The Market stability reserve (MSR) is a central instrument in the European Emissions trading (EU ETS). It was introduced in 2019 to reduce surpluses of emission allowances on the market, increase price stability and react flexibly to changes in supply and demand. As an important component of the CO₂ pricing the MSR only has a regulatory effect in the overall EU ETS system and is a dynamic corrective instrument.
Classification of the MSR in the overall EU emissions trading system
The market stability reserve operates within the regulatory emissions budget ("cap") and thus supplements the EU ETS quantity control system. It does not influence the total quantity of permitted emissions, but affects the availability of allowances on the market over time. In combination with other reform elements such as the linear reduction factor (LRF), the Innovation Fund or the planned social climate fund, an increasingly integrated system of instruments is being created. It promotes both market stability and transformation.
Market stability reserve as an instrument of climate policy
The MSR is therefore a central pillar of emissions trading and European climate policy. It helps to reduce surplus supply of emission allowances, which can accumulate as a result of economic downturns or political decisions, among other things. By stabilizing the certificate market, the MSR supports the pricing of CO₂ emissions. At the same time, it creates more predictable framework conditions for investments in low-emission technologies. This increases the effectiveness of emissions trading as a Market-based climate protection instrument and strengthens its steering effect with regard to the long-term reduction of greenhouse gas emissions.
Objectives of the market stability reserve in emissions trading
The main objective of the Market Stability Reserve is to make the European emissions trading system more resilient and effective. It does this by Structural imbalances between supply and demand for emission certificates equalizes. In the first few years after the introduction of emissions trading, there was a large surplus of emission allowances. This surplus arose because industry emitted less CO₂ than expected and at the same time many certificates from previous years were saved up. Overall, CO₂ certificate prices fell to such an extent that the incentive for companies to invest in climate-friendly technologies fell sharply. The Control effect of emissions trading was thus completely undermined.
This is precisely where the MSR comes in, with the aim of better matching the supply of emission allowances to actual demand. Through the Automatic removal of surplus certificates from the market, the Supply shortagewhich should help to stabilize the CO₂ price. This creates incentives to avoid emissions and invest in low-greenhouse gas technologies. In addition, the MSR is intended to strengthen the functionality and predictability of the emissions trading system in the long term. The automatic volume adjustment reduces the susceptibility to Short-term market fluctuations and political intervention. This increases the reliability of emissions trading and supports the achievement of European climate policy targets.
MSR mechanism in the EU ETS
The market stability reserve mechanism is based on the annual determination of the total number of emission allowances in circulation (Total Number of Allowances in Circulation, TNAC). If the TNAC exceeds a threshold of 833 million allowances, a new percentage of the surplus is transferred to the MSR each year. This rate is reduced annually. For example, if the TNAC falls below 400 million, 100 million allowances are transferred from the MSR reserve returned to the market. In addition, since 2023, allowances that exceed the previous year's auction volume in the MSR will be permanently canceled. This serves to further tighten and stabilize the certificate market.
Criticism and challenges of MSR in emissions trading
The market stability reserve has also been criticized in the professional debate. One key point concerns the Delayed reaction of the MSR. As it is based on historical data, the adjustment of the allowance supply does not take place immediately, but with a time lag. This can lead to additional allowances being released unintentionally if climate protection measures are announced early. In addition, the design of the MSR Structural weaknesses In particular, the calculation of the total number of allowances in circulation (TNAC) is considered inadequate, as it does not fully take into account key market dynamics such as the behavior of market participants or regulatory uncertainties. Against this backdrop, the Need for reform seen. Among other things, adjustments to the Withdrawal rate ("intake rate") and the Threshold valuesto improve the control and stabilization function of the MSR.
Current development of the market stability reserve
The permanent deletion of allowances that exceed the previous year's auction volume in the MSR was already introduced with the legislative package "Fit for 55" introduced. Experts are currently discussing further adjustments that will be necessary if European emissions trading is to be expanded to Other sectors will be expanded. Among other things, the focus will be on a review of the threshold values for the TNAC calculation and a possible realignment of the withdrawal rate. The future design of the MSR will therefore play a key role in determining whether the emissions trading system can reliably develop its steering effect even under changed framework conditions.
Conclusion and outlook
The market stability reserve has proven to be an effective instrument for stabilizing the certificate market. It helps to reduce surpluses and keep CO₂ prices at an effective level. Nevertheless, there are still weaknesses in the design, particularly in the calculation of scarcity and the speed of response. In view of the increasing climate targets and the expansion of emissions trading to other sectors, further development of the MSR will be necessary. Adjustments to threshold values and withdrawal rates are already being discussed. Further reviews are also due at European level in the coming years. The design of the MSR will play a role in determining whether emissions trading can reliably develop its control effect in the long term.