Market stability reserve: Council agrees targeted amendment for a resilient and predictable carbon market
The Council of the European Union (at EU ambassadors’ level) has set its position ahead of negotiations with the Parliament on amending the market stability reserve (MSR). The objective of the amendment is to increase long-term market liquidity and predictability within its emission trading system (ETS).
The Council’s position seeks to bolster the MSR’s ability to respond to evolving market conditions, including any potential market tightness after the mid-2030s. It aims to increase the firepower of the MSR for possible future releases while protecting against any risks of 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. The MSR adjusts the supply of allowances to be auctioned under the EU ETS year on year in accordance with predefined thresholds of the total number of allowances in circulation.
This targeted amendment does not alter the overall design of the MSR. A broader review of the ETS, including the rules on how the MSR works, was proposed by the Commission in July 2026 and the Council is currently examining the proposed texts.
Through cooperation and compromise, we have reached agreement on the amendment to the ETS market stability reserve. We are protecting the integrity of the EU carbon market while giving businesses the predictability they need to decarbonise. Finalising this file is a priority in the ‘One Europe, One Market’ roadmap, and I look forward now to constructive negotiations with the European Parliament (Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment).
Main elements of the Council mandate
Since the invalidation mechanism began in 2023, over 3 billion allowances have been removed from the market, restoring balance between supply and demand. While the Commission proposal provides for the indefinite halt of its invalidation mechanism, EU member states’ ambassadors today decided to temporarily suspend the invalidation of allowances until the end of 2030.
This means that, until then, allowances held above the current invalidation threshold of 400 million will not be cancelled and will remain in the system. 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.
According to the Council’s position, from 1 January 2031, a higher invalidation threshold of 800 million allowances will be introduced, doubling the existing clause and ensuring liquidity in a tighter market. The annual decrease of this threshold should be included in the context of the wider ETS review to ensure a consistent overall approach.
Next steps
The Council will begin negotiations with the European Parliament to agree on a final text. In line with the ‘One Europe, One Market’ roadmap, the Council aims to conclude negotiations on this file by the end of 2026.
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.
