EU ETS mechanics
Linear reduction factor (LRF) explained
LRF is the annual squeeze on the cap. Small number, large Mt.
Updated 2026-08-05 · Model output for professionals · Not investment advice
What LRF does
The linear reduction factor shrinks the EU ETS cap each year by a fixed percentage of a reference quantity. Raising LRF removes more allowances over time.
Why desks care
LRF changes are multi-year supply events. Price them as Mt by maturity with passage odds, not as a one-day headline.
FAQ
- Is LRF the same as MSR?
- No. LRF shapes the cap path. MSR adjusts auction volumes from TNAC. Both matter; they are different levers.