16. What is the market stability reserve?

What is the definition of the Market Stability Reserve?

The Market Stability Reserve (MSR) is a key part of the European Union Emissions Trading System (EU ETS). It helps balance the supply and demand of emission allowances to stabilize carbon prices and support the EU's climate goals.

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How does the Market Stability Reserve work?

Here's how the MSR works:

• Absorbing Surplus: If there are too many emission allowances, the MSR removes some from the market to prevent prices from dropping too low.
• Releasing Allowances: If allowances are too few, the MSR releases some back into the market to ensure enough supply.

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What is the goal of the Market Stability Reserve?

The goal is to keep the carbon market stable, avoid extreme price changes, and encourage emission reductions.

It has actually been effective - there was a structural oversupply in the market during the first years of its operation. This, combined with the financial prices has brought EUA prices very low for a long time. They have been under €30 for the whole period before the MSR was introduced. Then, they rose to as high as €97.59 in 2022.

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What are the MSR adjustment thresholds?

• Above 1096 Mt: The MSR withholds 24% of the surplus.
• Between 1096 Mt and 833 Mt: The MSR takes in the surplus minus 833 Mt. For example, if the surplus is 950 Mt, 117 Mt is moved to the MSR.
• Between 833 Mt and 400 Mt: The MSR does nothing.
• Below 400 Mt: The MSR releases 100 Mt per year into the market.

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