Reform of the EU ETS: does the market stability reserve need a new design?
The EU ETS is the cornerstone of the European climate policy covering about 45% of the EU’s greenhouse gas emissions. It follows the polluter pays principle under a cap-and-trade mechanism, whereby firms covered by the ETS purchase, sell and exchange emissions allowances representing one tonne of CO2-eq.
Within this carbon market, the Market Stability Reserve has the objective to increase resilience to demand shocks, deliver investment signals, and raise synergies with other climate and energy policies. It consists of a rule-based mechanism that adjusts the number of allowances to be auctioned to the market surplus by controlling the number of allowances in circulation in the carbon market. The surplus of allowances determines the response of the MSR:
- If the surplus exceeds a certain threshold, a predetermined percentage of the surplus is withheld from auctions and added to the reserve;
- if the surplus is lower than another threshold, some allowances are taken from the reserve and injected into the market through auction.
The European Commission’s proposal for MSR Review is planned for June 2021, in the context of a broader reform of the EU ETS to include new sectors in its scope and to support the new EU pledge to reach climate neutrality by 2050. In the publication discussed during this talk, the authors argue that a new MSR design appears necessary. They identify the risks that arise from the current MSR design and propose a feasible way to address them in the upcoming review of the EU ETS.
Jean-Michel Glachant, Director of the Florence School of Regulation
- Simone Borghesi, Director of FSR Climate, European University Institute and EAERE POC Secretary General
- Grischa Perino, Professor, University of Hamburg
- Jos Delbeke, EIB Chair on International Carbon Markets, School of Transnational Governance, European University Institute and EAERE POC Chairman
EU ETS Market Stability Reserve needs a new design, Grischa Perino, Michael Pahle, Fabian Pause, Simon Quemin, Hannah Scheuing and Maximilian Willner, 2021
EU Emissions Trading System, Series Cover the Basics FSR, 2021
The EU ETS needs a new autopilot: a proposed reform for the MSR, Grischa Perino, LIFE DICET Blog, 19 March 2021
The EU ETS at a crossroads: The MSR review as a defining moment, Michael Pahle and Simon Quemin, LIFE DICET Blog, 19 June 2020
Emissions trading systems with different price control mechanisms: implications for linking – Report for the Carbon Market Policy Dialogue, Giulio Galdi, Stefano F. Verde, Simone Borghesi, Jürg Füssler, Ted Jamieson, Emily Wimberger, Li Zhou, Florence School of Regulation – Climate, LIFE DICET Project, 2020
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