The EU’s Emissions Trading System (EU ETS) is undergoing one of its most significant transformations since inception. With supply constraints looming, the phaseout of free allowances to industry, and the Carbon Border Adjustment Mechanism (CBAM) scheduled to come online next year, the EU’s carbon market is tightening—and fast. Political risk also looms large as we see structural changes in the European carbon market.

In the latest episode of OPIS Talks Environmental Commodities, OPIS Senior Editor Humberto J. Rocha sits down with Mark Lewis, a veteran carbon market analyst and one of the earliest professionals to cover emissions trading full-time in London. Their conversation unpacks the complex interplay of market structure, policy evolution, and speculative flows shaping the road to 2030 and beyond.

Supply Squeeze Incoming?

The EU ETS has entered a new phase of scarcity. With the Market Stability Reserve (MSR) pulling volumes out and annual cap reductions intensifying, the system may flip into a structural deficit as early as 2025 or 2026, according to Lewis. “The EU has engineered this market to tighten over time,” Lewis notes. “The supply side is on rails.”

By 2034, free allowance allocation for key industrial sectors like steel and cement production will be fully phased out under CBAM rules. While this theoretically could boost carbon prices due to higher demand, the uncertainty lies in how quickly EU industry can decarbonize or pay higher EUA prices instead.

No Natural Sellers, Only Natural Buyers

In contrast to most commodity markets, carbon lacks a “natural short” position, Lewis said. “There are no natural sellers in this market—only buyers, mostly compliance entities,” says Lewis. That setup creates the potential for sharp price moves, particularly if speculative capital enters during a bullish phase.

While financial players have reduced positions amid recent volatility, Lewis sees signs of re-entry. “Volatility is the price you pay for liquidity. As the market matures, investor interest will come back—especially as the supply picture tightens.”

The Political Price of Decarbonization

Yet for all the bullish structural signals, one of the carbon market’s biggest risks may be political. . With EU elections behind us and significant changes and delays to environmental legislation, there’s growing uncertainty over how much political will exists to tolerate rising EUA prices.

“If prices double or triple, politicians may panic,” Lewis warns. “But without high carbon prices, you won’t get meaningful decarbonization. That’s the catch.”

The key risk is intervention—whether through price caps, market design changes, or CBAM adjustments. While the current setup favors rising prices, it also raises the stakes for backlash if carbon costs become politically untenable.

What’s Next: Global Linkage and Offsets?

Post-2030, the EU may be more open to including international carbon credits or removals within its compliance scheme. Lewis believes that global offsets could re-enter the ETS architecture as domestic abatement costs rise and international negotiations mature.

“Linking markets makes sense in the long run—it’s more efficient and can lower the cost of compliance. But only if the quality of offsets is unimpeachable.”

Markets like China’s ETS, California’s WCI, and the U.K. ETS are all watching Europe closely. The next five years will likely determine whether the EU ETS becomes a model for global linkage—or a cautionary tale.