The Price Isn’t Right: Europe’s Carbon Market Under Pressure

The EU Emissions Trading System (ETS) has entered a new phase of policy scrutiny. Recent signals from European Commission President Ursula von der Leyen confirm that targeted adjustments to the carbon market are imminent. At the same time, conclusions from the March European Council meeting reaffirm the ETS as a central pillar of the EU’s climate strategy, while recognizing the need to mitigate the impact of high energy prices on households and industry.

In the lead-up to the summit, a coalition of member states – including Italy, Slovakia and the Czech Republic – called for measures to limit carbon prices, citing concerns around electricity costs and industrial resilience. These pressures have been amplified by geopolitical instability and continued volatility in energy markets.

EU leaders called on the European Commission to develop options to address price volatility and its impact on electricity costs, with further proposals expected by July 2026. In parallel, leaders endorsed temporary and targeted measures – such as fiscal support, including subsidies and tax cuts – to address short-term affordability concerns.

From a market perspective, the ETS remains a critical long-term price signal, shaping expectations for the cost of emissions and underpinning investment in low-carbon technologies. However, recent developments introduce new complexities: the willingness to intervene and the formal mandate to review price impacts add policy risk. This is already evident: in March, EU carbon prices fell to around €63/tCO₂, an 11-month low, reflecting uncertainty and shifting expectations around potential intervention, as well as broader macroeconomic conditions.

This dynamic has direct implications for investment. Capital-intensive decarbonization pathways – including green hydrogen, carbon capture and storage, and industrial electrification – rely on predictable carbon pricing to support long-term business cases. Despite recent movement, the ETS’s structural fundamentals still provide stabilizing support: the cap continues to tighten, the Market Stability Reserve (MSR) continues to withdraw allowances, free aviation allocations have ended, and the Carbon Border Adjustment Mechanism (CBAM) is forcing organizations to internalize the cost of imported carbon-intensive goods.

What does this mean for industrial emitters? As short‑ and long‑term adjustments are made, there will likely be more carbon‑price volatility and higher policy‑intervention risk, which may require revising cost forecasts and investment assumptions.

Stay tuned for our upcoming Market Insight report, which breaks down what the CBAM definitive phase means for software product leaders.