Europe’s carbon market is getting more room to manoeuvre as the EU agrees to raise the threshold for scrapping surplus permits. That should give industry flexibility while keeping a lid on oversupply and price swings.
The Council of the EU and the European Parliament have reached a provisional deal to change how the EU’s carbon market handles surplus emissions permits. The mechanism for cancelling excess permits will stay in place. But the threshold will rise from 400 million to 700 million.
The new threshold will take effect once the deal is formally adopted. The European Commission had originally proposed scrapping the cancellation mechanism altogether.
Higher threshold, bigger buffer
Negotiators instead settled on a compromise that preserves a safeguard against oversupply while leaving more room to respond to future market swings.
“In response to European leaders’ call for accelerated action, we reached a balanced outcome on the Market Stability Reserve that provides European industry with immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market,” said Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment. He described the deal as part of the EU’s ‘One Europe, One Market’ roadmap.
The Mmarket Stability Reserve (MSR) helps balance supply and demand in the EU emissions trading system (ETS). When too many permits circulate, it removes some from the market. Under the rules, it can also release permits when needed. The mechanism aims to limit imbalances caused by a surplus or shortage of allowances.
Three billion permits off the market
Since the cancellation mechanism began in 2023, it has removed more than three billion permits from the market. This helped tackle the historic oversupply that had built up in the ETS.
Negotiators say the higher threshold will strengthen the market’s long-term stability and provide a larger buffer against future fluctuations. The change could also matter after the mid-2030s, when the ETS emissions cap will continue to fall and the market could face tighter supply.
A broader review of the ETS is still under way. It will also consider gradually lowering the cancellation threshold to ensure a consistent approach across the system. The current deal is a standalone change intended to help address high and volatile energy prices, rather than a full reform of the carbon market.
The provisional agreement must now be confirmed by the Council and Parliament before both institutions formally adopt it.
