Europe’s electricity bills are riding a rollercoaster — and Brussels wants to smooth the ride. The European Commission is changing the EU carbon market rules, aiming to prevent sudden price spikes. The goal: more predictable costs for households and businesses, while keeping Europe on track in its green transition.
Rising carbon costs already account for around 11 per cent of electricity bills on average across the EU. The share varies widely between member states depending on their energy mix. The European Commission says its latest proposal is designed to reduce this volatility. It should give businesses and households more predictability while ensuring the bloc continues its transition to cleaner energy.
The change targets the Market Stability Reserve (MSR), a mechanism at the heart of the EU Emissions Trading System (EU ETS). The MSR adjusts the number of carbon allowances available on the market. It removes excess permits when supply is high and releases them when the market is tight.
Under current rules, any permits in the reserve above 400 million are automatically cancelled. The Commission now proposes to stop this automatic cancellation. It wants to keep the surplus as a buffer, using it to stabilise the market when needed.
The move aims to prevent large swings in the availability of carbon permits. And avoid sudden jumps in prices that can ripple through energy bills and investment decisions. Companies that pay for the carbon they emit—power plants, factories, or airlines—will benefit from a system that is more predictable and less prone to shocks.
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Almost 40 per cent less emissions
Commissioner for Climate Wopke Hoekstra called the proposal an important first step in modernising our carbon market. “By strengthening the Market Stability Reserve, we enhance EU ETS’ resilience to volatility and ensure that it continues to drive decarbonisation, support competitiveness and foster clean investment,” he said.
The EU ETS is the bloc’s primary tool for cutting greenhouse gas emissions. Companies must buy allowances for every tonne of CO₂ they emit. That creates a financial incentive to reduce pollution and invest in cleaner technologies. Since 1990, the system has helped reduce EU emissions by 39 per cent. In that time, the economy grew by 71 per cent, demonstrating that environmental progress and economic growth can go hand in hand.
Review under way
The MSR itself has been in operation since 2019 and has already played a crucial stabilising role. The original purpose was to deal with a surplus of allowances that accumulated after the 2008 financial crisis. By the end of 2024, around 3.2 billion allowances had been cancelled under the mechanism, restoring confidence in the carbon market.
The Commission will now send the proposal to the European Parliament and EU member states for negotiation under the ordinary legislative procedure. “The work is not finished. We are going to propose the revision of ETS directive. We will update the benchmarks for free allocations and take into accounts the concerns of the industry,” Commission’s spokesperson Eva Hrnčířová stated. A broader review of the EU ETS is scheduled for July.
