ETS market stability reserve: Council and Parliament reach provisional agreement on targeted amendment
On 20 October 2026, the Council and the European Parliament reached a provisional agreement on amending the rules on the invalidation of allowances in the market stability reserve (MSR) for the EU emissions trading system. This targeted amendment of the MSR will increase long-term market liquidity and predictability while protecting industrial competitiveness. The provisional agreement still needs to be confirmed by both institutions before formal adoption.
The agreement bolsters the MSR’s ability to respond to evolving market conditions, including any potential market tightness after the mid-2030s as the overall cap on emissions continues to decrease. The updated rules increase the firepower of the MSR for possible future allowance releases to shield European industry from extreme price volatility, while sending a strong market signal with safeguards against allowance surpluses.
The MSR is a mechanism created to address imbalances in the carbon market by absorbing excess allowances or releasing them to stabilise prices. This targeted amendment does not alter the overall design of the MSR. A broader review of the ETS, including the rules governing the MSR, is currently underway.
“In response to European leaders’ call for accelerated action, we reached a balanced outcome on the market stability reserve that provides European industry with immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market. The EU is delivering on the ‘One Europe, One Market’ roadmap.” (Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment)
Future-proofing the market stability reserve
Since the invalidation mechanism began in 2023, over 3 billion allowances have been invalidated and removed from the market, restoring balance between supply and demand and addressing the historical oversupply of allowances accumulated in the ETS.
While the Commission proposal provides for the indefinite halt of its invalidation mechanism, the co-legislators provisionally agreed on a balanced compromise: the invalidation mechanism will still be in place, with a higher invalidation threshold of 700 million allowances (compared to the current 400 million threshold) entering into immediate effect, after the proposal is formally adopted. The larger number of allowances will enhance the long-term stability of the EU carbon market and will provide a larger buffer for future market fluctuations, while providing a safeguard against excessive oversupply of allowances
The co-legislators also agreed that a gradual decrease of the invalidation threshold should be included in the context of the wider ETS review to ensure a consistent overall approach.
Next steps
The provisional agreement will now have to be endorsed by the Council and the Parliament. It will then be formally adopted by both institutions following legal-linguistic revision.
Background
The Commission proposal is one of the short-term measures announced by the Commission to address high and volatile energy prices, as referred to in the March conclusions of the European Council. It is a first, stand-alone amendment to the market stability reserve, which is to be followed by a broader reform of the reserve in the context of the ETS review, currently under discussion within the Council.
