The market stability reserve
The Market Stability Reserve (MSR) is a rule-based mechanism that enables the delivery of allowances to respond to changes in demand, thus maintaining the balance of the EU ETS.
The market stability reserve aims to provide a long-term solution to the current imbalance in the market as a result of a growing surplus of allowances that have accumulated since 2009. The mechanism should also be able to cope with any future imbalances.
By controlling the number of allowances available at auctions under the MSR rules, a flexible supply of allowances is achieved. The market stability reserve is activated in January 2019 when units affected by the backloading decision are transferred to the reserve.
The function is designed as an objective and rule based mechanism with automatic adjustment of auction volumes according to predefined conditions:
- Allowances corresponding to 12% of the number of allowances on the market are withheld from auctions and thereby the market. They are added to the reserve when the surplus in the market exceeds 833 million allowances.
- Additions up to 100 million allowances are injected into the market through increased auctioning. They are taken from the reserve if the surplus on the market decreases to less than 400 million allowances.
- If the surplus of allowances on the market does not decrease to less than 400 million but if the price of an emission allowance for more than six consecutive months is three times higher than the average price over the last two years, up to 100 million allowances are injected into the market through an increase of auction volumes with units from the reserve.
The market stability reserve will maintain the surplus of allowances (the number of allowances available on the market) at certain levels. The total number of allowances in the ETS is determined for each year as the difference between the number of allowances issued and the number used for completion. International credits and allowances already placed in the reserve are also taken into account.
By using the total number of allowances on the market as an indicator, imbalances resulting from unexpected market impact and affecting demand can be handled. This allows the EU ETS to maintain the objective of reducing emissions in a cost-effective and economically efficient manner, even if unexpected circumstances should arise.