As part of its ‘Fit for 55’ climate legislation package presented on 14 July, the European Commission has proposed a revision of the EU Emissions Trading System (ETS), including the creation of a new ETS for road transport and buildings, as well as a modification of some of the rules of the current scheme and its expansion to the maritime sector (see EUROPE 12762/1). In the face of such changes, the European Commission will have to ensure, among other things, the stability of the EU carbon market.
One of the tools the European Commission has at its disposal for this purpose is the Market Stability Reserve (MSR). Operational since 2019, this reserve aims to address the current surplus of allowances and to increase the resilience of the system to shocks by regulating the supply of allowances available for auction.
More precisely, it is a mechanism that allows for an automatic adjustment of the number of allowances in circulation according to a predefined intake rate that determines the share of allowances in circulation that will be put into the reserve.
Under the rules set out in EU Directive 2018/410, this rate is 24%, up from 12% previously, and only applies if the total number of allowances in circulation exceeds 833 million. In addition, the minimum quantity of allowances to be placed in the reserve was set at 200 million allowances, double the previous threshold of 100 million.
However, the intake rate is expected to increase to 12% from 2024 onwards, a percentage which, according to the European Commission’s impact assessment, “would not be enough to ensure that the objectives of the MSR in terms of reducing the (quota) surplus and ensuring market resilience would still be fulfilled”.
Therefore, the EU institution proposes that the current parameters of the MSR (24% allowance rate and a minimum quantity of 200 million allowances to be set aside) should be maintained beyond 2023, until the end of phase IV of the ETS, i.e. 31 December 2030, in order to ensure market predictability.
See the draft decision: https://bit.ly/3zt9fhs (Original version in French by Damien Genicot)