Brussels: The European Commission has today announced a first concrete measure to reinforce the European Union Emissions Trading System (EU ETS). Today’s proposal, which follows President von der Leyen’s announcement at the March European Council, adapts the ETS’s Market Stability Reserve (MSR) enhancing stability and predictability.
According to Emirates News Agency, the Commission has proposed an amendment to the Market Stability Reserve Decision to strengthen the instrument that ensures a stable, well-functioning carbon market. Under the current system, all allowances in the reserve above 400 million are invalidated. The proposed amendment will stop the invalidation mechanism, allowing these allowances to be kept as a buffer that can support market stability. The MSR reduces the supply of allowances to the market when there are too many in circulation and injects allowances when there is market scarcity.
Commissioner for Climate, Net Zero and Clean Growth, Wopke Hoekstra, stated that this move marks an important step in modernising the carbon market. By strengthening the Market Stability Reserve, the EU aims to enhance the resilience of the ETS to volatility and ensure that it continues to drive decarbonisation, support competitiveness, and foster clean investment.
The EU ETS has significantly reduced fossil fuel consumption, decreasing the Union’s dependence on imports and bolstering its resilience. It has also driven major investments in the clean energy transition in renewables and low-carbon energy sources. However, recent challenges have highlighted the need to modernise and make the EU ETS more agile. The Commission is collaborating with Member States to ensure the ETS remains a stable tool that continues to deliver these benefits while being robust, predictable, and fit for purpose.
The proposed change is designed to better equip the MSR to respond to future market developments, including potential supply tightness in the coming decades. The proposal maintains the fundamental rules-based design of the MSR and the integrity of the EU ETS as a market-based instrument, while enhancing the system’s ability to ensure both stability and predictability.
The MSR has been operational since 2019 as a rules-based mechanism to adjust the supply of allowances in the EU ETS. It successfully addressed the structural surplus of allowances that accumulated after the 2008 financial crisis and has since helped restore confidence in the carbon market. By the end of 2024, 3.2 billion allowances had been invalidated.
The proposal to amend the Market Stability Reserve Decision will be submitted to the European Parliament and the Council and will need to follow the ordinary legislative procedure for adoption. A comprehensive review of the EU ETS is planned for July 2026, which will include any necessary adjustments to keep the MSR fit for purpose in the next decade.
