Market Stability Reserve (MSR)
European Union Carbon Market Glossary

 


 

 

Market Stability Reserve (MSR) has been designed and implemented within in the European Union Emissions Trading Scheme (EU ETS) as a response to the structural and long-lasting nature of the emissions' allowances surplus that emerged among the effects of the global financial crisis that started in 2009.

 

The intention was to increase shock resilience of the system by addressing the existing imbalance between the supply and demand of emission allowances in the EU ETS and making the auction supply of emission allowances more flexible.

 

The European Commission made a proposal to establish the EU ETS Market Stability Reserve in January 2014 and the legislative process has been finalised by the adoption of the Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC.

 

The Market Stability Reserve will start operating in January 2019.

 

Allowances will be added to the Market Stability Reserve, if the total number of allowances in circulation is higher than 833 million allowances. 900 million backloaded and a for the time being unknown amount of unallocated allowances will also be transferred into the Reserve.

 

Allowances will be released from the Market Stability Reserve, if the total number of allowances in circulation is lower than 400 million allowances or where measures are adopted under Article 29a of EU ETS Directive.

 

 

Report on the functioning of the European carbon market, accompanying the document Report from the Commission to the European Parliament and to the Council, Climate action progress report, including the report on the functioning of the European carbon market and the report on the review of Directive 2009/31/EC on the geological storage of carbon dioxide of 18 November 2015 (COM(2015) 576 final) accentuated (p. 20) that the key notion for the functioning of the market stability reserve is the total number of allowances in circulation (TNAC).

 

Market Stability Reserve absorbs or releases allowances, if the TNAC is outside of a predefined range in the following way:

 

- allowances are to be added to the Reserve, if the TNAC is above a predefined upper threshold (833 million allowances) and

 

- allowances are to be released from the Reserve, if the number is below a predefined lower threshold (below 400 million allowances or where measures are adopted under Article 29a of EU ETS Directive).

 

Allowances are added to the Reserve by auctioning less, and released from the Reserve by auctioning 100 million more allowances in the future.

 

900 million of backloaded allowances are required to be transferred into the MSR.

 

Decision 2015/1814, Recital 5

 

"... The reserve should function by triggering adjustments to the annual auction volumes. Where the conditions are met, beginning in 2019, an amount of allowances corresponding to 12 % of the number of allowances in circulation, as set out in the most recent publication of the total number of allowances in circulation by the Commission, should be deducted each year from the auction volumes and placed in the reserve. In any given year, a corresponding number of allowances should be released from the reserve to Member States in the same proportions and order as applied when placing them in the reserve, and should be added to auction volumes if the relevant total number of allowances in circulation is less than 400 million."

 

 

The Reserve is envisioned to also be replenished by the unallocated allowances, which are:

 

- allowances not allocated pursuant to Article 10a(7) of the EU ETS Directive, i.e. allowances remaining in the New Entrants' Reserve (NER), and


- allowances resulting from the application of Article 10a(19) and (20) of the EU ETS Directive, i.e. allowances foreseen for free allocation to installations but remaining unallocated because of (partial) cessation of operations or significant capacity reductions.

 

The total number of allowances in circulation relevant for the feeds and releases in the Market Stability Reserve is calculated by the following formula:

 

TNAC = Supply – (Demand (including cancelled allowances) + allowances in the MSR)

 

The supply of emission allowances consists of the allowances banked from phase 2, auctioned allowances, allowances allocated for free and the allowances in the New Entrants Reserve; while the demand is determined by the emissions of the installations and the cancelled allowances.

 

The starting point for determining the total number of allowances in circulation is the total number of allowances remaining after phase 2 of the EU ETS (2008-2012), which were not surrendered or cancelled. 

 

These allowances were replaced by phase 3 allowances at the end of the second trading period.

 

No other allowances from before the third trading phase contribute to the total number of allowances in circulation.

 

This 'banking total' thus represents the exact number of ETS allowances in circulation at the start of the third trading period of the EU ETS.

 

The banking total is 1 749 540 826 allowances (this number does not include early auctions of phase 3 allowances taking place in 2012 but does reflect the use of international credits before the start of phase 3).

The Market Stability Reserve becomes operational in 2019.

 

The European Commission is required to regularly publish in mid-May the total number of allowances in circulation for the preceding year, as of 2017.

 

The European Commission and the EU Member States without undue delay following the publication of the total number of allowances in circulation by the Commission by 15 May of a given year, must ensure the adjustment of auction calendars of the common auction platform and, where applicable, of opt-out auction platforms, to take account of the allowances placed in or to be released from the Reserve.

 

The adjustment of the volume of allowances to be auctioned will be spread over a period of 12 months following the change to the relevant auctioning calendar.

 

When it comes to concrete figures the aforementioned European Commission Report of 18 November 2015 evidences that the total supply in 2013 was about 2.18 billion allowances, and the total demand was about 1.96 billion allowances.

 

In 2014, both the total supply and demand decreased to around 1.87 billion allowances. The surplus therefore grew in 2013 by about 220 million allowances to over 2 billion allowances, while remaining stable in 2014.

 

Reduced supply and demand in the year 2014 reflected lower auctioning due to the backloading of allowances as well as a continued decline in emissions.

 

The European Commission for the first time published data on TNAC on 12 May 2017. 

 

The relevant Communication from the Commission, Publication of the total number of allowances in circulation for the purposes of the Market Stability Reserve under the EU Emissions Trading System established by Directive 2003/87/EC, C(2017) 3228 final) concerns the year 2016 and reserves that it is only "for information purposes", since the MSR will only start operating in 2019.

 

The said EC Communication of 12 May 2017 concludes that "in line with the agreed MSR rules, no reserve feed is triggered by the indicator published in 2017. The next publication will be made in May 2018. This will result in the determination of the first reserve feed for the period January to August 2019".

 

The detailed brakedown of positions representative for calculations of the total number of allowances in calculation, as aggregated by the European Commission in the said Communication of 12 May 2017, is laid down in the table below.

 

 

Supply

 

 

 

(a) Banking from phase 2

 

1 749 540 826  

 

 

(b) total number of allowances allocated for free between 1 January 2013 and 31 December 2016,

including from NER

 

3 600 800 263

 

(c) total number of allowances auctioned between 1 January 2013 and 31 December 2016,

including early auctions

2 774 262 500

 

(d) the number of allowances monetised by the European Investment Bank

for the purposes of the NER300 programme

 

 

300 000 000

 

(e) international credit entitlements exercised by installations in respect of emissions up to 31 December 2016

 

408 812 200

 

Sum (supply) 

 

8 833 415 789
   

 

Demand

 

 

 

(a) Tonnes of verified emissions from installations under the EU ETS between 1 January 2013

and 31 December 2016

 

7 139 317 195

 

(b) Allowances cancelled in accordance with Article 12(4) of Directive 2003/87/EC

by 31 December 2016

 

193 697

 

Sum (demand)

 

7 139 510 892

 

MSR holdings

 

 

 

Number of allowances in the reserve

 

0
   

 

Total number of allowances in circulation

 

 1693904897 

 

 

Another aspect is that the MSR assumptions will be subject to the judicial review soon on occasion of lawsuit filed by Poland at the European Court of Justice (ECJ) calling for an annulment of the decision to implement a MSR (see: Poland files lawsuit over ETS reserve).

 

In the light of Commission Staff Working Document, Stakeholder Feedback on the
Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments {COM(2015)337 final}, 14.1.2016, SWD(2015) 297 final the MSR appears to be interlinked to a certain extent with potential application in the EU ETS phase 4 (2020-2030) of the Cross-Sectoral Correction Factor (CSCF).

 

 

Documentation

 

 

Communication from the Commission, Publication of the total number of allowances in circulation for the purposes of the Market Stability Reserve under the EU Emissions Trading System established by Directive 2003/87/EC, 12.5.2017, C(2017) 3228 final

 

Commission publishes first surplus indicator for ETS Market Stability Reserve

 

 

Links

 

 

European Commission website on the Market Stability Reserve

 

 

 

 

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Last Updated on Thursday, 01 June 2017 22:39
 

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