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For many EU producers under the EU ETS, historical free allowances (FA) have exceeded emissions. This surplus is the producers’ FA “war chests” which can be a useful lever to reduce exposure to EUA volatility. With the European Commission (EC) targeting July 15th to release the ETS review proposal, now is a critical moment for participants to make plans for their war chest.
Free allowances are given to installations based on how their emissions compare to a benchmark of the most efficient installations in their sector. These benchmarks have fallen slower for hard-to-abate sectors, leaving industries such as Iron & Steel and Cement with the highest share of total free allowances in recent years. Additionally, where installations in these sectors have exceeded the EC’s expectations for decarbonisation in the sector, they can end up with a surplus of FAs. Some producers in hard-to-abate sectors can therefore have large volumes of FAs in their war chests.
EUA prices have had a turbulent year, trading between €63 and €94 as of June 1st 1, and there will be more price shocks and volatility over the next few months. The upcoming programme review deciding the future of the EU ETS after 2030 may prompt sharp market reactions, whilst the surrender deadline for 2025 emissions on September 30th could place further pressure on prices.
In the longer term, EUA supply will tighten through FA phase-out in CBAM sectors and through the Linear Reduction Factor (LRF) to the cap. Reforms expected in the EC’s July review could partially ease this pressure, including allowing high-quality carbon removals, a weaker LRF, and a stronger supply injection mechanism.
EU ETS reforms are already hitting producers’ balance sheets. A directive implemented in January 2026 excluded installations operating with more than 95% biogenic emissions from the EU ETS, closing a policy loophole. Stora Enso expects their carbon income from surplus free allowances will drop from €72M to €10-20M as a result,2 with further losses likely as these emissions become ETS2 obligations.
Several sectors have built up sizeable war chests. The Iron & Steel sector has accumulated a surplus of nearly 700 MtCO2e throughout the entire duration of the EU ETS3, equivalent to more than 7 years of sectoral emissions at 2025 levels. The Pulp & Paper and Cement sectors have also accumulated multi-year surpluses, whilst the Chemicals sector has accumulated less than a year of emissions.
The FA war chest is a valuable hedging tool to reduce exposure to EUA volatility over the next few months. With prices likely to tick up close to the surrender deadline in September, producers are protected if they can rely on using their FA war chest for their 2025 obligations. Market participants are already locking in significant hedge positions to reduce exposure to volatile prices, with Ryanair hedging their entire obligations for FY 2027, a 65% increase from the previous quarter, according to think-tank Transition Metrics and Ryanair company reports 4.
Following the surrender deadline, the FA war chest becomes a long-term strategic tool. A large war chest can be an opportunity to invest in green technologies now to maintain competitiveness in a higher-carbon-price future. A key debate raised by EC-affiliated heavyweights such as Jos Delbeke as part of the July review is making FAs conditional on investments in abatement technologies5. Investing now positions producers to maintain their FAs once conditions are finalised, particularly if capacity comes online for Phase 5 (from 2030), and creates a competitive advantage over less-prepared peers.
EU producers should calculate and monitor their FA war chest now to control their exposure to the high EUA volatility expected in the next few months. In the long term, producers should give careful consideration as to selling or surrendering FAs in the war chest, as both offer advantages within the EU ETS.
To understand how EU ETS reforms will affect your business, and for analysis of impacts of FA phaseout and different EUA price scenarios, get in touch with a member of our team, or mail to carbonsupport@fastmarkets.com.
To discuss what these dynamics mean for your business, get an analyst walkthrough of EUA scenarios, free allocation phaseout impacts, and CBAM costs via our proprietary calculator