EUAs to remain constrained by policy at €60–90/t in the short term, with post-2030 supply-demand gaps driving prices materially higher

Overview

The report assesses the impact of the EU ETS review proposal dated July 17, 2026 on EUA supply and demand, price formation, and related equity sectors. The review outcome is generally more favorable for carbon prices than the market had previously feared, so Morgan Stanley raised its 2026–2030 price forecasts; however, political acceptability and potential supply intervention will limit near-term upside. Entering the 2030s, emissions demand is expected to decline more slowly than effective supply contracts, and the carbon market will face a significant structural shortage.

Core views

The near-term ceiling for EUA prices is constrained by energy costs and European industrial competitiveness, and the European Commission may intervene through measures such as increasing supply when prices approach €90–100/t; the floor is around €60/t, corresponding to the carbon price level needed for unsubsidized onshore renewable energy projects to continue moving forward. In the long term, TNAC and MSR inventories are expected to be depleted in 2032 and 2040, respectively, while emissions demand declines more slowly than allowance supply. If emissions reductions do not accelerate substantially and the ETS framework is not further reformed, carbon prices will break above €100/t after 2030 and rise at an accelerating pace, forcing industrial emissions cuts, capacity exits, or policy mechanism adjustments.

Analysis framework

The report incorporates into its supply-demand model the investment promotion fund, CBAM free-allocation phase-out, sector benchmarks, Phase 5 emissions cap, MSR reform, international offset credits, and the expansion to aviation, shipping, and waste sectors involved in the July 2026 ETS review; near-term prices are estimated using the regression relationship between 2018–2025 EUA prices and cumulative tradable supply and demand over the following year, calibrated with the politically acceptable range; in the long term, the ETS supply-demand model is mechanically extended to 2050, with scenario analysis used to assess the feedback among prices, emissions reductions, and institutional reforms.

Methodology notes

• Fundamental analysisEUA supply-demand balance model

  Derives annual and cumulative supply and demand from the emissions cap, free allocations, auctions, MSR, TNAC, offset credits, and emissions from covered sectors.

  The model shows that after 2030, effective supply declines faster than emissions demand, the cumulative shortfall widens, and carbon prices are pushed up significantly after inventory buffers are depleted.

• Quantitative analysisRegression of prices against cumulative tradable supply and demand

  Uses the relationship between 2018–2025 EUA prices and cumulative tradable supply and demand over the following year to forecast near-term prices.

  The relationship has an R² of about 0.92, but as the ETS structure changes, the historical pricing mechanism may become invalid or change in the future.

• Scenario analysisBase, bear, and bull scenarios

  Builds different price paths based on policy intervention, supply-demand changes, and the pace of emissions reductions.

  The bear-case scenario for 2026–2030 remains roughly at €60/t, while the bull-case scenario rises from €100/t to €120/t; post-2030 forward forecasts are illustrative scenarios.

• Policy analysisAssessment of ETS Phase 5 reform

  Assesses item by item the impact of eight major reforms on EUA supply, demand, and market circulation.

  Except for MSR reform, which increases potential supply, and sector benchmark changes, which are broadly neutral, most reforms have a positive impact on medium- to long-term EUA supply-demand dynamics and price direction.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EU Allowances (EUA)

  Core research asset

  Strengths

  Post-2030 allowance supply contraction, expansion of covered sectors, and depletion of inventory buffers jointly support long-term prices.

  Weaknesses

  Near-term prices are constrained by industrial competitiveness, energy affordability, and policy intervention.

  Comparison

  The new 2026–2030 forecasts are about 10% higher on average than before, but the 2027–2029 forecasts remain below some forward curves.

  Risks

  ETS reform changes, additional allowance supply, expansion of international offset credits, faster-than-expected emissions reductions, or deindustrialization could all depress demand and prices.

• Fortum, Verbund, RWE, SSE, Orsted

  Potential beneficiaries of higher carbon prices

  Strengths

  Merchant generation and renewable energy assets can benefit from higher wholesale power prices and improved economics of unsubsidized projects.

  Weaknesses

  Actual benefits depend on generation mix, hedging, regulatory mechanisms, and project execution capability.

  Comparison

  Companies with higher merchant generation exposure generally benefit more directly than those with a higher share of regulated businesses.

  Risks

  Carbon prices suppressed by policy, insufficient pass-through to power prices, rising construction costs, and permitting delays.

• Endesa, Enel, Iberdrola, A2A, Naturgy

  Beneficiaries through integrated energy supply businesses

  Strengths

  Integrated supply businesses may benefit from higher wholesale power prices and growth in electrification demand.

  Weaknesses

  End-user price regulation or customer protection policies may limit cost pass-through and profit improvement.

  Comparison

  Compared with pure generation companies, earnings sources are more diversified, but carbon price sensitivity may be lower.

  Risks

  Government intervention, retail competition, demand decline, and fuel price volatility.

• Holcim, Heidelberg Materials

  Relative beneficiaries in the cement sector

  Strengths

  They have executable CCS, alternative fuel, and clinker reduction projects, and may gain first-mover advantages.

  Weaknesses

  The industry itself is highly carbon-intensive and still needs to bear substantial capital expenditure and compliance costs.

  Comparison

  ETS reform may widen the cost and valuation gap between decarbonization leaders and laggards.

  Risks

  Changes in the free-allocation phase-out path, delays in decarbonization projects, weak demand, and inability to pass through carbon costs.

• European steel industry

  Neutral to complex impact

  Strengths

  CBAM and subsidies linked to decarbonization plans can partially cushion rising carbon costs.

  Weaknesses

  High-emission production routes still face cost pressure and large transformation investment needs.

  Comparison

  Companies with low-carbon steelmaking projects have stronger long-term competitiveness than traditional blast furnace companies.

  Risks

  Weaker CBAM implementation, insufficient subsidies, excessively high costs of low-carbon technologies, and import competition.

• Ryanair, Wizz Air, and the European aviation industry

  Cost-pressure sector from rising carbon prices

  Strengths

  Low-cost carriers with higher fuel efficiency are relatively better able to control unit costs.

  Weaknesses

  Rising EUA prices directly increase operating costs.

  Comparison

  Low-cost carriers may be relatively advantaged, while traditional airlines may rely more on fare increases to pass through costs.

  Risks

  Insufficient fare pass-through ability, demand elasticity, expansion of allowance coverage, and simultaneous increases in fuel prices.

Key data

• Near-term expected EUA range€60–90/tApplicable over the next several years, reflecting the policy balance between industrial affordability and decarbonization needs.
• 2026 EUA base-case forecast€86/tThe previous forecast was €80/t, implying about 6% upside versus the forward curve.
• 2030 EUA base-case forecast€107/tThe previous forecast was €93/t, raised by 15%.
• 2026–2030 forecast adjustmentRaised by about 10% on averageThe 2026–2029 forecasts were raised by about 7%, 8%, 10%, and 11%, respectively.
• 2035 illustrative EUA forecast€270/tBased on the assumption that the current supply-demand and emissions-reduction trajectory remains broadly unchanged.
• Expected TNAC depletion date2032After excess inventory supply disappears, alternative sources of supply available to the market decrease.
• Expected MSR inventory depletion date2040The model expects the MSR to release allowances to the market from 2033 until inventories are depleted.
• Change in ETS emissions from 2025 to 2048Down 632 million tons, a 54% declineEffective supply is expected to decline by 943 million tons, or 95%, over the same period, creating a structural gap.
• Impact on European power prices in 2027Up about 9% on averageThe new combination of EUA and TTF forecasts is expected to support utilities’ earnings.

Impact & implications

Long-term increases in carbon prices will raise European wholesale power prices and the value of low-carbon generation assets, benefiting utilities with merchant generation exposure, renewable energy development capabilities, and integrated power supply businesses, while also increasing the need for grid investment. The cement industry cost curve will steepen further, giving leaders with mature CCS, alternative fuel, and clinker reduction projects a greater advantage. The impact on the steel industry is more complex, partly cushioned by CBAM and subsidies linked to decarbonization plans. Aviation operating costs generally rise, but low-cost carriers with higher fuel efficiency are relatively advantaged. Higher carbon prices will also improve the economics of technologies such as carbon capture and storage, heat pumps, green gases, and hydrogen.

Risks

• The ETS review proposal has not yet been finalized and still requires public negotiations, EU trilogues, and legislation; specific terms may change.
• The European Commission may increase supply or adjust the system when carbon prices are too high to protect energy affordability and industrial competitiveness.
• The pace of CBAM introduction and free-allocation phase-out may be slower than in the current proposal.
• The permitted share of international carbon offset credits may expand, thereby reducing demand for EUAs.
• Progress in emissions-reduction technologies, capacity closures, or European deindustrialization may cause emissions demand to fall faster than forecast.
• The specific implementation mechanisms for TNAC, MSR, and the investment promotion fund remain uncertain.
• EUA price formation may no longer follow historical regression relationships, and the reliability of long-term mechanical forecasts is limited.
• Morgan Stanley may have business relationships with companies covered by its research, and investors should use this report as only one factor in their decision-making.

What to watch

• ETS reform legislation expected to be completed in the first quarter of 2027 and the outcome of EU trilogues.
• The final timetable for CBAM introduction and free-allocation phase-out.
• The allocation, redemption, and market sale arrangements for the 400 million-ton investment promotion fund.
• The MSR injection rate, release mechanism, and reference threshold adjustments from 2028 onward.
• Whether EUA prices approach €90–100/t and trigger new policy intervention.
• The pace of TNAC decline and whether inventories are depleted around 2032 as forecast.
• Whether emissions from European power, industry, aviation, and shipping exceed model assumptions.
• Cost declines and commercialization progress for CCS, green hydrogen, heat pumps, and other emissions-reduction technologies.