This proposal aims to change how the Market Stability Reserve (MSR) manages allowances within the European Union's emissions trading system (EU ETS).

The MSR is designed to keep the carbon market stable. Currently, the system automatically removes (invalidates) allowances held in the reserve once they exceed a certain limit. This limit was set at a fixed threshold of 400 million allowances starting in 2024.

Since the invalidation process began in 2023, a total of 3.2 billion allowances have been removed from the market. While this process has successfully eliminated the historical surplus of allowances, continuing to remove them is predicted to reduce the total supply available in the market over the coming decades, potentially leading to higher prices and market instability.

To ensure the EU ETS remains stable and effective, especially after the mid-2030s, the proposal recommends stopping the automatic invalidation of allowances. By allowing a larger number of allowances to remain in the MSR, the reserve will gain a crucial "buffer" or "firepower" to balance the market in the future.

This targeted change will improve the long-term stability and predictability of the EU ETS, helping the EU meet its climate goals, such as the 2030 targets.

Broader context

The EU Emissions Trading System (EU ETS) is the world’s largest carbon market. It works on a “cap and trade” principle: the EU sets a limit (cap) on how much CO₂ power plants, factories, and airlines can emit. Companies must buy allowances (permits) for each tonne of CO₂ they release. Over time, the cap lowers to cut emissions.

The Market Stability Reserve (MSR) was added in 2015 to fix a problem: too many allowances were piling up, making carbon prices too low to motivate change. The MSR soaks up surplus allowances when supply is high and releases them when supply is tight. The current rule—invalidating allowances above 400 million—was meant to shrink the surplus permanently.

Stopping the invalidation means the MSR will keep a larger stock of allowances instead of destroying them. This gives policymakers more flexibility to manage price spikes or shortages after the 2030s, when the EU’s climate targets become much stricter.

Impact on people living in the EU

For most people, this change will not be directly noticeable day‑to‑day. However, it can affect household bills and jobs in two main ways:

1. Energy bills – Without the automatic removal of allowances, fewer permits are destroyed. That means more allowances remain available, which can help prevent sudden spikes in carbon prices. Stable carbon prices lead to more predictable electricity and heating costs. If prices had risen sharply because of missing allowances, households might have faced higher energy bills.

2. Jobs and local economies – Heavy industries like steel, cement, and chemicals pay for carbon allowances. If the market becomes unstable and prices jump unpredictably, factories might struggle to plan investments or risk closing. Keeping a “buffer” of allowances in the MSR helps avoid those shocks, protecting industrial jobs. At the same time, the EU ETS still pushes companies to pollute less, encouraging green innovation and new jobs in clean technology.

Impact on people outside the EU

The EU ETS influences carbon markets elsewhere. Countries with their own emissions trading systems (for example, the UK, China, or South Korea) often watch EU rules closely. If the EU avoids future market instability, it sets an example for stable carbon pricing globally. This can encourage other nations to strengthen their own climate policies without fearing price crashes or spikes.

For people in non‑EU countries that export goods to the EU (like steel from Turkey or aluminium from India), the EU’s carbon market also matters because of the Carbon Border Adjustment Mechanism (CBAM). A stable allowance price in the EU means a more predictable carbon cost on imported goods, affecting what exporters pay and, ultimately, the prices of those goods abroad.