Stop Removing Carbon Allowances to Keep the Market Balanced

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

This proposal modifies a key tool inside the EU’s carbon market, the European Union Emissions Trading System. This system puts a cap on total emissions and lets companies trade permits (“allowances”) to emit CO₂.

In the past, too many allowances were issued, which made carbon prices too low to push companies to reduce emissions. To fix that, the EU created the Market Stability Reserve to remove excess allowances and stabilize prices. One of its strongest tools has been permanently deleting (“invalidating”) surplus allowances.

Now that the surplus has largely been cleared, the problem shifts: if too many allowances keep being deleted, the system could become too tight in the future. This proposal is part of a broader effort under the European Green Deal to keep the carbon market both strict enough to cut emissions and flexible enough to avoid extreme price swings.

In short, the EU is moving from “cleaning up past oversupply” to “managing long-term balance.”

Impact on people living in the EU

For most people, this change will be indirect but important:

• Energy prices stability
  Carbon prices influence electricity and heating costs. By keeping a reserve of allowances instead of deleting them, the EU aims to avoid sudden spikes in carbon prices that could make energy much more expensive.

• More predictable cost of living
  Industries pass carbon costs into prices (e.g. goods, transport). A more stable carbon market helps avoid sharp increases in everyday costs.

• Continued pressure to reduce emissions
  The system still limits total emissions. This change doesn’t weaken climate goals—it adjusts how strictly supply is managed over time.

• Job and industry effects
  Sectors like steel, cement, and energy depend on carbon pricing. Greater predictability helps companies plan investments (e.g. in cleaner technologies), which affects jobs and economic stability.

Why this matters long-term

This proposal signals a shift in EU climate policy: from aggressively reducing excess allowances to carefully managing scarcity over decades. The goal is to keep the carbon market credible, stable, and effective all the way to long-term climate targets, not just the 2030 milestone.