This policy paper complements the briefing “A New Hope – recommendations for the EU Emissions Trading System review”
The EU Emissions Trading System (EU ETS) has been hampered by a historical oversupply since its inception. Since 2019, some of the excess allowances are being absorbed by the Market Stability Reserve (MSR), and a portion of the absorbed allowances is being cancelled.
With announced coal phase-outs around Europe, the impact of the COVID pandemic, and the very rapid reduction in coal power generation currently taking place, the EU ETS is at risk of seeing its oversupply grow once more.
To address this problem, the upcoming ETS revision should both tighten the cap, and strengthen the MSR.
- Apply a one-off reduction of 450 million allowances to the EU ETS cap
- Increase the linear reduction factor to 3.1%, starting in 2023
- Increase the MSR intake rate to 36%
- Cancel all allowances which have been held in the MSR for more than 3 years
- Ensure the MSR thresholds decline to zero by 2030