Market Stability Reserve

Market Stability Reserve

The European Parliament and the European Council reached earlier this month an informal agreement on the establishment and operation of a Market Stability Reserve (MSR). The legislative proposal to establish an MSR in the EU Emission Trading System (EU-ETS) seeks to address the problem of an oversupply of allowances, leading to a low carbon price. The proposal foresees the reserve as a mechanism to prevent extreme fluctuation of carbon price, by reducing or increasing the supply of allowances.

In the compromise package agreed by the two Institutions, the MSR will be established in 2018 and will become fully operational from 1st January 2019. The auction of 900 million allowances was postponed for 2019-2020 from originally proposed 2014-2016, and these "backloaded" allowances will be placed in the market reserve. Unallocated allowances will be directly included in the MSR in 2020, while their future usage will be decided in the upcoming EU-ETS review.

The MSR will have a strong impact on low carbon technologies which heavily rely on carbon price in the EU ETS, such as carbon capture and storage (CCS). While the market reserve will certainly have a direct impact on availability of funds, the question of when the allowances are to be monetized that will determine whether and when CCS technology will benefit from the fund.  The carbon price plummeted in 2009 and significantly reduced the size of NER 300, the fund designated to support CCS and renewable energy technologies. Only one CCS demonstration project succeeded in securing award from the fund out of the 14 projects that responded to the first and second calls of the grant. As NER400 is not likely to be monetized before 2021, it would result in a gap of at least 7 years between schemes able to deliver CCS funding.

Ms. Simjanovic, EU CCS Network Project Manager, presented on this topic at the Carbon EXPO held in Barcelona at the end of May. In order to contribute to the CO2 emissions reductions agreed by the European Council, CCS technology needs far much stronger support, on the financial as much as on the regulatory level. Ms. Simjanovic emphasized the need for establishing a bridge fund between NER400 and its predecessor, as long-term policy and coordinated financing mechanisms are the key for long-lasting support of technology development, investor confidence and market certainty.

Without a substantial change in EU policy approach towards CCS, the EU may further delay the development of a technology which is fundamental to reach Europe’s short- and long-term emissions reduction targets. Following the European Parliament vote on the MSR proposal at its plenary session of July, the broader review of the EU-ETS will start its legislative process providing EU Institutions with the opportunity to take the lead on driving investment in low carbon technologies.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any of the projects of the European CCS Demonstration Projects Network.