Greenhouse gas emissions: creation of a market stability reserve approved
Ana Crespo Parrondo
The Council adopted the decision on the creation of a market stability reserve (MSR) for the EU greenhouse gas emission trading scheme (EU ETS). This new reserve aims at tackling structural supply-demand imbalances in the EU ETS.
How it works
When in a given year the total of emission allowances exceeds a certain threshold, a percentage of allowances will be automatically withdrawn from the market and placed into the reserve. In the opposite case, allowances will be returned from the reserve to the market.
Why it is needed
In 2013, there was a significant surplus of allowances in the EU ETS, which was expected to grow over the following years. This resulted from an imbalance between the supply and demand of allowances, since demand is flexible and affected, for instance, by economic cycles.
The presence of a large surplus lowers the prices of allowances and reduces the incentives for low-carbon investment. Therefore, if not addressed, the current market imbalance would affect the ability of the EU ETS to meet its targets in a cost effective manner in the future.
Main elements of the final text
- A market stability reserve will be established in 2018 and operational from 1 January 2019
- "Backloaded" allowances (the 900 million allowances whose auctioning was postposed from the years 2014-2016 until 2019-2020) will be placed in the reserve
- Unallocated allowances from phase 3 of the EU ETS will be placed in the reserve in 2020
- The MSR review will take into account the reserve's impact on growth, jobs, industrial competitiveness and the risk of carbon leakage.
The Commission presented its proposal for a market stability reserve in January 2014, starting the legislative ordinary procedure. An informal agreement on a compromise text between the European Parliament and the Council was reached in May 2015. The Parliament endorsed the reform in July 2015. With the approval of the Council, the decision is now adopted in first reading.
The EU ETS
The EU ETS, launched in 2005, aims at delivering the EU's greenhouse gas emission reduction goals in an economically efficient manner. It is based on the so-called "cap-and-trade" approach: each year the EU establishes a limit (cap) for overall emissions from power plants, energy-intensive industry and commercial airlines covered by the system.
Within this limit, companies can buy and sell emission allowances. Each allowance gives the right to emit one tonne of CO2, the main greenhouse gas, or the equivalent of another greenhouse gas.
From 2013 to 2020, the cap is reduced annually by 1.74%. From 2021, the annual reduction will increase to 2.2%, reflecting the EU's new 2030 target for emission reductions.
EU ETS review
The establishment of the market stability reserve is the fist step of a wider review of the EU ETS proposed by the Commission this year.