EU emissions trading system (ETS): amending the market stability reserve
On Tuesday, Parliament voted on two separate proposals to support market stability in the European emissions trading systems ETS1 and ETS2.
Market stability reserve for ETS1
Under the EU emissions trading system (ETS) as it currently operates all allowances held in the reserve above a threshold of 400 million are cancelled. The Commission has proposed to end this invalidation mechanism, allowing the allowances to be kept as a buffer to support market stability.
To ensure the orderly functioning of the European carbon market and the MSR, increase long-term market predictability, and contribute to and align with the EU’s 2040 and 2050 climate targets, MEPs are proposing keeping the invalidation mechanism but raising its threshold from 1 February 2027 from 400 to 650 million allowances. This would maintain a sufficiently large buffer to absorb supply and demand imbalances, while avoiding the possible excessive build-up of allowances in the reserve that could occur under the Commission’s proposal.
Plenary backed the changes by 367 votes to 240, and with 59 abstentions. Parliament is now ready to start negotiations with Council on the final text.
Rapporteur Pierfrancesco Maran (S&D, IT) said: “Today’s vote strikes the right balance between climate ambition and industrial competitiveness. Raising the invalidation threshold and setting a clear date for entry into force gives the MSR the necessary flexibility while safeguarding the EU ETS. The agreement supported by a broad majority sets the scene for the ETS revision, proving that ambitious climate and industrial policies can go hand in hand.”
MSR for the ETS2 for buildings, road transport and additional sectors
In a separate vote, Parliament adopted (467 for, 158 against, 41 abstentions) the provisional agreement with Council to amend the MSR for the EU emissions trading system for buildings, road transport and additional sectors (ETS2) to cushion consumers against sharp price swings.
Once adopted by Council, it will enter into force 20 days after it has been published in the EU Official Journal.
Rapporteur Danuše Nerudová (EPP, CZ) said: “Europe must do more to shield households from the potential negative social impacts of ETS2. This revision will strengthen price stability for citizens. It underlines that member states must give priority to activities to address the social effects of the ETS2 when they spend its auction revenues and assess the prolongation of the current price control mechanism. The Commission will also assess by October 2027 the application ETS2 to buildings, road transport and other sectors and the appropriateness of the current measures to protect vulnerable households.”
Background
The MSR has been operational since 2019 to address the structural imbalance between the supply of and demand for allowances in the EU ETS. The MSR aligns the supply of emissions allowances in the ETS more closely with demand by reducing or increasing the total number of allowances in circulation to stabilise the market.
Parliament is also working on a Commission proposal to revise the EU ETS to drive competitiveness and decarbonise cost-effectively.
