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 EU's main tool for cutting greenhouse gas emissions from industries like power plants, factories, and airlines. It works like this: companies get or buy a limited number of "allowances," each permitting them to emit one tonne of CO₂. If they emit less, they can sell their spare allowances; if they emit more, they must buy extra ones. This creates a financial incentive to pollute less.

After the 2009 economic downturn, the market flooded with too many allowances, crashing the carbon price to as low as €3 per tonne — far too cheap to push companies to clean up their act. The MSR was created specifically to fix this problem by acting as a kind of automatic valve: absorbing excess allowances when the market is oversupplied, and releasing them when allowances become too scarce.

Following the MSR's implementation, tighter market conditions drove carbon prices up significantly — from below €30 before 2020 to nearly €98 in 2022. This higher price made it genuinely costly for companies to keep polluting, and it worked: since its launch, the EU ETS has helped cut emissions from electricity, heat generation, and industry by 50%.

The proposal is essentially a mid-course correction. The invalidation of allowances since 2023 successfully cleared out the old surplus — the original problem the MSR was built to solve — but continuing to delete them risks draining the reserve's ability to respond to future shocks. The change is about preserving the MSR's flexibility going forward, not weakening climate ambition.

Impact on people living in the EU

The carbon price affects everyday life mainly through energy costs. When companies pay more to emit CO₂, those costs tend to flow through to electricity and heating bills.

Stopping the deletion of allowances aims to prevent a scenario after the mid-2030s where the market runs so short of allowances that prices spike sharply and unpredictably. This kind of instability would be bad for households and businesses alike, since it makes energy costs harder to plan for.

EU ETS revenues have already raised over €200 billion for Member States, which governments have reinvested in things like clean public transport, energy-efficient housing, and modern infrastructure. A stable, well-functioning carbon market helps ensure this revenue stream continues to fund these benefits.

A bigger change coming: ETS2

Worth knowing in this context: a separate but related system called ETS2 is being launched in 2027. Unlike the current ETS (which covers factories and power plants), ETS2 is designed to cover road transport, buildings, and smaller industries — and forecasts suggest it could significantly raise costs for fuel and home heating if carbon prices rise as projected. The proposal covered in the summary is about the existing system (ETS1), but both systems will shape energy costs for EU residents in the coming decade.