The European Commission’s proposed EU ETS reforms could result in billions more allowances over 2031 to 2040 than under the current trajectory, according to modelling highlighted by an environmental group on Friday, as reported by Carbon Pulse. Lawmakers remain divided over how quickly to tighten the bloc’s carbon cap. For buyers, compliance desks and investors, the EU ETS oversupply risk matters because a looser cap, combined with a large existing surplus, would shape the long-term EU carbon price path.
What the modelling says
The headline from the Carbon Pulse report is that the Commission’s design, as proposed, supplies more allowances than the present trajectory would. The group presenting the figure argues that this is a risk to market tightness, not a certainty. The excerpt available to us does not set out the full modelling assumptions.
A related analysis from think tank Sandbag, published on 11 August 2026, gives a comparable picture with its own numbers. It finds that the combined design features proposed by the Commission amount to a net increase of 1,903 million allowances over the period to 2040, according to Sandbag. Sandbag’s figure and the one in the Carbon Pulse story are different calculations, so they should not be treated as the same estimate.
The starting point: a large surplus
Sandbag estimates that the EU ETS ended 2025 with a total surplus of 2,190 million allowances. After 270 million allowances from the Market Stability Reserve (MSR) were invalidated on 1 January 2026, the surplus stood at 1,902 million, according to Sandbag. That is 1.7 times the level of emissions covered by the scheme in 2025, which it estimates at 1,139 million tCO2.
The surplus is made up of 874 million allowances in circulation, 486 million in the New Entrants Reserve, 117 million unallocated allowances carried over from previous years, 25 million in the Greece fund and 400 million in the MSR. Sandbag treats the allowances in circulation and the New Entrants Reserve as excess supply, since it expects the reserve amounts to reach the market eventually.
What the Commission proposed
On 17 July 2026 the Commission tabled its proposal to revise the EU ETS, setting the legal framework for Phase 5, covering 2031 to 2040, according to ICAP. The proposal aligns the system with the EU target of a 90% net reduction in greenhouse gas emissions by 2040 compared with 1990 levels, of which at least 85% must be domestic.
The central change is a shallower cap decline. The Commission proposes an annual Linear Reduction Factor (LRF) of 3.7% for 2031 to 2035 and 1.7% from 2036 onward, against 4.3% for 2024 to 2027 and 4.4% from 2028 today, according to ICAP. As a result, allowances would continue to be issued into the 2040s, rather than new supply ending around 2039 as current rules would imply if simply extended.
Two other elements matter for supply. Up to 260 million allowances would be ring-fenced from the Union-wide quantity, and Sandbag lists the issuance of up to that amount to purchase carbon removals among the measures with significant impact, alongside the cap increase and changes to MSR rules, according to Sandbag.
How the MSR changes interact
The proposal would also amend the MSR. From 2028 a new lower buffer would mirror the upper buffer introduced in the 2023 revision. When the total number of allowances in circulation (TNAC) falls between 300 million and 400 million, the release would equal the difference between 400 million and the TNAC. Below 300 million, a fixed release of 100 million allowances would apply, according to ICAP.
From 2029 all reference points would become dynamic and decline by a fixed rate each year. These include the upper threshold of 947 million, the upper buffer of 833 million, the lower threshold of 400 million and the lower buffer of 300 million. The effect of these mechanics on the surplus is the part of the debate where the modelling and the political arguments are most likely to diverge.
Why the emissions path decides the outcome
Sandbag’s results depend heavily on how fast emissions fall. If emissions follow an 85% reduction target by 2040, the surplus to emissions ratio rises from 1.7 times today to 5.6 times in 2040, according to Sandbag. If emissions follow only a 75% reduction pathway, the ratio returns to 1.7 times in 2040.
This is the core tension. A loose cap looks harmless if industry decarbonises slowly, but it becomes a large overhang if abatement is faster than the cap assumes. The ambition of the climate target and the supply of allowances then pull in opposite directions.
Implications for buyers and investors
For compliance buyers, the risk is to forward curves. A market that expects a growing surplus after 2030 may price later years differently from one that expects scarcity, and hedging horizons that reach into Phase 5 should account for that uncertainty.
For investors in abatement and removals, the proposal to reserve allowances for carbon removals is a possible new demand channel, but it also adds to supply. The net effect is not settled in the material reviewed here.
The proposal is not law. Parliament and Council positions could change the LRF, the MSR design and the removals provision, and any of these would change the modelling results.
What to watch
The next signals are the positions of lawmakers on the speed of cap tightening and any revision of the LRF figures. Also watch whether the MSR mechanics are adjusted, and whether further modelling from Sandbag or others converges on a common range for the added allowances. Until then, treat the oversupply figures as scenario outputs that depend on the emissions pathway.
