Introduced in 2018, the Market Stability Reserve (MSR) functions as the oversupply control mechanism of the EU Emissions Trading System (ETS). Created to address structural oversupply on the market, every year it extracts a share of surplus emissions allowances. The MSR came to the rescue of the misfiring ETS by ending a decade of low market confidence and rock bottom prices. In practice it has proven effective, syphoning oversupply out of the system and invalidating (or deleting) over 3.4 billion EU Allowances (EUAs). 

Yet, the MSR currently sits in the crosshairs of policymakers seeking to weaken the ETS. Only a few months before the entire ETS undergoes a scheduled legislative review, the European Commission has intervened early by proposing to delete the invalidation mechanism. When the full review is underway additional elements of the MSR will also be under scrutiny.

However, the ETS is still burdened with structural oversupply as the cap remains overgenerous. And in the future other factors that trigger oversupply – both expected and unexpected – cannot be ruled out, including economic shocks or the impacts of other energy and climate policies (coal phase-outs, electrification, faster rollout of renewables and battery storage).

As the risk of oversupply persists, the MSR must still be capable of permanently deleting oversupply. This maintains the focus on reducing emissions, makes the ETS trajectory more predictable, and helps the system raise revenue for climate action. Despite the potential negative outcomes of altering the MSR during the revision, there is a case for the MSR to be modernised. The intake and release threshold, and the release quantity should be calibrated in relation to a decreasing cap in order to prevent a build up of massive oversupply again. As the ETS becomes smaller, the MSR’s triggers and release quantity must become dynamic and shrink in parallel.