Today, the European Commission presented a legislative proposal to amend the MSR Decision to strengthen the Market Stability Reserve for the emission trading system for road transport and buildings (ETS2) that will come into operation in 2028. More amendments are being prepared to start early auctioning of ETS2 allowances in 2027 and set up a front-loading facility (in cooperation with the European Investment Bank) that will offer funding to the member states already in 2026.

Last October, following strong pressure from more than half the EU member states, Climate Commissioner Wopke Hoekstra announced plans to reconfigure the so-called Market Stability Reserve (MSR) in the ETS2 so that it can release more EUA2s if the price reaches above €45/t. He also planned to delete the clause that stipulates the invalidation of unused EUA2 volumes from the MSR after 2030. He said the legislative proposals would be presented within a few weeks.

The purpose of these amendments is to lower price expectations and reduce volatility. See our take on how the amendments might impact the ETS2 market dynamics here.

Since then, the ETS2 reform has been overshadowed by the European Council and Parliament’s negotiations on the 2040 climate target, which led both lawmakers to agree to delay the full operational start of ETS2 from 2027 to 2028.

Today (27 Nov), the European Commission put forth a legislative proposal to amend the MSR Decision from 2015, which created the Market Stability Reserve in ETS1 and will serve as the legal base for the sister instrument in ETS2.

Being a primary-level legal text (a decision of the European Parliament and the Council), amending it will require the active participation of the two lawmakers. Given the high level of support, we might expect a swift and easy processing, in which case the proposal could be adopted in early 2026.

Lawmakers could theoretically take the occasion to also look at ETS1-related elements in the MSR Decision, most notably the intake rate, thresholds and invalidation. If so, that would no doubt slow down the processing. That said, a full review of the MSR Decision (and the ETS Directive) for what concerns ETS1 is already scheduled for later in 2026, and it would make little sense to complicate that process by expanding the present amendment proposal that is clearly limited to the ETS2 MSR.

The text presented today aims to ensure stronger intervention if the EUA2 price should go €45/t. For this, it adds a top-up mechanism that would release up to 80 million allowances each year from the start of auctioning until the end of 2029.

Secondly, the proposal reinforces the MSR’s capacity to operate in the longer term, extending the validity of ETS2 allowances in the reserve beyond 2030. With this amendment, all 600 million allowances will be available to be released in the market if needed to stabilise the price.

Thirdly, the Commission proposes an additional buffer to allow for earlier and smoother intervention to stabilise the supply of ETS2 allowances in the market above certain levels. The proposal sees a dynamic release from the MSR when the total number of allowances in circulation (TNAC) is between 210 million and 260 million. The injection in this range will be 100 million allowances minus twice the difference between the TNAC and the 210 million threshold.

More proposals on the way

Today’s statement reiterates that more amendments are in the making. Chief among these is to adjust the Auctioning Regulation to start ETS2 auctions in 2027, the year before the system comes into full operation. That will make revenues available for governments and deliver an early price signal for market participants. The Commission has already consulted member states’ experts on draft amendments to the Auctioning Regulation with a view to adoption by the Commission in early 2026.

Finally, the Commission and the European Investment Bank are exploring a new ETS2 Frontloading Facility for Member States, to be launched shortly. Frontloading of ETS2 revenues could make up to EUR 6 billion available already in 2026-2027. This comes on top of the national ETS2 revenues and the Social Climate Fund.

Like the MSR amendments, the early auctions and the EIB front-loading facility are initiatives that will be implemented without opening the ETS Directive.