The Cypriot Presidency of the Council of the EU and representatives of the European Parliament have reached a provisional agreement on a targeted revision of the Market Stability Reserve (MSR) linked to the EU Emissions Trading System for buildings, road transport and other sectors (ETS2) (European Council press release).
According to the press release, “The market stability reserve addresses supply and demand imbalances in ETS2, by adjusting the number of emission allowances available in circulation. Today’s agreement will strengthen the market stability reserve and further ensure a stable and predictable market for allowances ahead of the full launch of ETS2 in 2028”. Furthermore, the reserve will remain in force beyond 2030, rather than expiring in that year.
Under the agreement reached by EU member states and the European Parliament, if allowance prices in the new carbon market rise above EUR45 (USD52) per tCO2, 40 million emission allowances will be released from the stability reserve to increase market supply, doubling the previously planned volume of 20 million allowances. According to the Council, "the agreement will ensure a more gradual and responsive release of allowances when the number in circulation falls below 260 million, to help prevent market uncertainty caused by a ‘threshold effect’."
The co-legislators also agreed to include a reference highlighting the importance of investments and the allocation of revenues generated through ETS2 auctions to support climate and energy transition initiatives in the buildings and road transport sectors.
The EU’s second emissions trading system (ETS2) will apply a carbon price to CO2 emissions associated with heating fuels and transport fuels. The objective is to accelerate the adoption of electric vehicles and cleaner residential heating technologies. Under the scheme, fuel suppliers and distributors will be required to purchase CO2 allowances through the ETS2 market to cover the emissions linked to the fuels they place on the market.
Introduced in 2023 as part of the Fit for 55 legislative package, ETS2 is designed to reduce emissions from the covered sectors by 42% by 2030 compared with 2005 levels.
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