Following the economic downturn in 2009, the EU Emissions Trading System broke down. An overabundance of pollution permits, representing an equivalent of one tonne of CO2 emissions per unit, had stifled the effectiveness of the EU ETS to decarbonise the polluting sectors by sinking the carbon price to as low as €3 a tonne.

Following temporary market interventions (the“backloading” or delaying of the sale of millions of emission allowances), the Market Stability Reserve (MSR) was the permanent tool devised to fix this saturation problem. It is a control mechanism that can limit the number of allowances in circulation, therefore regulating oversupply.

Each year the European Commission calculates the total number of allowances in circulation, and those over the capped threshold are gobbled up by the Market Stability Reserve. Starting in 2023, allowances held in the MSR above a certain threshold are invalidated annually, meaning they are permanently removed from the market. That way the carbon price stays at a steady level, and continues to drive forward decarbonisation from the covered sectors.