European carbon allowances settled at €80.63/t at the end of May, their highest month-end level since 9 February. Prices gained 9.27% during the month, marking the strongest monthly increase in 16 months.

The EUA Dec’26 contract bottomed at €72.71/t early in the month before rallying to €80.99/t on the final trading day, its highest level of the period. While the move underscores strengthening bullish momentum across the European carbon market, prices have yet to recover to the €93.80/t high reached in January.

The recent upward move was supported by several bullish drivers, including an unprecedented heatwave across much of Western Europe, growing expectations of a future linkage between the EU and UK emissions trading systems, and “concerns of further delay to 2026 free allocation”, according to Yan Qin, Carbon Analyst at ClearBlue Markets.

Uncertainty surrounding the timing of free allowance issuance could tighten near-term market conditions, as compliance entities may be forced to source additional EUAs from the secondary market should allocations be delayed.

Looking ahead, “political risk remains the key constraint on the upside,” according to BBVA analysts, who note that concerns over rising carbon costs are becoming increasingly prominent among European policymakers. Nevertheless, reaching a common position could prove both challenging and time-consuming amid the EU’s increasingly fragmented political landscape.

An immediate challenge for the market is the sharp increase in auction supply expected in June, driven by the inclusion of an additional 50 million allowances earmarked for the Social Climate Fund. Combined with the absence of public holidays that reduced auction activity in May, this is expected to result in auction volumes being roughly 50% higher month-on-month, creating a significant near-term headwind for prices.