The European Commission has announced the first Emissions Trading System (ETS) reform measure proposal, which would allow all allowances in the Market Stability Reserve (MSR) above 400 million to be kept as a buffer to support market stability. Currently, all allowances above this number are invalidated annually.
Although a key decarbonisation driver in the EU, “in light of recent challenges, the EU ETS needs to be modernised and made more agile”, the Commission says in a note seen by Kallanish.
The MSR, in operation since 2019, is a rules-based mechanism that reduces the supply of emissions allowances to the market when there are too many in circulation and injects allowances when there is market scarcity. It addressed the allowance build-up after the 2008 financial crisis and helped restore confidence in the carbon market, invalidating 3.2 billion allowances in the process, the Commission says.
“Therefore, the invalidation provision has served its purpose. It should cease to apply from the date of entry into force of this amendment. The earlier the proposal is adopted, the more allowances could be prevented from being invalidated and could be held in the MSR,” it notes.
The proposed change will better equip the MSR to respond to future market developments. “Allowing a greater number of allowances to remain in the MSR rather than invalidating them could provide an essential liquidity buffer to manage future market tightness after the mid-2030s and beyond,” it adds.
The proposal will now be submitted to the European Parliament and Council and would need to follow the ordinary legislative procedure (co-decision) for adoption.
A comprehensive review of the EU ETS will follow in July. This will include any relevant adjustment to keep the MSR fit for purpose in the next decade.
