Reviewing the Market Stability Reserve in light of more ambitious EU ETS emission targets

The stringency of the EU's Emission Trading System (ETS) is bound to be ratcheted-up to deliver on more ambitious goals as formulated in the EU's Green Deal. Tightening the cap needs to consider the interactions with the Market Stability Reserve (MSR), which will be reviewed in 2021. We analyse these issues using the model LIMES-EU. First, we examine how revising MSR parameters impacts allowance cancellations. We find that varying key design parameters leads to cancellations in the range of 2.6-7.9 Gt - compared to 5.1 Gt under current regulation. Overall, the bank thresholds, which define when there is intake to/outtake from the MSR, have the highest impact. Intake rates above 12% only have a limited effect, and cause oscillatory intake behaviour. Second, we analyse how more ambitious climate 2030 targets can be achieved by adjusting the linear reduction factor (LRF). We find that the LRF increases MSR cancellations substantially up to 10.0 Gt. This implies that increasing its value from currently 2.2% to only 2.6% could be consistent with an EU-wide target of-55% by 2030. However, MSR cancellations are subject to large uncertainty, which increases the complexity of the market and induces high price uncertainty.

Automated summary

Research shows that adjusting key design parameters and the linear reduction factor in the Emission Trading System can help achieve more ambitious climate targets by 2030. However, this may result in substantial cancellations of emission allowances, increasing market complexity and price uncertainty.