The Council of the European Union and the European Parliament have reached a provisional agreement to modify the rules regarding the cancellation of allowances held in the Market Stability Reserve of the EU Emissions Trading System (ETS). The regulation foresees increasing the cancellation threshold in the reserve from 400 million to 700 million allowances.
The agreement reached on October 20 aims to enhance long-term liquidity and predictability in the carbon market while supporting industrial competitiveness. For the regulation to enter into force, it needs to be approved and formally adopted by both institutions.
The Market Stability Reserve operates as a mechanism that absorbs surplus allowances or releases them back into the market under specific conditions, depending on the total number of allowances in circulation. The targeted amendment aims to create a larger buffer against potential future supply crunches while maintaining the overall structure of the reserve.
The European Commission’s proposal foresaw pausing the cancellation of allowances in the reserve indefinitely. The Council and the Parliament, however, agreed to retain this mechanism while raising the cancellation threshold. Consequently, more allowances can be held in the reserve, while the practice of cancelling allowances above the specified threshold will continue.
Since the implementation of the cancellation mechanism began in 2023, more than 3 billion allowances have been permanently removed from the market. With the new threshold, the objective is to strike a balance between preventing the re-emergence of past allowance surpluses and meeting future market needs.
The regulation serves as a preparatory measure against market tightness that may arise, particularly after the mid-2030s, as the overall emissions cap under the ETS continues to decline. The parties also agreed that a gradual reduction of the cancellation threshold in the future will be addressed within the framework of the broader ETS review.
Ireland’s Minister for Climate, Energy and the Environment, Darragh O’Brien, stated that the agreement aims to provide flexibility to European industry while protecting price stability and the integrity of the EU carbon market.
Following approval by the Council and the Parliament, the provisional agreement will undergo legal and linguistic revision before being formally adopted. A more comprehensive reform of the Market Stability Reserve will be evaluated as part of the ongoing ETS review.
