Policy Paper 6: EU ETS reform – Assessing the Market Stability Reserve
Lars Zetterberg, Daniel Engström Stenson, Susanna Roth
In light of the current state of European emissions trading, with a surplus of more than 2 billion allowance and a low price (around €6) , the European Commission has proposed using a Market Stability Reserve (MSR) to restore the function of the European Emissions Trading Scheme (EU ETS). The objective of the MSR is to regulate the surplus of allowances so that it falls within an ‘optimal’ band. This is achieved by adjusting annual auction volumes in a rule-based manner. The European Commission’s proposal builds on two triggering thresholds, which are based on the quantity of allowances in circulation. The first threshold is triggered when the quantity of allowances is higher than 833 million tons, then 12% of the allowances are removed from auctions and placed in the MSR. If the quantity of allowances is less than 400 million tons, 100 million tons are taken from the MSR and added to the auction of that current year.
The objective of this policy paper is to analyze how the MSR affects the function and efficiency of the EU ETS. The paper builds on previous analyses from other observers, as well as additional analysis made by our team.
We conclude that making a significant volume of planned allowance allocations unavailable for buyers is generally positive. Yet our preferred choice, and in our view the most effective way to reset the market, would be to permanently remove a number of allowances from the market.
If a temporary removal of allowances is preferred, the proposed MSR has some merits. It is likely to reduce the rapidly growing surplus, and it is designed in a way that keeps the removed allowances out of the market for enough time to have a real impact on price. Yet for a number of reasons, we are less certain that the MSR as proposed by the Commission constitute the best option for strengthening the functioning of the EU ETS because:
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