Ireland proposes deal to end spat over EU carbon market permits
The design of the Market Stability Reserve, which absorbs surplus permits from the market and can release them in the case of price shocks, has divided EU member states as the bloc seeks to reconcile its ambitious climate policies with the need to protect its industry in the face of rising energy prices and tougher global competition.
Ireland proposed a compromise plan to adjust the European Union’s carbon market supply controls, seeking to end a dispute between member states over surplus emission allowances.
Ireland, which holds the EU rotating presidency until the end of this year, wants to introduce additional assurances a broader reform of the emission trading system should gradually tighten the limit on excessive carbon permits kept in a reserve for potential interventions
Ireland's plan was on Monday shared with member states as part of talks on revising the Market Stability Reserve (MSR) regulation, according to people with knowledge of the issue.
The design of the MSR, which absorbs surplus permits from the market and can release them in the case of price shocks, has divided EU member states as the bloc seeks to reconcile its ambitious climate policies with the need to protect its industry in the face of rising energy prices and tougher global competition.
The revision of the reserve was originally put forward by the European Commission in April, after EU leaders called on the bloc’s executive to take steps to reduce energy costs that were already stubbornly high before the Iran war.
The proposal was to make the MSR more flexible by scrapping invalidation of permits it absorbs from the market and keeping them usable for potential future interventions.
The Irish presidency will seek agreement on the MSR on Wednesday, said a spokesperson for the presidency, adding the proposal was time-sensitive and European leaders had called for its urgent adoption.
The goal was to reach a fast deal on the MSR adjustment to calm the market and then discuss potential further changes during a broader reform of the ETS, which the commission unveiled in July and member states discuss separately.
The MSR became a key feature of the ETS in 2019, when it began absorbing surplus permits from the market once a certain threshold of allowances in circulation was reached. The legislation currently in force invalidates any allowances held in the reserve above a threshold of 400 million on January 1 each year.
The commission sought to overturn that provision to build a bigger buffer of permits that could be used to stabilise the market.
Earlier this month, Ireland proposed letting the excess allowances sit in the MSR until the end of 2030. From the start of 2031, the reserve could keep up to 800 million allowances, with the level to be potentially reduced during the post-2030 reform of the ETS.
In a last-minute push to further tighten the regulation, Germany called for an annual 4% reduction of the threshold starting in 2028, in line with the declining emissions cap. The country also wants to maintain the rate at which the MSR absorbs allowances at 24%, and to reduce the level triggering the withdrawal of surplus permits from circulation. It should be set at 650 million compared with the current 833 million.
The German proposal was opposed by a group of countries including Poland and the Czech Republic.
In its new compromise, the Irish presidency is seeking to resolve the spat by embedding in the deal an additional commitment to include in the broader ETS reform an annual reduction of the limit on surplus permits in the reserve.
The proposal will be discussed on Wednesday by ambassadors representing member states to the EU. If they reach a deal, it will become their stance for talks with the European Parliament on the final shape of the MSR regulation.
