Balancing the carbon markets: a key step in the reform of the EU ETS

As the EU Emissions Trading System (EU ETS) approaches its 2026 reform, attention is turning to how the market is managed. The current Market Stability Reserve (MSR) – a quantity-based mechanism that adjusts supply in response to surplus allowances – has been instrumental in restoring market balance and confidence (Sitarz et al., 2024). Yet, as the EU ETS enters a phase of structural scarcity, questions are emerging about its responsiveness and predictability. 

To explore alternative approaches, the FSR hosted an online debate on Balancing carbon markets: design options and trade-offs in price-based supply adjustments.

Watch the recording:

Exploring price-based alternatives 

The discussion built on the observation that while the MSR has successfully addressed the historical surplus, it relies on annual data and thus responds with a lag. As allowance supply tightens, each intervention carries greater impact, raising the need for mechanisms that can react more swiftly to changing market conditions (Pahle et al., 2025).  

Price-based supply adjustments – already in use in systems such as the Regional Greenhouse Gas Initiative (RGGI) and the California-Québec market – offer an alternative by linking intervention directly to the carbon price itself. When prices move outside a predefined range, supply adjusts automatically, allowing the system to respond dynamically while maintaining market fundamentals. Low price triggers, in particular, play a key role in de-risking and incentivising low-carbon investment (Cason et al., 2023; Borghesi et al., 2025). 

Design challenges, trade-offs, and lessons from international experience 

Panellists from academia, policy, and market practice examined the key design dimensions of such mechanisms (the featured presentations can be found here).  

Dallas Burtraw (Resources For the Future) provided insights from North American systems, explaining the different functioning of price-responsive allowance supply in RGGI and the Western Climate Initiative, notably highlighting that RGGI applies an instantaneous adjustment.  

Jean-Yves Benoit (Quebec ministry of the environment) detailed the California-Québec design, which relies on an auction floor price mechanism that removes allowances when prices fall below a threshold, offering a historical view of its functioning and impact.  

From a European perspective, Florent Le Strat (Electricité de France) reflected on the performance of the MSR and made the case for a price-based tool in the EU ETS, noting its potential to improve price predictability for investors and to support long-term decarbonisation objectives.  

Haege Fjelheim (Veyt) discussed the MSR and the ETS 2, with its €45 safety valve, noting that as the system moves into scarcity, the release function of the MSR may become more important than its intake function. She also highlighted the importance of considering the interactions between the MSR and other policies, such as REPowerEU. 

Looking ahead 

The debate underscored that, as the EU ETS matures, the focus is shifting from establishing market stability to refining its long-term responsiveness.  

Price-based mechanisms could offer a valuable complement to quantity-based tools, aligning market dynamics more closely with decarbonisation goals while preserving the system’s integrity. Experience from international systems highlights that transparency and rule-based governance are essential to ensuring credibility and preventing policy-induced volatility.  

To continue informing this discussion, FSR Climate will further explore the design and governance of price-based market stability mechanisms in carbon markets through its ongoing research.