Latvian Presidency reaches a deal on Market Stability Reserve

The agreement will have to be endorsed by the Committee of Permanent Representatives on the basis of a consolidated text which will then be formally adopted by the Council at one of its forthcoming meetings.

The decision, which introduces measures to tackle structural supply-demand imbalances in the EU Emissions Trading System (EU ETS), is an important step in the fight against climate change and paves the way for the wider review of the EU ETS.

Aim of the proposal

Since 2009, partly due the economic crisis, a surplus of emission allowances has accumulated in the system - reaching approximately 2,1 billion allowances in 2013 - and this has significantly weakened the carbon price. Furthermore, the structural surplus is expected to remain in the system up to and beyond 2020. 

To correct the current market imbalance and to avoid similar problems in the future, the decision proposes to automatically withdraw from the market a percentage of EU ETS allowances that would be placed into a reserve if the total number of allowances exceeded a certain threshold. In the opposite case, allowances would be returned to the market.

Main outcomes of the negotiation

• starting date (1 January 2019)
• "backloaded" allowances (the 900 million allowances whose auctioning was postposed from the years 2014-2016 until 2019-2020) will be placed on the market reserve
• unallocated allowances transferred directly to the market reserve in 2020 and future usage to be considered under wider ETS review
• EU ETS and MSR review to take into account carbon leakage and competitiveness aspects, as well employment and GDP related issues.

What is the EU ETS?

The aim of the EU ETS is to reduce greenhouse gas emissions in an economically efficient manner.

The EU ETS is based on the so-called "cap-and-trade" approach: each year the EU establishes a limit (cap) for overall emissions from power plants, energy-intensive industry and commercial airlines covered by the system. 

Within this limit, companies can buy and sell emission allowances as needed. Each allowance gives the holder the right to emit one tonne of CO2, the main greenhouse gas, or the equivalent amount of another greenhouse gas.

From 2013 to 2020, the cap is reduced annually by 1.74% and from 2021 onwards by 2.2%, reflecting the EU's new 2030 target for greenhouse gas emission reductions.

Altogether the EU ETS covers around 45% of total greenhouse gas emissions from the 28 EU countries.