European Commission Proposes First ETS Reform Targeting Market Stability Reserve Rules

The European Commission published a proposed measure to reform the EU Emissions Trading System's Market Stability Reserve, stopping the automatic invalidation of allowances above the 400 million unit threshold to create a buffer against price volatility. The proposal is the first in a series of ETS reforms promised by Commission President von der Leyen following industry pressure over rising energy costs.

The Market Stability Reserve has been operational since 2019, managing the supply of carbon allowances by reducing circulation when too many are in the market and injecting allowances back when scarcity conditions arise. Under the current system, allowances above the 400 million threshold are automatically invalidated. The new proposal would halt invalidations, allowing the MSR to retain excess allowances as a price stabilization buffer. The Commission credited the ETS with driving a 39% reduction in EU emissions since 2019 as the economy grew by 71%.

The reform follows von der Leyen's commitment in March 2026, after a Euro Summit focused on energy prices driven by the Middle East conflict, to introduce near-term ETS adjustments alongside a comprehensive ETS review planned for July 2026. The proposal reflects a broader tension in EU climate policy between maintaining carbon pricing as a decarbonization driver and responding to industrial competitiveness concerns as energy costs rise. The Commission said the reform is intended to keep the ETS fit for purpose while maintaining core design principles.

The proposal must be adopted by the European Parliament and Council to take effect. Commissioner for Climate Wopke Hoekstra described the MSR reform as an important first step in modernizing the carbon market to enhance resilience against volatility and continue driving decarbonization and clean investment. For Indian exporters covered by the EU's Carbon Border Adjustment Mechanism, the direction of ETS carbon price reform will directly affect the CBAM adjustment calculations applied to exports of steel, cement, aluminum, fertilizers, and electricity into the EU market.

Key figure — 39% reduction in EU emissions since 2019 cited by the Commission in defending ETS design