and the restructuring of the Market Stability Reserve (MSR)—threaten to fundamentally alter the supply-demand balance through 2030.

The "Friends of Industry" Revolt

While Italy’s Minister Adolfo Urso grabbed headlines with a radical call to suspend the ETS entirely, the broader coalition's strategy is more nuanced and, consequently, more likely to succeed. Convened by German Minister for Economic Affairs Katherina Reiche, the group represents a diverse cross-section of the European economy, uniting the industrial cores of Western Europe (Germany, France, Austria) with the energy-intensive economies of the East (Poland, Czechia, Romania).

The coalition’s joint statement argues that "decarbonization should not be achieved by deindustrialization." Their core technical grievance is that the annually declining emissions cap is creating "increased market volatility and limited liquidity," necessitating a revision to ensure an "effective price signal" that remains "investment-compatible."

Translation for traders: The coalition wants to delay the phase-out of free allowances beyond the current 2034 deadline and loosen the MSR’s grip on supply to prevent price spikes.

The Volatility Paradox: Financialization vs. Fundamentals

The irony of the ministers' complaint regarding "volatility" is that their own political signaling has triggered the most violent price swings seen since the energy crisis.

The sell-off began in earnest on February 11, following comments from German Chancellor Friedrich Merz suggesting the ETS "should be revised or postponed." Since then, the market has witnessed a capitulation of speculative capital. According to ICE Commitment of Traders data, investment funds reduced net long positions by 6.58% in the week ending February 6 alone, bringing total holdings to 94 million allowances—the lowest level since October 2025.

Analysts suggest this "washout" was overdue. "We think speculation is the largest driver of EUAs over the last six months," noted Jason Ying, commodities strategist at BNP Paribas. The rally to €93.80 in January was driven by funds front-running a perceived 2026 supply squeeze; the crash to €70 is those same funds exiting as political support for that squeeze evaporates.

For compliance entities, this creates a dangerous environment. The fundamental picture—an aggressive linear reduction factor and the end of REPowerEU supply loading in August 2026—still points to long-term tightness. However, the short-term price is now hostage to legislative headlines rather than the marginal abatement cost of coal-to-gas switching.

The Three Pillars of Proposed Reform

The coalition’s demands focus on three mechanisms that would directly impact EUA supply and demand:

1. Extending Free Allocation

Currently, free allowances for CBAM-covered sectors are set to phase out completely by 2034. The coalition is explicitly calling for a "postponement" of this timeline.

• Market Impact: Bearish. Extending free allocation reduces the volume of allowances industrial emitters must purchase in the open market, dampening demand growth in the critical 2027-2030 window.

2. The CBAM Export "Leak"

The statement calls for a "stable support mechanism for exporting companies," reflecting deep dissatisfaction with the Carbon Border Adjustment Mechanism (CBAM). European exporters argue they are competitively disadvantaged in non-EU markets where competitors pay no carbon price.

• Market Impact: Neutral to Bearish. If the EU introduces export rebates (a "WTO-incompatible" subsidy in all but name), it effectively negates the carbon cost for a significant portion of EU industrial output.

3. MSR Recalibration

By citing "liquidity" concerns, the ministers are implicitly targeting the Market Stability Reserve.

• Market Impact: Highly Volatile. Proposals may include raising the threshold for releasing allowances or increasing the volume released during price spikes. This would effectively institute a "soft price ceiling," limiting upside potential for investors.

The Counter-Weight: Nordic Defiance & Commission Strategy

The push for relaxation is not unanimous. As reported in our Nordic Industry Defends EU ETS analysis, industry associations from Sweden, Finland, and Denmark have urged the Commission to hold the line, arguing that weakening the price signal now would be "industrial suicide" for companies that have already invested billions in low-carbon technology.

Commission President Ursula von der Leyen is attempting to thread this needle. While defending the ETS as a success story, she has conceded that member states must "step up" in recycling ETS revenues back to industry. The Commission’s counter-offer likely involves revenue recycling rather than market restructuring—using the cash from high carbon prices to subsidize industrial capex, rather than lowering the carbon price itself.

Analyst Outlook: The repricing of Risk

The consensus forecast for EUAs has shattered. In early February, the median analyst forecast for 2026 averaged €92.65/mtCO2e. Following the coalition’s intervention, expectations have reset. Trading Economics now projects prices drifting toward €67.13/mtCO2e over the next 12 months.

Veyt has lowered its Q3 2026 forecast to €80/tonne, citing political risk. However, the medium-term structural reality remains: the cap is shrinking. Unless the "Friends of Industry" succeed in legally altering the Linear Reduction Factor (a legislative marathon that would take 18+ months), the physical supply of allowances will continue to tighten.

What to Watch

For professionals managing ETS exposure, the next six months will be defined by three signals:

• The July 2026 Proposal: The Commission is scheduled to present its ETS review proposal in Q3. Watch for leaks regarding the "free allocation phase-out" timeline. Any official delay to the 2034 date will trigger a further repricing of the forward curve.
• The €65 Support Level: Technical analysis suggests strong psychological support around €65. If prices break this floor, it signals that the market believes a structural suspension or "hard cap" is probable.
• Gas-Carbon Correlation: As speculative money leaves, the market is reverting to energy fundamentals. With European gas prices up 40% due to LNG supply constraints, the fuel-switching price provides a soft floor. Watch the clean spark spreads; if gas remains expensive, power sector demand will support EUAs even if industrials waver.
• German Coalition Dynamics: Katherina Reiche is the key player. If Germany fully aligns with Italy’s hardline stance, the Commission will be forced to concede. If Germany pivots back to a "revenue recycling" compromise, the current sell-off may prove to be a buying opportunity for compliance hedgers.