Carbon Crunch 2026: Why EU Allowance Prices Are Primed for a 40% Spike

The European carbon market is on the verge of a historic price correction that could see EU Allowance (EUA) costs soar by nearly 40% this year. Market experts at Veyt are forecasting a jump to €104 per tonne—a massive leap from the €75 average seen in 2025. For investors and developers, this isn't just a price hike; it is a fundamental shift in the supply-demand balance of the world's most liquid carbon market.

Newly planted trees in the foreground leading into a dense, mature forest in the distance. AI generated picture. 

The primary engine behind this rally is a dual-layered squeeze on supply. First, regular policy adjustments—including the rebasing of the EU ETS cap and the Market Stability Reserve (MSR)—are expected to slash weekly auction volumes by about 21%.

However, the real ‘wildcard’ for 2026 is the abrupt conclusion of the RePowerEU program. To fund the transition away from Russian gas, the EU front-loaded millions of allowances. But because this program is fixed to a €20 billion revenue target, not a fixed volume, the recent price recovery means that the target will be hit much sooner than expected.

‘Unlike a volume-based programme, RePowerEU operates on a €20 billion revenue target, meaning auctions will be suspended as soon as that threshold is reached’, explains Henry Lush, carbon analyst at Veyt. If prices hold near €90, these auctions could vanish as early as late April, potentially triggering a total supply drop of up to 45% compared to last year.

While supply is tightening, demand is proving resilient. Industrial sectors like steel and cement are expected to stop their downward emission trends, with a forecast decline of less than 1% in 2026. Meanwhile, although the power sector continues to decarbonise through renewables, Lush notes that “the continuation of the buildout of renewables is going to eat quite significantly into more (carbon) intensive power (sources).”

This tightening outlook hasn't escaped the notice of the financial world. Investment funds have already staked a record net long position of 125 million EUAs. While Lush admits the market is ‘open for profit-taking at current levels’, he emphasises that the ‘overall picture is pretty clear that investors see upside potential for 2026.’

As we move through the second half of 2026, the focus will shift to long-term policy. The European Commission is set to decide how the heavy lifting for 2040 green goals will be split between different sectors.

According to Anders Nordeng, senior carbon analyst at Veyt, ‘The key files for carbon market participants this year will be how the 2040 abatement efforts will be split between ETS and non-ETS sectors, [and] what the EUA supply trajectory should be beyond 2031.’