The EU is strengthening the stability and predictability of its carbon market

The Commission has announced a first concrete step to strengthen the European Union Emissions Trading System (EU ETS). Last April 1st’s proposal, which follows President von der Leyen’s announcement at the March European Council, adapts the EU ETS’s Market Stability Reserve (MSR) to improve stability and predictability.

The Commission has proposed an amendment to the Decision on the Market Stability Reserve to strengthen the instrument that ensures a stable and properly functioning carbon market. Under the current system, all allowances in the reserve exceeding 400 million are invalidated. The proposed amendment will end the cancellation mechanism, allowing these allowances to remain as a buffer that can support market stability. The MSR reduces the supply of allowances to the market when there are too many in circulation and injects allowances when there is a market shortage.

The EU ETS is a key driver of decarbonisation. It has significantly reduced fossil fuel consumption, lowering the Union’s dependence on imports and strengthening its resilience. Furthermore, it has driven significant investment in the clean energy transition towards renewable energy and low-carbon energy sources. These are home-grown and enhance our energy independence. However, in light of recent challenges, the EU ETS must be modernised and made more agile.

Thanks largely to the EU ETS, national emissions in the EU fell by 39%, whilst the economy grew by 71% between 1990 and 2024. Against a backdrop of increased energy price volatility and geopolitical tensions, the Commission is working with Member States to ensure that the EU ETS remains a stable instrument that continues to deliver these benefits whilst remaining robust, predictable and fit for purpose.

The proposed change will better equip the ETS to respond to future market developments, including potential supply shortages in the coming decades. The proposal preserves the ETS’s fundamental rules-based design and the integrity of the EU ETS as a market-based instrument, whilst strengthening the system’s ability to ensure both stability and predictability.

Background

The REM has been operational since 2019 as a rules-based mechanism to adjust the supply of emission allowances in the EU ETS. It successfully addressed the structural surplus of emission allowances that had accumulated following the 2008 financial crisis and has since helped to restore confidence in the carbon market. By the end of 2024, 3.2 billion emission allowances had been invalidated.

Next steps

The proposal to amend the Decision on the Market Stability Reserve will now be submitted to the European Parliament and the Council and must follow the ordinary legislative procedure (co-decision) for adoption.

A comprehensive review of the EU ETS will take place in July 2026. This will include any necessary adjustments to ensure the ETS remains fit for purpose over the next decade.

More information: European Commission.