On September 18, 2015, the European Council adopted a decision
related to the creation of a market stability reserve
("MSR") for the European greenhouse gas emission trading system
("EU ETS"). This decision was initially proposed by the
European Commission in January 2014 and approved by the European
Parliament in July 2015.
The EU ETS was established by Directive 2003/87/EC of October 13,
2003 and launched in 2005. Based on this scheme, an EU-wide cap is fixed for the total emissions produced
by European industries covered by the scheme.
Concerned industrials are required to obtain emission allowances necessary to cover emissions from
their activities, either for free or through an auctioning system, and can trade allowances on
the market. The European strategy on greenhouse gas emissions was recently revised
in October 2014 and set a new target for 2030 of lowering
greenhouse gas emissions by 40 percent compared to 1990.
The post-2008 economic crisis led to a decrease in the need for
emission allowances, and a large surplus of emission allowances
emerged in the past few years, which led to a fall in prices for
the allowances. As a consequence, low-carbon investments have
decreased: the less expensive the allowances, the less attractive
the investments to reduce greenhouse gas emissions. A quick fix,
namely the "back-loading" of auction volumes through
which the EC postponed the auction of 900 million allowances until
2019–2020 (Regulation 76/2014), was enforced on February 27,
2014, but structural reforms were still needed.
In this context, EU institutions adopted the MSR. It aims at
addressing these supply–demand imbalances that would
otherwise compromise the targets of the 2030 climate and energy
policy framework. Such new MSR will come into force on January 1,
2019 and will bring substantial changes to the EU ETS. First, all
the allowances that went unattributed between 2013 and 2020 will be
placed in the MSR in 2020, as well as the 900 million allowances
resulting from the "back-loading." Secondly, every year,
12 percent of the total number of allowances in circulation
(whenever more than 100 million), as published by the Commission,
will be deducted from trading volumes and placed in the MSR for a
year.
Alternatively, whenever the total number of allowances in
circulation is less than 400 million, 100 million allowances will
be released from the reserve and added to the auctioning volumes.
Finally, the European Commission will monitor the functioning of
the MSR in its report, taking into account issues such as
competitiveness or employment.
The MSR revision of the EU ETS scheme should leave industrials with
a number of emission allowances in circulation easier to manage,
but should also lead to higher prices. It paves the way for a
broader revision of the European carbon market, which may include the creation
of a fund to promote low-carbon industrial innovation projects,
based on the auction of 50 million allowances before 2021.
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