European Commission | Questions and Answers on the EU ETS Market Stability Reserve

1. What is the Commission proposing to change in the EU ETS Market Stability Reserve?

The Commission is proposing to stop the automatic invalidation of ETS allowances held in the Market Stability Reserve (MSR) above 400 million. Instead of being cancelled, these allowances will be retained in the reserve.

This strengthens the MSR’s role as a buffer, improving its ability to respond to future market developments, including situations of supply tightness or excessive price volatility, while preserving the system’s rules-based design.

2. Why is the Commission proposing updates to the Market Stability Reserve now?

The EU Emissions Trading System(EU ETS) is delivering: it is reducing emissions, cutting Europe’s dependence on imported fossil fuels and driving investment in clean, homegrown energy. At the same time, as recently highlighted by President von der Leyen at the March European Council, it needs to be modernised to remain effective, flexible and responsive to changing market conditions.

The proposed update to the MSR reflects this need. Stopping the invalidation of allowances will strengthen the system’s capacity to act as a buffer and ensure stability in the years ahead. The comprehensive review of the EU ETS, planned for July 2026, will contain that assessment and include any relevant adjustment to keep the MSR fit for purpose in the next decade.

This measure is part of a broader effort to keep the EU ETS fit for purpose, maintaining its core design while strengthening its ability to deliver decarbonisation, competitiveness and energy security.

3. How will this change affect carbon prices and the functioning of the EU carbon market?

The Commission does not speculate on carbon price developments or make projections on the price impacts of legislative proposals. The EU ETS remains a market-based system where prices are determined by supply and demand.

The proposed change does not have an immediate impact on the market balance. Under the proposal, allowances in the MSR would only be released into the market at times of market tightness or excessive price increases.

A comprehensive review of the EU ETS will follow in July 2026.

4. How will the proposal support Europe’s competitiveness while delivering on its climate targets?

Mainly thanks to the ETS, domestic emissions in the EU dropped by 39%, while the economy grew by 71% between 1990 and 2024. The proposal strengthens the EU ETS, so it continues to drive emissions reductions while providing the stability and predictability that industry needs to invest in the transition.

At the same time, strengthening the Market Stability Reserve improves the system’s ability to respond to market imbalances and reduces the risk of excessive price volatility. A more stable and predictable carbon market provides greater certainty for businesses planning long-term investments in clean technologies.

Compliments of the European Commission