| EU ETS:
Is the Market Stability Reserve the right tool for remedying
By Andreas Arvanitakis
Climate Policy Perspectives 12
The Emissions Trading Scheme (ETS)
is the central plank of EU climate policy. It provides a price signal by
placing a cap on emissions, and is neutral as to technology choices. While the
cap will be met in 2020, the price signal is now too low, driving down the
carbon market price and investment in deploying low-carbon
The low price is a function of the economic climate since
2009. Demand for allowances has proven highly responsive to GDP, but the supply
is fixed for each trading phase. The EU ETS is now oversupplied by 2 billion
Of the options the EC put to public consultation in 2012, it
has now chosen to propose a Market Stability Reserve (MSR), to start in 2021.
Its function is to withhold allowances from being auctioned when the market
surplus is above 833 MtCO2, and re-inject them when the surplus is below 400
MtCO2. It is also triggered by rapid and extreme price rises.
The MSR is
not intended to change the fundamental balance of the market, but to use the
current oversupply to protect against high volatility as the market moves from
surplus to shortfall. It is based on transparent rules and is to operate
impartially. It is also compatible with the future decision on a 2030
The MSR might prove more effective in smoothing the transition
from surplus to shortfall if it could take effect earlier and more decisively -
for example, withdrawing all backloaded allowances before 2019.
general efficacy could be improved if the triggers were based on more recent
data than the two years currently proposed.