The measure announced Wednesday is a modest prelude to potentially much more sweeping changes to the ETS later this year. It will amend an existing mechanism called the Market Stability Reserve, which puts a cap on the number of permits in circulation at any one time. It acts much the same way as oil reserves, which can be used to regulate the price of a barrel of crude.
Introduced in 2015, the reserve’s original purpose was to boost the carbon price by removing permits from the market once the number in circulation reaches a certain level. That was because in the early years of the ETS, the carbon price was stubbornly low due to a surplus of permits in the market, meaning it wasn’t acting as a sufficient price signal for businesses to reduce emissions.
The Market Stability Reserve is allowed to accumulate up to 400 million permits, and any permits over that number are retired under the so-called invalidation clause. When the number of permits in circulation falls below a certain level, reserve permits are reintroduced.
Wednesday’s measure has the opposite of the original goal: It aims to stop the price rising too high. It proposes removing the invalidation clause, meaning an unlimited number of permits would be able to accumulate in the Market Stability Reserve, giving the EU “more firepower” as Commission chief Ursula von der Leyen put it weeks ago when she previewed the changes.
The Commission’s thinking is that by allowing more spare permits to flow back into the system when they fall below a certain level will prevent the carbon price from staying elevated for too long — a welcome change for Italy, Poland, Austria, and other allies who led calls for reexamining the ETS in light of the energy crisis wrought by the U.S.-Israeli war in Iran.
At Wednesday’s midday briefing, Commission spokesperson Eva Hrncirova said the proposal is part of a broader effort to stabilize prices, noting that boosting the reserve’s capacity “should bring more stability and reduce price volatility.”