Yesterday, EU member states, through their ambassadors in Coreper, agreed on the Council’s position on a targeted reform of the Market Stability Reserve (MSR) for the existing EU ETS. Talks with the European Parliament can therefore begin, with the aim of reaching a final agreement by the end of 2026.

Under the negotiating position adopted on Wednesday, EU member states want to suspend the automatic invalidation of surplus EU ETS allowances held in the MSR above the current 400 million threshold until the end of 2030. From 1 January 2031, the invalidation mechanism would resume, but the threshold would be raised to 800 million allowances.

The Council’s approach differs from both the European Commission’s original proposal and the European Parliament’s position, setting the stage for further discussions over the future design of the invalidation mechanism.

Under the current EU ETS framework, allowances held in the MSR above the 400 million threshold are invalidated, meaning they permanently lose their validity rather than remaining available in the reserve. The invalidation mechanism has applied since 2023, and around 3.2 billion allowances have been cancelled to date.

The scale of these cancellations provides important context for the European Commission’s earlier proposal to reform the MSR. Instead of continuing to automatically invalidate allowances exceeding the reserve threshold, the Commission proposed removing the invalidation rule and retaining the allowances in the MSR, where they could serve as a liquidity buffer for the EU carbon market.

The proposed change would not result in these allowances being immediately returned to the market. Rather, they would remain in the reserve and could potentially be released in the future if market conditions trigger the MSR’s release mechanism. 

The European Parliament, meanwhile, favours retaining the invalidation mechanism but raising the threshold from 400 million to 650 million allowances from 1 February 2027. According to Parliament’s official position, “This would maintain a sufficiently large buffer to absorb supply and demand imbalances, while avoiding the possible excessive build-up of allowances in the reserve that could occur under the Commission’s proposal”.

With the Council and Parliament now having established their respective positions, interinstitutional talks can begin on the final text. However, significant differences remain over the future of the invalidation mechanism, pointing to potentially challenging negotiations in the months ahead. In line with the ‘One Europe, One Market’ roadmap, the Council is aiming to reach a final agreement by the end of 2026.