The Council and the European Parliament reached a provisional agreement this week to revise the rules governing the invalidation of emission allowances held in the Market Stability Reserve (MSR) under the EU Emissions Trading System (EU ETS).

According to the Council’s press release, the two institutions reached what they described as a “balanced compromise”, agreeing to retain the invalidation mechanism while raising the threshold to 700 million allowances, with the revised threshold taking effect immediately upon formal adoption.

Under the current EU ETS framework, allowances held in the MSR exceeding the 400 million threshold are automatically invalidated, meaning they are permanently cancelled rather than retained in the reserve. The invalidation mechanism has been in place since 2023, with approximately 3.2 billion allowances cancelled to date.

The European Commission’s earlier proposal to reform the MSR sought to abolish the invalidation mechanism altogether, allowing allowances to remain in the reserve and serve as a liquidity buffer for the EU carbon market.

Darragh O’Brien, Ireland’s Minister for Climate, Energy and the Environment, representing the Irish Presidency of the Council, welcomed the agreement, stating: “In response to European leaders’ call for accelerated action, we reached a balanced outcome on the market stability reserve that provides European industry with immediate flexibility, while ensuring price stability and protecting the integrity of the EU carbon market.”

The higher threshold would allow more allowances to remain in the reserve rather than being permanently cancelled. However, these additional allowances would not immediately return to the market and could only be released if the conditions governing the MSR’s release mechanism are met.