EU makes its first amendment to the ETS; boosts reserve allowances to counter energy market volatility

Brussels – The comprehensive overhaul of the European Union’s Emissions Trading Scheme (ETS) “will follow in July 2026,” but in the meantime, today (1 April), the European Commission has announced the end of the scheme to invalidate surplus allowances, allowing them to be kept as a reserve. It also confirmed that greenhouse‑gas emissions will continue to carry a cost, a clear rebuff to the Meloni government, which instead called for everything to be put on hold. 

“Mainly thanks to the ETS, domestic emissions in the EU dropped by 39 per cent, while the economy grew by 71 per cent between 1990 and 2024”, the EU executive points out. A clear premise: the architecture works, and therefore it is not being scrapped. If anything, it is being reformed, given that in its current form, the mechanism for supporting a sustainable production system was designed with a horizon up to 2030, but no further. So, the review starts from this objective, and this is also the starting point for the European Commission’s proposal: to scrap the invalidation. 

Specifically, the reference is to the Market Stability Reserve (MSR), which was established in 2015 to provide a long-term solution to the surplus of emission allowances on the European carbon market. It aims to rebalance supply and demand, making the carbon market more resilient to shocks, by reducing supply when there are too many allowances in circulation and releasing them when there is a shortage. Under the current system, all reserve allowances – the permits that allow companies to emit CO2 – in excess of 400 million are invalidated. Therefore, the amendment proposed today, which must be endorsed by Parliament and the Council, will suspend the invalidation mechanism, allowing these allowances to be retained as a buffer to support market stability.

This proposal is essential, particularly in light of the energy crisis caused by the war in Iran. “By strengthening the Market Stability Reserve, we enhance the EU ETS’ resilience to volatility,” said Wopke Hoekstra, Commissioner for Climate Action, Net Zero and Green Growth. At the same time, he adds, “ensure that it continues to drive decarbonisation, support competitiveness and foster clean investment.”

Speaking of prices, the ETS has so far ensured stability, with carbon prices remaining between 80 euros and 100 euros per tonne from 2022 to 2026, and the Commission’s proposal aims to build on what has been achieved so far. 

As part of the emissions trading system, in 2018, the Commission introduced changes specifically designed to ensure price predictability and stability by invalidating, from 2023 onwards, allowances in the reserve above a threshold equal to the total number of allowances auctioned during the previous year. This threshold was amended by the 2023 Directive, shifting from a dynamic threshold to a fixed threshold of 400 million allowances from 2024 onwards, in order to ensure the predictability of the level of allowances in the reserve. 

The European Commission now believes that allowing more allowances to remain in the reserve, rather than invalidating them, could provide an essential liquidity buffer to manage future market tensions from the mid-2030s onwards. Keeping more allowances “will increase the
firepower of the MSR for possible future releases in the next decade to balance the market,”  according to the proposal submitted to Member States.