Complementing the MSR by a mechanism preventing excessive carbon price volatility

Onn 22 September 2026, the EUI hosted a Climate Workshop on “Reforming the Market Stability Reserve of the EU ETS”.

The EU Emissions Trading System is currently undergoing its fifth review. The Commission’s proposal seeks to reform the system to deliver further emission reductions and incentivise decarbonisation investments under a tightening cap. As part of the ETS reform, the Commission has also proposed changes to the functioning of the Market Stability Reserve (MSR). It seeks to end the invalidation of allowances held in the MSR, while recalibrating the MSR’s key intervention parameters – the intake rate, the buffers and the thresholds (discussed in more detail in a previous post).

The Council and the European Parliament have already developed their positions on the invalidation mechanism. Member States want to only temporarily suspend it, while increasing the number of allowances held in the MSR. The European Parliament prefers to retain the invalidation provision, while also raising the threshold above which allowances in the reserve are invalidated. Both institutions are still developing their views on the other elements of the MSR reform.

These policy developments, together with the publication of the FSR Technical Report, “Managing market tightness in the EU ETS on the path to net-zero: design options and trade-offs in price-based supply adjustments”, provided the background for discussions on the post-2030 optimal design of the MSR.

The session, chaired by Jos Delbeke and Simone Borghesi, opened with presentations by Julia Michalak and Marie Missao Raude on the Commission’s MSR reform proposal and the FSR Technical Report. Participants agreed that in EU ETS Phase 5 (2031-2040), characterised by greater allowance scarcity and reduced liquidity, the MSR can no longer focus on absorbing oversupply, as it did in the past, when the instrument’s main objective was to address oversupply and restore market scarcity. The discussants reflected on how the ongoing policy developments could draw on the design archetypes developed in the FSR Technical Report and their performance under scarcity, including:

• A standard price corridor, with a ceiling and a floor price, with TNAC replaced by price values as MSR intake and release trigger.
• A gradual stabiliser, with multiple tiers and allowance price containment reserve, similar to the one in the California-Quebec system.
• A high-frequency stabiliser, that would be volatility-based, triggered by carbon price dynamics; a design not yet used in any existing cap-and-trade system.
• A crisis containment mechanism, combining the issuance of additional allowances above the cap with an auction reserve price (no auction clearance if the price remains below the threshold), similar to California’s design.

The report’s assessment shows that no single archetype performs best under deep scarcity: mechanisms responsive enough to contain extreme prices cannot simultaneously guarantee a fixed emissions cap, while those that preserve environmental integrity face capacity constraints as scarcity deepens. This points toward hybrid configurations as the most promising direction.

The discussion focused on the characteristics of the presented options, including hybrid approaches and considering the MSR depletion rate, the stringency of climate targets, and regulatory and political feasibility. New ideas also emerged, including the question of whether the MSR is needed at all in a market characterised by structural scarcity of allowances. It was also proposed to consider another market indicator to serve as the MSR trigger, given that the TNAC provides only an end-of-year assessment of the market supply-demand balance, without reflecting carbon price drivers and market developments.

Another relevant point that emerged in the discussion was the lack of proposed changes to Article 29a, which provides the MSR release rule in cases of excessive upward carbon price volatility. Given that the Article 29a intervention thresholds are set at levels considered unrealistically high, the question was raised whether a crisis-management mechanism, allowing a rapid MSR response to changing market developments, is needed. Participants agreed that any such mechanism should be rule-based, as alternative designs would be very challenging to agree on politically. It was also argued that greater transparency is needed regarding the basis for the values that trigger MSR interventions.

It was concluded that a model applicable in practice may require a combination of features from different archetypes. Participants agreed that the MSR reform and potential changes to Article 29a should be considered together: as the emissions cap declines, the role of the MSR should shift from absorbing allowances, triggered primarily by the relationship between the TNAC and the buffer thresholds, towards releasing allowances in response to sharp price increases under a reformed Article 29a. This approach is closest to the high-frequency stabiliser archetype outlined in the FSR Technical Report.