The EU strengthens the stability and predictability of its carbon market

Fortunately, this was not what Italy expected. Instead of a suspension of the ETS, the Commission announced on Wednesday, April 1st, its intention to strengthen the European Union's Emissions Trading System (EU ETS). The proposal, which follows President von der Leyen's announcement at the March European Council, adjusts the ETS Market Stability Reserve (MSR) by improving stability and predictability.

The Commission proposed an amendment to the Market Stability Reserve decision to strengthen the tool that ensures a stable and well-functioning carbon market. Under the current system, all allowances in the reserve exceeding 400 million are invalidated. The proposed amendment will put an end to the invalidation mechanism, allowing these allowances to be kept as a reserve capable of supporting market stability. The Market Stability Reserve reduces the supply of allowances on the market in the event of an excessive surplus and injects allowances in the event of market scarcity.

What is the purpose of this amendment? Primarily, it makes the Market Stability Reserve better prepared to respond to future market developments, including a potential supply squeeze in the coming decades. The proposal preserves the fundamental rule-based design of the Market Stability Reserve and the integrity of the EU ETS as a market-based tool, while reinforcing the system's ability to ensure stability and predictability.

"This is an important first step to modernize our carbon market. By strengthening the Market Stability Reserve, we enhance the resilience of the EU ETS to volatility and ensure it continues to drive decarbonization, support competitiveness, and foster clean investments," said Wopke Hoekstra, Commissioner for Climate Action, Net-Zero, and Clean Growth.

"The proposal should be read as an attempt to increase the EU's intervention capacity in the ETS market: eliminating the invalidation clause allows for a potentially unlimited accumulation in the MSR, increasing the regulator's power in the event of high EUA (EU Allowance) prices," commented Andrea Maggiani, a carbon market expert and columnist for The Carbon Observer. "However, its effectiveness is uncertain: on the one hand, it improves flexibility, but on the other hand, it risks reducing the predictability of the system and the long-term signal for investments. The risk is that the scarcity signal is weakened, which is exactly what makes the ETS effective."

The EU ETS remains a key driver of decarbonization. It has decreased domestic emissions by 39%, reducing the Union's dependence on imports and strengthening its resilience. Thanks to the generated resources, significant investments have been mobilized in the transition to clean energy, renewable energy, and low-carbon energy sources.

A comprehensive review of the EU ETS will follow in July 2026. This will include any relevant adjustments to keep the Market Stability Reserve fit for purpose in the next decade.

This article is also published on Materia Rinnovabile - Renewable Matter, in Italian. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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