On May 5th 2016 the Council and the European Parliament have come to a positive compromise on the Market Stability Reserve (MSR), which will temporarily remove some of the gigantic surplus of pollution permits in the EU Emissions Trading Scheme (ETS). CAN Europe called for strong improvements and some of them were incorporated.
The MSR will start in 2019, two years earlier than originally proposed by the European Commission. All the back-loaded and the unused allowances will be put in the reserve. This means that around 2 billion pollution permits will be removed from the market: 240 to 510 million due to the earlier start, 900 million backloaded and about 750 unallocated allowances (left over because of some factory closures or lower than expected demand from new entrants to the market).
A strong Market Stability Reserve will be a first step towards curing the ailing ETS and setting an adequate pollution price signal. It can help accelerate our transition to renewable and energy efficient economy, and stimulate green growth, and job creation so as to ensure a just transition towards a decarbonized society.
The EU ETS has faced a severe price crash due to a very large oversupply of pollution permits, called EU allowances. The Market Stability Reserve (MSR) tries to address this supply and demand imbalance and create more price stability. Starting in 2019, EU allowances will automatically be put into the MSR when there is a large oversupply of emission allowances and released back into the market when allowances are scarcer.
CAN Europe welcomes the MSR as a first step towards setting an adequate pollution price signal. But the MSR design is weak: it will take until 2025 to move all the surplus pollution allowances into the MSR. Without additional bold reforms, the ETS will likely not drive emission reductions for years to come.
The MSR in more detail:
- the MSR will start on January 1st 2019, with 8% of surplus transferred in 2019 and 12% from 2020 onwards
- 900 million back-loaded allowances will be put directly in the reserve
- around 750 million unallocated allowances will be placed in the reserve, but what will ultimately happen to them will be decided in the upcoming ETS review. Options are to cancel them (yay!) or to use them to address carbon leakage (no way!)
- wealthier member states have agreed that up until 2025 they will contribute more allowances to the reserve to facilitate an agreement with some poorer countries that had resisted an earlier start date. This means three clusters of allowances are excluded from the MSR: phase 3 solidarity and growth allowances, the phase 4 modernisation fund, and the phase 4 solidarity, growth and interconnection allowances. This will result in a redistribution of around 14 million pollution permits from wealthier Member States to poorer ones.