The EC has proposed a reform in the form of a Market Stability Reserve (MSR) to be introduced as of 2021. The MSR aims to address the problem of a persistently low EUA price by adjusting the amount of allowances circulating in the system, according to pre-determined thresholds, in order to protect the EU ETS from economic fluctuations and reduce the surplus of allowances that has built up over the past years.

In its brief entitled Comprehensive ETS Reform Bellona underlines a number of design weaknesses of the envisaged MSR and expresses strong doubts over the mechanism’s ability to stabilise the EUAs price. Bellona questions the very central assumption of the MSR – that a temporary reduction of the allowance surplus would raise the EUA price, due to it being in contradiction to standard economic theory and the concept of inter-temporal price smoothing. In other words, because in the long-term, temporarily removed allowances will be returned to market auctions, the overall impact on the EUA price would be minor and so will the impact of investment in low-carbon technologies.

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Source: Bellona Europe, 20 Jan 2015