By Grischa Perino, Michael Pahle, Fabian Pause, Simon Quemin, Hannah Scheuing and Maximilian Willner
Reforms in 2015 and 2018 fundamentally changed the design of the EU Emissions Trading System (ETS). The Market Stability Reserve (MSR) was created to increase resiliency to demand shocks, deliver investment signals and raise synergies with other climate and energy policies by adjusting both medium-term allowance supply and the long-run cap based on market outcomes. Crucially, the 2018 reform renewed confidence in the EU ETS, permanently removing historic surplus, curbing emissions substantially and raising prices to the range of 20–40 EUR/ton.
After the achievement of some key objectives, policy priorities are likely to change towards sustaining market stability, inducing robust investment incentives, ensuring synergies with overlapping policies and reducing regulatory uncertainty. However, the current MSR design could jeopardize the attainment of these objectives, and thereby undermine the EU ETS and its functioning. With the EU poised to step up its climate targets, it is essential that the EU ETS be equipped to take up the challenges ahead. In this Policy Brief, we identify the risks that arise from the current MSR design and propose a feasible way to address them in the upcoming review of the EU ETS.