At EUR 65-75/t, an EUA adds approximately EUR 34-39/MWh to the cost of gas-fired electricity generation, which accounts for a large share of the EUR 62-68/MWh running-floor German industrial users are reporting.Source: european-energy-markets briefing

What is an EU Allowance (EUA) and how does it work?

An EUA is a tradeable permit under the EU Emissions Trading System permitting one tonne of CO2; emitters must surrender one EUA per tonne or pay a EUR 100/t penalty. EUAs are traded on ICE Endex and EEX.Source: European Commission EU ETS

Why are EU carbon allowance prices rising in 2026?

Phase 4 of the EU ETS tightens the cap by 2.2% per year rising to 4.3% after 2026, structurally reducing supply. Tighter caps combined with sustained demand from the gas-heavy power mix have kept EUAs elevated.Source: European Commission EU ETS Phase 4

Background

In European power markets, the EUA price is a direct input to every gas-fired generator's short-run marginal cost via the carbon stack: at an emission factor of approximately 0.52 t CO2/MWh, an EUA at EUR 75/tonne adds roughly EUR 39/MWh to CCGT generation cost. This makes the carbon stack one of the two principal levers (alongside TTF) determining whether gas-fired plant sits on or off the merit order. EUA settled at EUR 78.22/tCO2 on 4 June 2026, extending past the EUR 77.46 clawback level that had reversed the 11 May ETS benchmark revision; the extension confirmed the structural cap-tightening narrative was re-establishing as the dominant price signal. The Commission's 11 May revision increased free allocations for 2026-2030 by an estimated EUR 4 billion in cost relief as a competitiveness signal following US tariff pressure, yet the market priced through it within two weeks. EUA broke cleanly above EUR 80/tonne for the first time on 25 June 2026, settling at EUR 80.73 as TTF simultaneously sagged to approximately EUR 40.75/MWh, a carbon-up/gas-down divergence that floored German CCGT marginal cost near EUR 98/MWh. Drivers included US-Iran de-escalation and UK-EU summit optimism, but the underlying force was structural ETS cap tightening: the annual cap is falling approximately 180 Mt year-on-year alongside CBAM's progressive withdrawal of free allocations. For German chemical and heavy industrial consumers, the carbon milestone sustains the floor under EUR 100-plus German day-ahead clearing and the structural France-Germany power spread.

EUA broke EUR 81/tonne on 13 July, its highest since February 2026, climbing from a flat EUR 79.04 settlement on 10 July to about EUR 81.35. The move extended a run that had first cleared EUR 80 on 25 June and held EUR 80.17 on 30 June, and this time the driver was structural rather than sentiment-led: the Market Stability Reserve's continued withdrawal of surplus allowances tightened the tradeable pool just as fuel-switching demand rose, with gas-fired plant covering output that curtailed French nuclear could no longer supply.

An EU Allowance (EUA) is the permit currency of the EU Emissions Trading System: one EUA grants the holder the right to emit one tonne of carbon dioxide equivalent. Under the ETS cap-and-trade model, a finite quantity of allowances is set each year and declines annually — by 4.3% from 2024 onwards under the Fit for 55 revision — creating structural upward pressure on the carbon price as the supply of permits shrinks relative to compliance demand. Allowances are obtained via auction or free allocation; uncovered emissions attract a EUR 100/tonne non-compliance penalty. EUAs trade on the ICE Endex and EEX derivatives exchanges, with the December-dated future the benchmark contract for price discovery.

The ETS has operated in phases since 2005. Phase 1 (2005-07) and Phase 2 (2008-12) established the architecture; Phase 3 (2013-20) introduced full auctioning for the power sector and the Market Stability Reserve (MSR), a self-regulating buffer that cancels or withholds allowances when the total number in circulation exceeds set thresholds. Phase 4 (2021-30) accelerated the annual cap reduction and expanded coverage to shipping from 2024 and certain domestic aviation routes. The MSR is the system's primary supply-management tool and is subject to ongoing legislative review, including in 2026, as policymakers calibrate its withdrawal rate against price-volatility concerns.

EUAs interact with EU industrial policy through the Carbon Border Adjustment Mechanism (CBAM), which entered full compliance on 1 January 2026. CBAM certificate prices are set to the weekly average EUA price, extending the carbon price signal to imports of steel, aluminium, cement, fertilisers, hydrogen, and electricity. As CBAM phases in through 2034, free allocations to covered sectors are progressively withdrawn — 2.5% in 2026, 5% in 2027 — reinforcing the structural tightening of EUA supply. The ETS also covers approximately 40% of total EU greenhouse gas emissions, making the EUA price the single most important carbon cost signal for European industry and power generation.