The Council of the EU and the European Parliament have announced that they have reached a provisional agreement on amendments to the EU Emissions Trading System (ETS) market stability reserve (MSR), aimed at improving long-term market liquidity and predictability while supporting industrial competitiveness.
The agreement, reached on October 20, 2026, proposes increasing the threshold for invalidating allowances held in the MSR from the current 400 million to 700 million allowances.
Higher allowance threshold aims to improve EU carbon market stability
Under the existing mechanism, allowances exceeding the applicable threshold are permanently invalidated to prevent excessive surpluses in the EU carbon market. The higher threshold will allow a larger volume of allowances to remain in the reserve, providing an additional buffer against potential market shortages and price volatility in the future.
According to the Council, the amendment is intended to strengthen the MSR's capacity to respond to changing market conditions, particularly potential supply constraints after the mid-2030s as the EU's overall emissions cap continues to decline. Since the invalidation mechanism was introduced in 2023, more than three billion emissions allowances have been permanently removed from the market to address the historical oversupply of allowances under the ETS.
Allowance invalidation mechanism retained
While the European Commission had initially proposed indefinitely suspending the invalidation mechanism, the Council and Parliament agreed to retain it with the higher threshold of 700 million allowances. This approach is intended to preserve safeguards against excessive allowance surpluses while increasing the reserve's capacity to respond to future market fluctuations.
The two institutions also agreed that a gradual reduction in the invalidation threshold should be considered as part of the broader ongoing review of the EU ETS, which includes the rules governing the MSR. The provisional agreement must now be endorsed by both the Council of the EU and the European Parliament before undergoing legal-linguistic revision and formal adoption.
