On Tuesday, the European Parliament endorsed changes made last week by its Environment Committee (ENVI) to the European Commission’s proposal concerning the Market Stability Reserve (MSR) under the EU Emissions Trading System (EU ETS).

Under current rules, carbon allowances held in the MSR above the 400-million threshold are permanently cancelled, meaning they cannot be released back onto the EU carbon market in the event of a supply shortage.

Faced with growing concerns over the impact of high carbon prices on European industry and its competitiveness, the EU executive proposed on 1 April to amend the MSR rules. The Commission proposed that “in order to increase long-term market predictability, allowances held in the reserve above 400 million allowances should no longer be considered invalid.”

The change would preserve a larger pool of allowances that could potentially be released back onto the market, helping to mitigate supply shortages and sharp price increases while addressing industry concerns over the cost burden of the EU ETS.

However, on 10 September, the ENVI Committee adopted its final report, proposing instead to raise the threshold for the invalidation of allowances from 400 million to 650 million. Unlike the Commission’s approach, Parliament would therefore retain the invalidation mechanism, but allow a larger volume of allowances to remain in the reserve. Under its proposal, allowances above the new 650-million threshold would be permanently invalidated from 1 March 2027.

The changes were endorsed by Parliament in Tuesday’s plenary vote, with 367 votes in favour and 240 against.

“Raising the invalidation threshold and setting a clear date for entry into force gives the MSR the necessary flexibility while safeguarding the EU ETS. The agreement supported by a broad majority sets the scene for the ETS revision, proving that ambitious climate and industrial policies can go hand in hand,” said rapporteur Pierfrancesco Maran (S&D, Italy).

In parallel, EU member states are negotiating within the Council to agree on a common position on the MSR proposal, which would provide the Council’s mandate for subsequent trilogue negotiations with the European Parliament and the Commission.

In a last-minute push during the Council talks, Germany and a group of like-minded member states proposed changes aimed at ensuring that the bloc can “effectively and quickly” address a potential surplus of allowances that could weigh on carbon prices. According to a document circulated to member states on Tuesday and seen by Bloomberg, the amendments include stronger parameters for withdrawing excess allowances from the market.

“The division underscores the challenge for the EU to reconcile its climate-neutrality goal with the need to avert placing an excessive burden on industry during the energy transition,” Bloomberg reported. Those differences could prolong negotiations over the reserve beyond the timetable envisaged by Ireland, which currently holds the rotating Council presidency and had been aiming to secure an agreement among member states on Wednesday.