The European Commission proposes targeted amendments to the Market Stability Reserve (MSR) for the EU Emissions Trading System covering buildings, road transport and additional sectors (ETS2). The plan seeks to ensure an orderly launch of the system, mitigate price volatility, and reinforce predictability during its first operational years.
The new proposal responds to several developments since the ETS2 entered EU law in 2023: the gathering of early market data, postponed launch of ETS2 to 2028 agreed by the Council and Parliament in November 2025, uncertainties around initial allowance prices, and the need to guarantee investor confidence before the first auctions begin in 2026.
Without altering the structure of the MSR, the Commission introduces three focused adjustments: preserving the long-term validity of initial allowances, making the release of allowances more gradual and reactive, and strengthening the price-control mechanism for early years. These changes are intended to improve liquidity, reduce abrupt price movements and help Member States prepare support and compensation measures for affected consumers.
Understanding the Core Elements
Why the Amendment Is Needed
The ETS2 carbon market is designed to drive decarbonisation in buildings and road transport, two sectors that historically have been difficult to regulate due to fragmented national policies and volatile demand. Since monitoring and reporting began, several challenges emerged:
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Large uncertainty in early price projections, linked to diverging assumptions about Member States’ complementary climate policies.
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Existing rules would invalidate all unspent MSR allowances after 2030, creating long-term uncertainty for market participants.
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A “threshold effect” in the original release mechanism risked abrupt injections of allowances, potentially triggering unwanted price swings.
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Member States expressed concern about the system’s readiness ahead of the newly anticipated start in 2028.
The Commission concludes that the MSR needs technical refinement to enhance stability, particularly during the early years when confidence is most fragile.
What the Proposal Changes
The document outlines three targeted modifications to Decision (EU) 2015/1814:
1. Removal of the 2030 invalidation rule
The initial 600 million ETS2 allowances placed in the MSR would no longer expire at the end of 2030. This aims to strengthen long-term predictability and assure market actors that the system will not face an arbitrary supply contraction.
2. A more gradual allowance release mechanism
When the Total Number of Allowances in Circulation (TNAC) falls between 210 and 260 million, a variable quantity will now be released:
100 million minus twice the difference between the TNAC and 210 million.
This formula softens the former cliff-edge effect where a single-allowance difference could trigger or block a release.
3. Reinforced excessive-price mechanism
If the early-years price safeguard in Article 30h(2) of Directive 2003/87/EC is activated, an additional 20 million allowances will be released each time. The objective is to make the safeguard more effective at dampening unwarranted price surges.
These measures keep the overall architecture of the MSR intact but refine its behaviour in situations expected to occur frequently in the early years of ETS2.
Interpretation and Implications
What This Means for Market Behaviour
With these amendments, the Commission attempts to create a more predictable environment for the launch of a new carbon market that directly affects households, transport operators, fuel suppliers, and national budgets. By preventing sudden changes in supply and extending the lifetime of initial allowances, the system reduces the risk of extreme volatility, which could undermine political and social acceptance.
The gradual release mechanism addresses a structural flaw that could otherwise compromise price formation, while the enhanced price-control response reinforces early market confidence during the transition to full operation.
What It Means for Member States
Member States will have greater clarity when planning national compensation schemes, social funds, and decarbonisation measures. More stable price expectations help governments define policy trajectories and manage anticipated auction revenues. The Commission explicitly notes that improved liquidity may influence auction proceeds, though the overall net budgetary effect is expected to balance out.
What It Means for Consumers and Regulated Entities
A smoother price trajectory can soften the indirect impact on fuel and heating costs. The proposal does not modify the ETS2 design or its obligations but reduces the probability of disorderly price spikes during the first years, giving suppliers and consumers more time to adjust.
The proposal is a targeted stabilisation effort designed to ensure that the ETS2, the EU’s newest carbon market, begins functioning in a controlled and predictable manner. The amendments are grounded in early implementation experience, evolving legislative timelines, and concerns raised by Member States and stakeholders.
By refining the MSR’s operational parameters without altering the core structure of the ETS2, the Commission aims to reduce volatility, maintain confidence, and support the decarbonisation trajectory embedded in EU climate law.
This initiative ultimately reinforces the EU’s capacity to deliver a coherent and resilient carbon-pricing framework for sectors that are essential to achieving the 2030 and 2050 climate targets.
