Carbon Market shift: Why the EU is proposing to stop MSR Allowance Cancellations

In the European Carbon Market, the COM (2026)153 proposal by the EU Commission marks a first turning point in the management of the Market Stability Reserve (MSR). This proposal aims to address the increase in ETS allowance prices, shifting from a logic of setting aside excess supply to one of strategic conservation to ensure the stability of the European industrial system.

In the last few years, various Member States have highlighted how high volatility and rising CO2 prices have had disruptive effects, mainly in energy-intensive sectors, increasing production costs and reducing the competitive capacity of European companies compared to non-EU competitors.

Until now, the MSR mechanism has been set to invalidate allowances accumulated in the reserve exceeding the 400 million threshold. Since 2023, this system has successfully removed 3.2 billion allowances from the market.

The new proposal seeks to suspend the current process by stopping the automatic invalidation of excess allowances, instead retaining them within the MSR as a “strategic buffer” to counter future price shocks.

Why change now?

The Commission recognises that the historical surplus of allowances has been almost entirely reabsorbed. However, the future risk is the opposite: a structural scarcity in the second half of the next decade that could push prices to levels unsustainable for European competitiveness.

The Commission believes that the measure will improve:

• Liquidity: more allowances, meaning potentially more offers, remain available in the reserve instead of disappearing from the market.
• Price Stability: The risk of artificial scarcity and excessive price spikes in CO₂ is reduced.
• Long-term Predictability: Industrial operators and investors will have a market less exposed to sudden shocks.

Conclusion

The European Commission’s proposal modifies the functioning of the MSR in a targeted but significant way, introducing an element of greater flexibility into the ETS system, just as the market is entering a phase of growing structural tension.

While the EU’s climate targets and overall emissions cap remain unchanged, this reform could make the MSR a more flexible tool. By transforming the reserve from a “destructive” mechanism into a strategic buffer, the Commission aims to ensure that the Green Deal remains economically sustainable for European industry.

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