Prices of emission allowances in the EU should become more stable and less prone to sharp fluctuations. The system should also be able to respond more flexibly in times of crisis. The European Parliament has backed changes to the Market Stability Reserve responding to concerns about the impact of the new ETS2 system on households.
At the heart of the changes is an adjustment to the Market Stability Reserve (MSR), which acts as a regulatory ‘buffer’ within the EU’s emissions trading system (EU ETS). If there are too many allowances on the market and their price falls, a part is withdrawn into the reserve. Conversely, if prices rise rapidly, some allowances can be released back onto the market to stabilise it.
On Wednesday, MEPs voted on an amended version of the proposal compared with the European Commission’s original draft. The revised proposal was supported by 433 MEPs, with 120 voting against and 91 abstaining.
„Europe must do more to shield households from the potential negative social impacts of the ETS2,“ rapporteur Danuše Nerudová (EPP/CZE) said.
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The changes are part of a broader reform of emissions trading that introduces the so-called ETS2. It extends carbon pricing to sectors that directly affect consumers, such as heating and motor fuel costs. ETS2, which is due to start on 1 January 2028, aims to reduce emissions from buildings and road transport by 42 per cent by 2030 compared with 2005 levels.
Lighten the load for households
The potential social impact of ETS2 was one of the main arguments behind the proposed adjustments. Supporters argue it should prevent the prices of allowances from rising too quickly and triggering sudden spikes in energy and transport costs. At the same time, the system should remain strong enough to maintain incentives to cut emissions.
Under the European Commission’s proposal, emission allowances would be capped at a maximum price of €45 per tonne of CO₂ (in 2020 prices) until 2029. If prices exceed this ceiling, additional allowances would be released after two months. All unused allowances held in the MSR would be cancelled after 1 January 2031.
The version approved by Parliament strengthens the responsiveness of the mechanism. Committee on the Environment, Climate and Food Safety (ENVI) proposed shortening the time for extra allowances to enter the market from two months to one in order to stabilise prices more quickly.
It also calls for extending the retention of unused allowances in the MSR. Half of them should be cancelled on 1 January 2034, and the rest on 1 January 2036. The Commission should assess the appropriateness in this approach within four years of the launch of ETS2.
Longer-lasting price cap
MEPs stressed that changing the market stability reserve alone won’t be enough to soften ETS2’s impact. Extra measures are needed to help households move away from fossil fuels. Therefore they propose to allow states temporarily postpone ETS2 for residential buildings if they can meet climate targets by other means.
ENVI also calls for the Commission to assess whether to prolong the current €45 cap beyond 2029. And to strengthen the European Social Climate Fund, designed to protect vulnerable groups from the negative social impacts of ETS2.
According to the supporters, the revised mechanism will increase market predictability and reduce the risk of price shocks. Critics, however, warn that too frequent market interventions could weaken the carbon price signal that drives green investment.
The vote in Parliament now opens the way for further negotiations with EU member states. The final shape of the rules may still change during trilogue talks between the Parliament, the Council and the Commission.
