The Cyprus Presidency of the Council of the EU and the European Parliament reached a provisional agreement on a targeted modification of the Market Stability Reserve of the EU Emissions Trading System for buildings, road transport and additional sectors, known as ETS2.
According to a Council communication, the agreement aims to strengthen the mechanism and ensure a more stable and predictable functioning of the market, with a view to the full implementation of the ETS2 by 2028.
The Market Stability Reserve aims to address imbalances between supply and demand in the emission allowance market by adjusting the number of allowances on the market.
Stronger framework and less volatility
The Minister of Agriculture, Rural Development and Environment, Maria Panagiotou, said that the agreement creates a stronger and more predictable framework for the operation of the mechanism.
As he noted, the changes are expected to improve market liquidity, limit price volatility and enhance the system's ability to respond to unjustified increases.
She underlined that strengthening the framework will strengthen confidence and provide households, businesses and member states with the predictability they need for a cleaner future.
According to the Council, the co-legislators confirmed the key elements of the Commission's proposal, agreeing on the need to strengthen market predictability, limit volatility and address excessive price increases.
Extension of the mechanism beyond 2030
The provisional agreement provides for the extension of the Market Stability Reserve beyond 2030, with the aim of maintaining price stability in the long term.
At the same time, the existing price control mechanism is being strengthened. The number of allowances that can be released to the market when the cost of carbon exceeds €45 per tonne of carbon equivalent, at 2020 prices, doubles from 20 million to 40 million.
The agreement also introduces a more gradual and flexible process of release of allowances when the number of allowances in circulation falls below 260 million. The aim is to avoid the uncertainty associated with the so-called 'threshold effect'.
Future review and use of revenues
The co-legislators agreed that a future review of the mechanism by the Commission will also take into account the number of allowances remaining in the reserve. The next revision of the ETS2 will include an assessment of the price stability mechanisms and the operating rules of the MSR.
The provisional agreement also includes a reference to the need to use the revenues from the ETS2 auctions to support measures contributing to the climate and energy transition in the buildings and road transport sectors, in line with the current European framework.
The agreement will now need to be approved by the Council and the European Parliament, before the final legal and linguistic scrutiny and formal adoption of the relevant legislative acts.
What is ETS2
ETS2 was introduced in 2023 as part of the Fit for 55 package and aims to reduce emissions in the relevant sectors by 42% by 2030, compared to 2005 levels.
The system is applied to fuel suppliers for buildings, road transport and other sectors. Suppliers are required to monitor and report emissions associated with the fuels they place on the market and to surrender the corresponding emission allowances.
