The European Commission is amending the rules on the market stability reserve

Having been asked to relax the rules of the European Union Emissions Trading System (EU ETS), the European Commission has presented an initial measure concerning the market stability reserve. The market stability reserve is a regulatory mechanism designed to prevent excessive volatility in CO2 prices. When the number of allowances in circulation is too high, allowances are withdrawn from the market and placed in the reserve. Conversely, allowances are returned to the market when the number of allowances in circulation falls too low. There are currently 3.6 billion allowances in the reserve. However, current regulations provide for the cancellation of all allowances held in the reserve above a threshold of 400 million allowances. The Commission proposes to remove this cancellation mechanism, which would allow the reserve to have more ammunition in the event of pressure on CO2 prices. The reform of the stability reserve should be complemented by a further reform aimed at amending the mechanism for allocating free allowances. The Commission will need to make progress on this aspect before 1 July, the date by which the entire EU ETS reform must be presented to the various EU decision-making bodies for adoption.