The European Commission has proposed amendments to the current regulation in order to strengthen the Market Stability Reserve (MSR) mechanism under the European Union Emissions Trading System (ETS). While the existing system provides for the cancellation of allowances exceeding 400 million in the reserve, the new proposal plans to suspend this cancellation mechanism. In this way, these allowances could be retained as a buffer to support market stability.
Commenting on the development, Wopke Hoekstra, EU Commissioner for Climate, Net Zero and Clean Growth, stated that this step was taken as part of delivering on leaders’ commitments and represents an important first step in modernizing the carbon market. Hoekstra emphasized that strengthening the MSR will enhance the ETS’s resilience to volatility, while continuing to support decarbonization, boost competitiveness, and encourage clean investments.
The MSR mechanism balances the market by reducing supply when there is a surplus of allowances and injecting allowances when there is a shortage. With the proposed changes, the system is expected to become more flexible and resilient against potential future supply constraints.
The European Union Emissions Trading System is considered one of the key instruments in the decarbonization process. Through the system, fossil fuel consumption has been significantly reduced, the Union’s dependency on energy imports has decreased, and energy supply security has been strengthened. At the same time, it has contributed to the growth of renewable and low-carbon energy investments.
According to data, emissions in the European Union decreased by 39% between 1990 and 2024 due to the ETS, while the economy grew by 71%. Amid increasing energy price volatility and geopolitical developments, the Commission continues to work with member states to make the system more modern and flexible.
Background
The Market Stability Reserve has been implemented since 2019 as a rules-based mechanism balancing supply under the ETS. Following the surplus created after the 2008 global financial crisis, the system has played a key role in reducing excess allowances, with 3.2 billion allowances cancelled by the end of 2024.
Next Steps
The proposal to amend the MSR regulation will be submitted to the European Parliament and the Council of the European Union for consideration. It must go through the ordinary legislative procedure to enter into force.
Meanwhile, a comprehensive review of the European Union Emissions Trading System is scheduled for July 2026. During this process, additional measures to ensure the effectiveness of the MSR over the next decade will also be evaluated.
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