EU ETS Market Stability Reserve (MSR)
- Category: 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.
|
|
16 May 2023
Communication from the Commission Publication of the total number of allowances in circulation in 2022 for the purposes of the Market Stability Reserve under the EU Emissions Trading System established by Directive 2003/87/EC 2023/C 172/01 published in the EU Official Journal
Decision (EU) 2023/852 of the European Parliament and of the Council of 19 April 2023 amending Decision (EU) 2015/1814 as regards the number of allowances to be placed in the market stability reserve for the Union greenhouse gas emission trading system until 2030 published In the EU Official Journal In Article 1(5), first subparagraph, of Decision (EU) 2015/1814, the last sentence is replaced by the following: ‘By way of derogation from the first and second sentences of this subparagraph, until 31 December 2030, the percentages and the 100 million allowances referred to in those sentences shall be doubled.’.
25 April 2023 ‘Fit for 55': Council adopts key pieces of legislation delivering on 2030 climate targets
28 March 2023 ‘Fit for 55’: Council adopts decision on market stability reserve, which prolongs beyond 2023 the increased annual intake rate of allowances (24%). In Article 1(5), first subparagraph, of Decision (EU) 2015/1814, the last sentence is replaced by the following: ‘By way of derogation from the first and second sentences of this subparagraph, until 31 December 2030, the percentages and the 100 million allowances referred to in those sentences shall be doubled.’
|
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. The legislative process was 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 start date for the Market Stability Reserve was January 2019.
The European Court of Justice (ECJ) in the judgment of 21 June 2018 referred to the above priorities with the following words:
“it follows from both the aim and the content of that decision that the MSR was designed as a tool seeking, in the first place, to remedy existing imbalances and, in the second place, to render the ETS more resistant to any future event on a sufficiently large scale as to disturb seriously the balance between the supply and demand of allowances” (Case C-5/16).
The ECJ added, moreover, that in essence, MSR was “a one-off intervention on the part of the legislature for the purpose of correcting a structural weakness of the ETS that could prevent the scheme from fulfilling its function of encouraging investment with a view to reducing carbon dioxide emissions in a cost-effective manner and being a driver of low-carbon innovation contributing to the fight against climate change". The ECJ underlined that “the price of allowances set by the market has no influence on the functioning of the MSR, which remains, by its nature, neutral in that respect”.
 Links
|
The effects of the MSR have been assessed by the European Commission in the 2020 Report of 14 October 2020 on the State of the Energy Union pursuant to Regulation (EU) 2018/1999 on Governance of the Energy Union and Climate Action (COM(2020) 950 final) as follows:
“The Market Stability Reserve, which started operating in January 2019, has substantially lowered the surplus of emission allowances. The carbon market surplus indicator was published in May 2020 for the fourth time and showed that the surplus has decreased to around 1.39 billion allowances. Based on the surplus and the revised EU ETS legislation for phase 4 of the EU ETS (2021-2030), the number of allowances auctioned was reduced by around 375 million in 2020. Auction volumes in 2021 will be reduced under the same legal basis. The Market Stability Reserve will be reviewed for the first time in 2021 within the wider context of EU ETS revision to achieve the proposed greenhouse gas emission reduction objective of at least 55%.”
Report on the functioning of the European carbon market of 18 November 2015 (COM(2015) 576 final) accentuated (p. 20) that the key notion for the functioning of the MSR 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 added to the Reserve, if the TNAC is above the threshold 833 million allowances and
- allowances are released from the Reserve, if the number is below the threshold 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 were 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.
Recital 2 of the Commission Regulation of 18.10.2017 amending Regulation (EU) No 1031/2010 to align the auctioning of allowances with Decision (EU) 2015/1814 and to list an auction platform to be appointed by the United Kingdom
Pursuant to Decision (EU) 2015/1814 of the European Parliament and of the Council, a market stability reserve (the 'reserve') is to be established in 2018 and is to start operating from 1 January 2019. In accordance with the pre-defined rules of this Decision volumes of allowances are to be placed in or released from the reserve adjusting the volumes of allowances to be auctioned over a period of 12 months beginning on 1 September of a given year. That rules for the functioning of the reserve are necessary to address situations where the total number of allowances in circulation for the previous year, published by the Commission on 15 May of the given year, is outside a predefined range. In the first year of the reserve's operation, the first adjustment to the auction volumes is to be made from 1 January to 1 September 2019.
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 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 |
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).
Key facts on MSR
the MSR was established in 2018 and started operating as from 1 January 2019
Volumes of allowances are to be placed in or released from the MSR adjusting the volumes of allowances to be auctioned over a period of 12 months beginning on 1 September of a given year
MSR’s purpose is to address situations where the total number of allowances in circulation for the previous year, published by the European Commission on 15 May of the given year, is outside a predefined range
In the first year of the MSR’s operation, the first adjustment to the auction volumes was made from 1 January to 1 September 2019
900 million allowances originally planned to be reintroduced in 2019 and 2020, were no longer auctioned but placed in the MSR
Allowances not allocated from the new entrant reserve, or those not allocated to installations because of their closure or partial cessation in accordance with Articles 10a(7), 10a(19) and 10a(20) of Directive 2003/87/EC, were placed in the MSR in 2020 rather than auctioned
The auction calendars of the common auction platform and, where applicable, of opt-out auction platforms are to be adjusted to take account of the volume of allowances placed in or to be released from the MSR
Implementation of the EU ETS reforms designed to tackle the surplus of allowances brought tangible results - some 30% fewer allowances were auctioned in 2019 compared to 2018, and the MSR surplus indicator led to a reduction in auction volumes by nearly 40% (or some 397 million allowances) in 2019 (2020 State of the EU ETS Report, ERCST, Wegener Center, BloombergNEF and Ecoact, 2020, Future role of the EU ETS in achieving Europe’s decarbonisation targets, EFET Discussion Paper, 27 May 2020).
MSR in the period 2020 - 2030
As the reserve functions by triggering adjustments to the annual auction volumes, in order to preserve a maximum degree of predictability, Decision (EU) 2015/1814 established clear rules for placing allowances in the reserve and releasing them from it. These rules were amended by Directive (EU) 2018/410 of the European Parliament and of the Council. Directive (EU) 2018/410 doubled until 2023 the intake rate (the percentage from the total number of allowances in circulation (TNAC) which is put in the reserve) from 12 % to 24 %, and the minimum amount to be placed in the reserve from 100 to 200 million allowances. According to Article 1(5) of the MSR Decision, the intake rate reverts back to 12 % after 2023. The invalidation rule is, moreover, set out in Article 1(5a) of the MSR Decision. It states that, as of 2023, allowances held in the reserve above the total number of allowances auctioned during the previous year will be invalidated.
Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814, Recitals 22, 23, Article 2
(22) Decision (EU) 2015/1814 establishes a market stability reserve for the EU ETS in order to make auction supply more flexible and make the system more resilient. That Decision also provides for allowances that are not allocated to new entrants by 2020 and not allocated because of cessations and partial cessations to be placed in the market stability reserve.
(23) A well-functioning, reformed EU ETS with an instrument to stabilise the market is a key means for the Union to reach its agreed target for 2030 and the commitments under the Paris Agreement. To address the current imbalance between supply and demand of allowances in the market, a market stability reserve will be established under Decision (EU) 2015/1814 in 2018 and become operational as of 2019. Considering the need to deliver a credible investment signal to reduce CO2 emissions in a cost-efficient manner and with a view to strengthening the EU ETS, Decision (EU) 2015/1814 should be amended so as to increase, until 31 December 2023, the percentage rates for determining the number of allowances to be placed each year in the reserve. Furthermore, as a long-term measure to improve the functioning of the EU ETS, unless otherwise decided in the first review in accordance with Article 3 of Decision (EU) 2015/1814, from 2023 allowances held in the reserve above the total number of allowances auctioned during the previous year should no longer be valid. Regular reviews of the functioning of the reserve should also consider whether to maintain those increased rates.
Article 2
Amendments to Decision (EU) 2015/1814
Article 1 of Decision (EU) 2015/1814 is amended as follows:
(1) In the first subparagraph of paragraph 5, the following sentence is added:
‘By way of derogation from the first and second sentences, until 31 December 2023, the percentages and the 100 million allowances referred to in those sentences shall be doubled.’.
(2) The following paragraph is inserted:
‘5a. Unless otherwise decided in the first review carried out in accordance with Article 3, from 2023 allowances held in the reserve above the total number of allowances auctioned during the previous year shall no longer be valid.’
Article 10a(7) of the Directive 2003/87/EC after amendment made by the Directive 2018/410
Allowances from the maximum amount referred to in paragraph 5 of this Article which were not allocated for free by 2020 shall be set aside for new entrants, together with 200 million allowances placed in the market stability reserve pursuant to Article 1(3) of Decision (EU) 2015/1814. Of the allowances set aside, up to 200 million shall be returned to the market stability reserve at the end of the period from 2021 to 2030 if not allocated for that period.
From 2021, allowances that pursuant to paragraphs 19 and 20 are not allocated to installations shall be added to the amount of allowances set aside in accordance with the first sentence of the first subparagraph of this paragraph.
Allocations shall be adjusted by the linear factor referred to in Article 9.
No free allocation shall be made in respect of any electricity production by new entrants.
Fit for 55
The EU ETS revision Inception Impact Assessment of 29 October 2020 (Ref. Ares(2020)6081850) considerd a broad variety of options regarding MSR, including on parameters for the operation of the MSR, including the predefined range triggering adjustments to annual auction volumes, as well as the percentage rate applied to the total number of allowances in circulation. These options became specific with the adoption by the European Commission on 14 July 2021 of the Fit for 55 package. European Commission legislative initiative of 14 July 2021 (COM(2021) 551 final) proposed to amend the Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme in Article 2 (the intentions are explained in Recitals 61 - 66). According to European Commission Proposal of 14 July 2021 for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757 (COM(2021) 551 final, 2021/0211 (COD), Annex 7: Legal review of the Market Stability Reserve, p. 8):
“The MSR was introduced as a permanent rules-based approach to addressing market imbalances. The MSR was introduced in 2015, amended in 2018 and became operational in 2019. The MSR was chosen over other policy options since it could both resolve the historical allowance surplus as well as automatically respond in the event of future supply-demand imbalances”.
Among modifications of the MSR envisioned by the Fit for 55 Package the European Commission included the following:
“As the MSR Decision currently stands, the 24 % intake rate of the MSR and the minimum amount to be placed in the reserve of 200 million allowances will expire in 2023. As from 2024, the intake rate would become 12 %. The impact assessment has shown that 12 % intake rate would not be enough to ensure that the objectives of the MSR in terms of reducing the surplus and ensuring market resilience would still be fulfilled. The aim of this proposal is to ensure that the current parameters of the MSR (intake rate of 24 % and minimum amount to be placed in the reserve of 200 million allowances) are maintained beyond 2023 and until the end of Phase IV of the EU ETS on 31 December 2030 to ensure market predictability. The MSR intake rate would revert to 12 % after 2030” (Proposal for a Decision of the European Parliament and of the Council amending Decision (EU) 2015/1814 as regards the amount of allowances to be placed in the market stability reserve for the Union greenhouse gas emission trading scheme until 2030 (COM(2021) 571 final, 2021/0202 (COD), Explanatory Memorandum, p. 8).
On 16 May 2023 the Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system has been published in the EU Official Journal.
The Directive increased the percentage rate for determining the number of allowances to be placed each year in the MSR. In addition, for lower levels of the TNAC, the intake will be equal to the difference between the TNAC and the threshold that determines the intake of allowances. This would prevent the considerable uncertainty in the auction volumes that results when the TNAC is close to the threshold, and at the same time ensure that the surplus reaches the volume bandwidth within which the carbon market is deemed to operate in a balanced manner.
Furthermore, in order to ensure that the level of allowances that remains in the market stability reserve after the invalidation is predictable, the invalidation of allowances in the reserve will no longer depend on the auction volumes of the previous year. Instead, the number of allowances in the reserve will be fixed at a level of 400 million allowances, which corresponds to the lower threshold for the value of the TNAC.
Further, the calculation of the TNAC will include aviation emissions and allowances issued in respect of aviation as of the year following the entry into force of the Directive.
The Decision (EU) 2015/1814 specifies now that only allowances issued and not put in the MSR are included in the supply of allowances. Moreover, the formula will no longer subtract the number of allowances in the MSR from the supply of allowances.
In order to mitigate the risk of supply and demand imbalances associated with the start of emissions trading for the buildings, road transport and additional sectors, as well as to render it more resistant to market shocks, the rule-based mechanism of the MSR will be applied to those sectors. For that reserve to be operational from the start of the system, it will be established with an initial endowment of 600 million allowances for emissions trading in the buildings, road transport and additional sectors. The initial lower and upper thresholds, which trigger the release or intake of allowances from the reserve, will be subject to a general review clause. Other elements such as the publication of the TNAC or the quantity of allowances released or placed in the reserve will follow the rules of the reserve for other sectors.
Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May 2023 amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading system, recitals 102 - 106
(102) Considering the need to deliver a stronger investment signal to reduce emissions in a cost-efficient manner and with a view to strengthening the EU ETS, Decision (EU) 2015/1814 should be amended so as to increase the percentage rate for determining the number of allowances to be placed each year in the market stability reserve. In addition, for lower levels of the TNAC, the intake should be equal to the difference between the TNAC and the threshold that determines the intake of allowances. This would prevent the considerable uncertainty in the auction volumes that results when the TNAC is close to the threshold, and at the same time ensure that the surplus reaches the volume bandwidth within which the carbon market is deemed to operate in a balanced manner.
(103) Furthermore, in order to ensure that the level of allowances that remains in the market stability reserve after the invalidation is predictable, the invalidation of allowances in the reserve should no longer depend on the auction volumes of the previous year. The number of allowances in the reserve should, therefore, be fixed at a level of 400 million allowances, which corresponds to the lower threshold for the value of the TNAC.
(104) The analysis of the impact assessment accompanying the proposal for this Directive has also shown that net demand from aviation should be included in the TNAC. In addition, since aviation allowances can be used in the same way as general allowances, including aviation in the reserve would make it a more accurate, and thus a better, tool to ensure the stability of the market. The calculation of the TNAC should include aviation emissions and allowances issued in respect of aviation as of the year following the entry into force of this Directive.
(105) To clarify the calculation of the TNAC, Decision (EU) 2015/1814 should specify that only allowances issued and not put in the market stability reserve are included in the supply of allowances. Moreover, the formula should no longer subtract the number of allowances in the market stability reserve from the supply of allowances. This change would have no material impact on the result of the calculation of the TNAC, including on the past calculations of the TNAC or on the reserve.
(106) In order to mitigate the risk of supply and demand imbalances associated with the start of emissions trading for the buildings, road transport and additional sectors, as well as to render it more resistant to market shocks, the rule-based mechanism of the market stability reserve should be applied to those sectors. For that reserve to be operational from the start of the system, it should be established with an initial endowment of 600 million allowances for emissions trading in the buildings, road transport and additional sectors. The initial lower and upper thresholds, which trigger the release or intake of allowances from the reserve, should be subject to a general review clause. Other elements such as the publication of the TNAC or the quantity of allowances released or placed in the reserve should follow the rules of the reserve for other sectors.