EU Carbon Allowance 2 Futures: A Strategic Hedge for Europe’s Green Transition

The Intercontinental Exchange (ICE) marked a pivotal moment in Europe’s climate policy evolution on May 6, 2025, with the launch of its EU Carbon Allowance 2 Futures (EUA2). This new derivative, the first major contract aligned with the EU’s expanded Emissions Trading System 2 (ETS2), has positioned itself at the heart of the bloc’s ambitious decarbonization agenda. With initial trading volumes equivalent to 5,000 EUA2 allowances and a raft of policy tailwinds, the contract’s success could reshape how industries manage carbon risk—and offer investors a leveraged play on Europe’s low-carbon future.

Key Contract Specifications: A Blueprint for Physical Delivery

The EUA2 futures contract is designed to mirror the realities of the EU’s carbon market, with specifications tailored to its expanding scope:
- Contract Size: Each EUA2 futures contract represents 1,000 EU Allowances, aligning with the scale of compliance obligations for large emitters.
- Tick Value: A minimum price fluctuation of €0.01 per tonne, resulting in a €10 per contract tick value, provides granularity for hedging.
- Settlement: Physical delivery against EUA2 allowances issued under the ETS2 framework, with a delivery period extending up to four business days post-trading to accommodate market volatility.

The contract’s structure, including monthly and quarterly settlement dates through 2030, reflects ICE’s ambition to serve as a liquidity hub for a market expected to grow alongside the ETS2’s 2027 launch.

Market Context: The ETS2 Expansion and CBAM’s Impact

The EUA2’s launch coincides with two seismic shifts in Europe’s climate policy:
1. ETS2 Expansion: By 2027, the Emissions Trading System will cover 80% of the EU economy, including sectors like road transport and building heating—doubling the number of regulated entities to 20,000. This will create a surge in demand for carbon allowances, as industries previously exempt now face compliance costs.
2. CBAM Implementation: The Carbon Border Adjustment Mechanism, set to phase in from 2026, will impose carbon tariffs on imports of high-emission goods like steel and aluminum. For example, a Chinese steel importer with a carbon intensity of 2.1t CO₂/ton would face a 12% CBAM liability under current EUA prices of €90/ton, rising to 20% or more if prices hit €100+. This creates immediate hedging demand for EUA2 futures to offset compliance costs.

Policy Drivers: The 2040 Climate Target and Clean Industry Deal

The EU’s proposed 2040 Climate Target, aiming for a 90% emissions reduction versus 1990 levels, hinges on carbon pricing. Key elements include:
- Funding the Transition: The EU ETS’s ~€40 billion annual revenue (from auctioning allowances) will fund the Clean Industry Deal, prioritizing low-cost clean energy, grid upgrades, and carbon capture projects for hard-to-abate industries.
- Supply Discipline: The EU ETS’s allowance supply will decline sharply post-2026, as reforms under the “Fit for 55” plan reduce free allocation to industries. This tightens the market, supporting higher prices.

Price Projections: A Return to €100+ Levels?

Analysts project EUA prices could surpass €100/ton by 2026–2028, driven by:
- ETS2 Compliance Costs: The inclusion of 16,000 new entities under ETS2 will boost demand for allowances.
- CBAM-Driven Hedging: Importers and domestic producers alike will use EUA2 futures to lock in carbon costs.
- Policy Certainty: The 2040 target’s finalization by mid-2025 will solidify investor confidence in long-term carbon pricing.

ICE’s environmental markets—already trading over €1 trillion annually—are well-positioned to capture this demand. The EUA2 futures’ liquidity could rival its predecessor’s, which saw over 173 billion allowances traded on ICE platforms since 2005.

Competitive Landscape and Risks

While ICE dominates carbon derivatives with a 90%+ liquidity share, competition is emerging. The European Energy Exchange (EEX) plans to list its own EUA2 futures in July 2025, potentially fragmenting trading volume. Meanwhile, risks include:
- Economic Slowdowns: A prolonged EU recession could dampen emissions growth, capping price upside.
- Policy Delays: Finalizing the 2040 target and Clean Industry Deal faces political hurdles, delaying market confidence.

Conclusion: A Strategic Bet on Carbon Pricing

The EUA2 futures launch is more than a derivatives product—it’s a market mechanism enabling the EU’s climate policy ambitions. With ETS2’s 2027 rollout and CBAM’s 2026 implementation creating urgent hedging demand, the contract’s liquidity is likely to grow exponentially.

Consider this:
- Supply Constraints: EU ETS allowance supply will decline by 2.2% annually post-2026, per reforms, tightening the market.
- CBAM’s Scale: The mechanism could add €5–10 billion in compliance costs annually by 2030, driving demand for hedging tools like EUA2.

For investors, the EUA2 futures offer exposure to a €100+ carbon price trajectory, supported by structural policy shifts. While risks like economic volatility linger, the convergence of ETS2 expansion, CBAM, and the 2040 target makes this a critical decade for Europe’s carbon markets—and the EUA2 a strategic hedge in the transition.

In short, the EUA2 futures are not just a derivative—they’re a currency of the green transition, and their trajectory will mirror Europe’s success in balancing climate ambition with economic resilience.