The EU ETS at a Turning Point — and What It Could Mean for ETRM

I recently spoke with Balakumaran Baskaran, Markets Expert, of ETRMServices about the EU Emissions Trading System (EU ETS), the European Commission’s proposed reforms and what they may mean for ETRM users and vendors.

Launched in 2005, the EU ETS operates on a cap-and-trade basis. Each allowance generally permits one tonne of CO2-equivalent emissions, and companies must surrender enough allowances to cover their verified emissions. As the cap declines, companies must reduce emissions, adopt cleaner alternatives or purchase increasingly scarce allowances.

Of course, the system did not get off to the strongest of starts. Its early effectiveness was weakened by an oversupply of allowances, lower industrial output following the financial crisis and the use of international credits. The EU subsequently tightened the cap, improved emissions measurement, reduced free allocation and introduced the Market Stability Reserve.

According to the European Commission, emissions from covered sectors have now fallen by more than 50% since 2005. Much of that visible progress came from power generation, where wind, solar and other lower-carbon alternatives were already available.

However, the next phase may prove considerably harder. Heavy industry, aviation, maritime transport and waste management all produce significant emissions, yet they often lack commercially mature low-carbon alternatives at the scale required. The EU must therefore maintain a meaningful decarbonisation signal while avoiding damage to the competitiveness of European industry. That will not be an easy balance to strike.

On 17 July 2026, the European Commission proposed a targeted revision of the EU ETS in support of its 2040 climate target. The proposal seeks to address industrial competitiveness, investment and carbon-market stability while expanding the system into areas such as municipal waste incineration and strengthening its application to aviation and maritime transport.

The proposal is not yet law and will be subject to further negotiation. Balakumaran believes that many newly affected industries remain in wait-and-see mode and that the final measures may look quite different from the Commission’s opening position. Even so, changes in allowance supply and demand could affect carbon prices across the entire market, including power generation and other sectors already covered by the ETS.

ETRMServices works with global energy trading desks including power and gas utilities, providing project-based implementation services, market connectors, BAU managed services and  advisory support. For many such companies, EU allowances are already treated as a commodity. Carbon exposure feeds into hedging, forecasting, generation economics, valuations and customer pricing.

Recent work by ETRM Services has included exposing ETS-related premiums to end customers. In other words, the carbon position is not simply a compliance concern buried somewhere in the back office. It is increasingly visible across the commercial lifecycle.

A utility may need its ETRM to capture allowance trades, forecast emissions, manage compliance positions, incorporate carbon into clean spark and dark spreads, and connect emissions data with settlement and reporting.

Traditional ETRM applications can generally represent allowances as a commodity. However, Balakumaran sees no clear best-in-class ETRM solution for the complete ETS requirement—and, based on what ComTech sees in the market today, I tend to agree.

Vintage and lifecycle tracking remain particular weaknesses. Many systems still require workarounds rather than providing a natural way to manage issuance periods, eligibility and compliance use. “ETS configurations often need to be revisited after five or six years. Regulation changes, business requirements become more sophisticated and vendors gradually add functionality. A setup that once appeared adequate may eventually need to be rebuilt,” Balakumaran told me. That is an important distinction. Supporting an allowance as a tradeable instrument is not necessarily the same thing as supporting its complete operational, commercial and compliance lifecycle efficiently.

ComTech believes the proposed ETS expansion could bring additional companies into the ETRM market. These might include large industrial energy consumers facing higher energy and allowance costs that may decide to procure and hedge more of their own requirements. For some, that could eventually justify implementing an ETRM. Balakumaran agreed that this is plausible in certain industries, though perhaps less likely for organizations such as municipal waste operators. Such companies may face allowance-management obligations without needing a complete trading platform.

That got me thinking about another possibility: could there be an opportunity for a standalone allowance-management solution positioned somewhere between spreadsheets and a full ETRM? Such a platform might support allowance procurement, position management, forecasting, vintage tracking, compliance and reporting without imposing the expense and complexity of a complete enterprise trading system. Would that requirement be addressed by an established ETRM vendor, an environmental-market specialist or an entirely new category of carbon-management application? It is too early to tell, but it certainly looks like an area worth watching.

With the existing ETS evolving and ETS2 expected to extend carbon pricing into additional areas, companies should probably begin reviewing their readiness now. Where do their emissions data reside? How is carbon exposure forecast? Are current ETRM workarounds sustainable? Do they need a full trading platform, or would something narrower be sufficient?

ETRMServices sees this as an area in which it can advise clients based on its experience with existing configurations and carbon-market processes.

Carbon is already a commodity and an increasingly material business cost. The question is whether the systems supporting it are ready for what comes next. Perhaps not quite yet.

 

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