Addressing the supply-demand imbalance in the EU ETS through the Market Stability Reserve

Date: 8 February 2021

Author(s): Andrei Marcu, Domien Vangenechten and Jean-Yves Caneill

This paper makes the case that that while many levers could be used to address current and future issues related to the carbon market and climate policy in general, including EU ETS market imbalances, each of them should focus on what they were intended to achieve, and not give way to expedience and inappropriate use.

It also makes the case that the market stability reserve (MSR) was intended to address EU ETS market imbalances. The MSR was not presented and intended, and maybe not well equipped, to address other legitimate EU climate goals, which may need addressing. While the EU ETS has many goals, most notably limiting emissions and driving emission reductions, the MSR was meant to contribute to the long-term, relatively stable and predictable signal it is to provide covered entities, in order to assure a ‘business case’ to decarbonise.

In addition, the paper outlines a number of consideration that should be part of the MSR review, in the context of making the EU ETS “fit for 55”.