EU states agree to keep surplus CO2 allowances in the ETS to ease energy costs
EU ambassadors agreed on Wednesday to stop cancelling surplus CO2 allowances and instead hold them in the market stability reserve as a supply buffer. No allowances will be cancelled until 2030, and from 2031 the cancellation threshold rises to 800 million. The rules still have to be negotiated with the European Parliament.
Ambassadors of European Union member states agreed on Wednesday to keep a larger volume of surplus CO2 allowances inside the bloc's Emissions Trading System (ETS) instead of removing them permanently from the market, a change designed to limit the system's contribution to energy costs. The decision was taken at a closed-door meeting and was described to Reuters by two EU diplomats, according to economica.net.
The plan was first proposed by the European Commission in April. It forms part of the EU response to the rise in fuel prices triggered by the conflict with Iran, which pushed governments to look quickly for ways to bring down energy bills.
What changes in the market stability reserve
Under the rules in force, when the market stability reserve (MSR) holds more than 400 million allowances, the volume above that level is cancelled and leaves the system for good. The MSR is also designed to work in the opposite direction: it releases 75 million additional allowances into the ETS if the EU carbon price doubles or rises by more than a factor of two.
Member states agreed to halt the current practice of withdrawing surplus allowances from the market. Instead, the surplus is to be held inside the MSR as a supply buffer that can be released onto the ETS market to counter sharp price increases. The agreed parameters, based on a draft of the deal seen by Reuters, are the following:
- No surplus CO2 allowance will be cancelled until 2030.
- From 2031, the volume above 800 million allowances held in the MSR will be cancelled.
- That 800 million threshold will then fall every year.
- The reserve keeps its release function of 75 million allowances triggered by a doubling of the carbon price.
Why governments pushed for the change
The ETS is the bloc's main climate policy and is not the principal cause of the increase in European energy prices. The changes agreed on Wednesday nonetheless respond to demands from governments including Poland and Italy to limit the ETS contribution to electricity costs, Reuters reported. On average, the ETS accounts for 11% of electricity bills for EU industry, but the share is far higher in countries whose power mix is dominated by fossil fuels, such as Poland, and lower in countries with large volumes of nuclear and low-carbon renewable generation, such as Sweden.
Exposure concentrated in coal generation
The ETS obliges large emitters, including power plants and factories across Europe, to buy allowances covering their CO2 emissions, and it allows surplus allowances to be traded on a market where the price moves daily. In Romania's power sector, the most exposed operators are the coal-fired plants still running, which have to buy roughly one carbon allowance for every MWh they produce. For those units, the cost of compliance moves directly with the traded allowance price, which is why supply decisions in the reserve matter for their operating economics.
Next step: talks with the European Parliament
The agreement among member states sets the Council position only. EU countries will now negotiate the final rules with the European Parliament before they can enter into force, meaning the 2030 cancellation moratorium and the 800 million threshold from 2031 remain open to change in those talks. Until the file is closed, market participants are pricing a supply outlook that is politically agreed but not yet legally fixed.