Brussels – Let the negotiations with the European Parliament begin: the ambassadors of the Member States agreed today (23 September) on the EU Council’s position on the amendment to the Market Stability Reserve (MSR) – the mechanism designed to address imbalances in the carbon market – of the EU Emissions Trading Scheme (ETS). The aim of the 27 Member States is to reduce the volatility of carbon prices and make the market more predictable. All this is to be achieved by the end of the year. However, while the Commission proposed an indefinite suspension of the mechanism for cancelling surplus allowances in the Reserve, Member State ambassadors are asking not to remove them until the end of 2030. Therefore, until then, allowances held in excess of the current cancellation threshold of 400 million will not be cancelled and will remain in the system.
We need to take a step back. The EU Emissions Trading Scheme (ETS) is the world’s first global carbon market: every year, emissions allowances are placed on the European market, for which emitting companies pay. The ETS is therefore the EU’s main tool for making “clean” investments profitable because, as they have to pay, companies are incentivised to reduce pollution. The revenue generated then goes towards funding the transition to cleaner energy and technologies. Launched in 2005, the ETS has helped to reduce emissions by around 50 per cent. Since 2009, however, a substantial surplus of emission allowances had built up in the system – partly due to the 2008 economic crisis, which led to lower emissions and therefore reduced demand for allowances, and partly due to a high influx of international credits that could be exchanged for allowances. To address this surplus, the Market Stability Reserve (MSR) was established in 2018; this is a mechanism designed to tackle imbalances in the carbon market: like a warehouse, it absorbs excess allowances or releases them to stabilise prices.
The issue addressed by the ambassadors today centred primarily on what to do with allowances that end up in the reserve and exceed a certain cap. Currently, the cap stands at 400 million, and any allowances in excess of this are gradually cancelled and can no longer re-enter the carbon market. Since the cancellation mechanism came into effect in 2023, over 3 billion allowances have been removed from the market, restoring the balance between supply and demand. The European Commission had proposed to permanently halt this mechanism. The idea was to leave the allowances in the reserve, creating a larger “buffer” to be used in the future should the market become too tight and carbon prices rise rapidly.
Member States have instead opted today for a temporary solution. Their position is to suspend, until the end of 2030, the cancellation of allowances above the 400 million threshold; these will remain in the reserve rather than being cancelled. Such cancellation would allow the EU to increase the number of allowances to be held in the “market stability reserve”, which could be released in the event of price spikes to counter volatility.
The Council is also calling for the automatic cancellation threshold to be raised from 400 million to 800 million allowances with effect from 1 January 2031. The Member States thus wish to maintain a larger reserve and have greater scope to intervene in the event of significant market fluctuations. The main difference compared with the Commission’s proposal therefore lies in the timing of the suspension: Brussels aimed to abolish the invalidation mechanism altogether, while the governments wish, for the time being, to freeze it until 2030 and then introduce a threshold double that of the current one.
English version by the Translation Service of Withub
