A recently leaked joint non-paper so far signed by 16 EU member states – notably including Germany, Italy, and Spain – proposes five adjustments to the current policy framework. Given both the potential market impact of these suggestions and the political weight behind them (increasing the likelihood of adoption), we have assessed their implications using our ETS2 model.
The proposed redesign of the MSR could have a substantial impact on market outcomes. Most strikingly, removing the clause that cancels all allowances initially placed into the reserve from 2031 onward could drive the carbon price down to just under one-half of our base-case projection in the early 2030s.
The non-paper outlines these changes:
Publish regularly information to better inform price forecasts for ETS2
Launch early auctions in 2026 to reduce price uncertainty for 2027
Smooth the MSR trigger mechanism to limit volatility, as in ETS1, and increase the released MSR volumes in tight market conditions
Extend the MSR lifetime beyond 2031
Reinforce the price control mechanisms
Of these, proposals 3 to 5 are expected to have the most direct impact on market outcomes. The remainder of this Analyst Update will therefore focus on these elements.
How the policy works in our model
We let allowances be released into the market already when the TNAC reaches 300 million allowances, and that the release amount increases linearly from zero to 100 million as TNAC goes from 300 to 210 million allowances.
Main findings
Making the MSR thresholds dynamic lowers early prices—by around 8–13% through 2033 in our estimation. This is because a more generous MSR releases more allowances into the market, increasing supply and pushing prices down. In the scenario we modelled, the MSR triggers a large release already in 2028, as the TNAC in 2027 is projected to come close to—but not go past—the 210 Mt mark. On top of that, despite the initial boost from the 2026 release, the TNAC still dips below 300 Mt in 2029, triggering another release (in 2030 an 2031). In total, these adjustments lead to roughly 20 Mt of additional allowances entering the market—equivalent to about 2% of the cap in the first year. The fact that this modest increase in supply causes such a large price drop highlights just how tight the ETS2 market could be in its early years.
How the policy works in our model
We remove the cancellation clause from the MSR policy and let the MSR keep releasing allowances into the market after 2031
Main findings
Starting prices fall by 48% (as market participants are forward-looking and anticipate less need for hedging, knowing that additional MSR volumes will enter the market when conditions tighten), and in 2032—when the effect peaks—they are 54% lower than in our base case. This drop occurs because allowing the MSR to continue operating beyond 2031 enables it to intervene during the period of greatest market tightness. As a result, the full 600 million allowances initially placed in the reserve are released into the market—compared to 160 million allowances in our base case.
However, this additional supply leads to higher emissions. We estimate cumulative emissions would increase by 525 million tonnes relative to the base case. A close reader might note that this exceeds the 400 million additional allowances released. The explanation lies in weakened price signals: lower early-phase prices reduce incentives for clean technology uptake, leading to less abatement. In our base case, a positive annual balance is achieved by 2038, but with lower starting prices, this never materializes—resulting in persistently higher emissions through the 2030s.
How the policy works in our model
In our setup, we maintain the existing rule that 20 million allowances are released when prices remain above €45/t for three consecutive months. On top of that, we’ve introduced a stronger price trigger: if the price stays above €45/t for an additional three months, a further 40 million allowances are released into the market.
Main findings
Of the three scenarios analysed, this one has the smallest impact on prices—reducing them by 9% at market start in 2027, and by just 2% in 2032. An interesting dynamic emerges: increasing the releases via the price-based trigger raises the TNAC, which in turn reduces the likelihood of releases from the quantity-based mechanism. In essence, stronger price-triggered intervention dampens the activity of the volume-based MSR.
A weekly cap of what moved EUA prices and a clear view of the week ahead. We set out the drivers, their directional impact, and what matters next.
Specialising in data, analysis, and insights for all significant low-carbon markets and renewable energy.
