EU agreement on the ETS reserve: rapporteur Maran (PD) says, “Climate ambition and competitiveness go hand in hand”

From our correspondent in Strasbourg – European industries will be able to count on a greater number of carbon emission allowances to set aside and draw upon when necessary. Today (21 October), the European Parliament and the Council of the EU have reached an agreement on an amendment to the Market Stability Reserve (MSR), the automatic mechanism that regulates the number of CO2 emission allowances in circulation within the European Union Emissions Trading Scheme (EU ETS). The agreement raises the threshold from 400 to 700 million, above which, from 1 January 2031, excess allowances will be invalidated, with the aim of supporting the stability of the European carbon market. In effect, “the agreement strengthens the MSR’s ability to respond to changing market conditions, including a potential contraction in supply after the mid-2030s, as the overall emissions cap continues to decrease,” states the Council of the EU. In this way, the updated rules enhance the MSR’s capacity to intervene by allowing, where necessary, the release of allowances, thereby protecting European industry from extreme price volatility while at the same time sending “a clear signal to the market through safeguard mechanisms against an oversupply of allowances.”

According to the rapporteur for the text, the Democratic Party MEP, Pierfrancesco Maran, Chair of the European Parliament’s Environment Committee (ENVI), the agreement “demonstrates that climate ambition and industrial competitiveness can and must go hand in hand.” Maran expects the current revision of the ETS to demonstrate “to businesses and citizens that Europe can play a leading role on climate issues and strengthen its industry.” Darragh O’Brien, Minister for Climate, Energy and the Environment of Ireland – the country currently holding the rotating presidency of the Council of the EU – also argued that, with the agreement between the two sides, the EU has achieved “a balanced outcome on the market stability reserve” which provides European industry with “immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market.” 

Under the rules currently in force, all allowances held in the reserve in excess of the 400 million threshold would have been invalidated. Under the agreement, the limit is raised to 700 million: allowances falling between the two thresholds will therefore not be cancelled, but will remain available in the reserve to help stabilise the market and address imbalances between supply and demand. 

The agreement amends the European Commission’s initial proposal, which had suggested suspending immediately and indefinitely the mechanism for cancelling excess allowances. This solution would have made it possible to keep an unlimited number of additional allowances in the reserve, creating a buffer to support market stability.

The European Parliament and the Council, however, have opted for a compromise solution. The aim, according to the press release, is “to ensure the orderly functioning of the European carbon market and the MSR, to increase long-term market predictability and to align with the EU climate targets for 2040 and 2050.” The threshold should thus maintain a “sufficiently large reserve” to absorb imbalances between supply and demand, while avoiding “the excessive accumulation of allowances in the reserve” that might have resulted from the Commission’s proposal. The co-legislators have also agreed that the cap should be gradually lowered on an annual basis, to “ensure a consistent overall approach.” 

The next step involves the formal approval of the agreement by the European Parliament and the Council. The amended regulation will enter into force three days after its publication in the Official Journal of the EU and will apply immediately.