European Union Market Stability Reserve CO2 Emissions Trading System

The European Union Emissions Trading System Market Stability Reserve (EU ETS MSR) is a proposed amendment to the European Union Emission Trading Scheme (EU ETS). The proposal was made by the European Commission.

The Market Stability Reserve Design

In order to amend the EU ETS ETS, on 22 January 2014, the European Commission proposed the Market Stability Reserve, which is a "an objective and rule-based mechanism on the basis of which the auction volumes are adjusted in an "automatic manner" under pre-defined conditions applied as of phase 4 of the EU ETS starting in 2021.

It reduces the amount of EU Allowance units (EUAs) that are auctioned if an upper threshold of EUAs in circulation is exceeded and releases them if the EUAs in circulation fall short of a lower threshold. Thus a soft target corridor for banking of EUAs is introduced to the EU ETS.

The legal triggers that will prompt the minimum and progressive carbon tax are laid out in the proposed Commission design:

• "In each year beginning in 2021, a number of allowances equal to 12% of the total number of allowances in circulation in year x-2, [...], shall be placed in the reserve, unless this number of allowances to be placed in the reserve would be less than 100 million"

• "In any year, if the total number of allowances in circulation is lower than 400 million, 100 million allowances shall be released from the reserve. In case less than 100 million allowances are in the reserve, all allowances in the reserve shall be released."

• "In any year, if [the previous paragraph] is not applicable and measures are adopted under Article 29a of the Directive, 100 million allowances shall be released from the reserve. In case less than 100 million allowances are in the reserve, all allowances in the reserve shall be released under this paragraph."

In effect, the first paragraph establishes an upper trigger of the MSR of 833 million allowances (the minimum addition of 100 million EUAs, divided by 12%).

Initial analysis of the EU ETS MSR scheme points to a price increase following the introduction of the MSR. The price could increase to 35 euro per emitted tonne of CO2 according to Reuters PointCarbon analysts.

The EU ETS MSR differs from the Kerry-Boxer bill in that the change in auctioning volume is triggered by the volume of banked credits, not by credit prices.

References

• Frédéric Gonand, Paris-Dauphine University - http://www.chaireeconomieduclimat.org/wp-content/uploads/2014/03/14-03-07-Policy-Brief-2014-01-EN-v2.pdf
• Dr. Alison Shaw and Dr. James Tansey, University of Victoria, BC, Canada - http://pics.uvic.ca/sites/default/files/uploads/publications/Market%20stability%20reserve.pdf
• Denny A. Ellerman and Paul L. Joskow, The European Union’s Emissions Trading System in Perspective, 2008
• JOnAS Monast, Jon Anda, Tim Profeta, Duke University Nicholas Institute for Environmental Policy Solutions: Regulating emission allowances as financial instruments, February 2009
• Neil Thomson, Climate Intelligence Unit, CSSI, Sauder School of Business, University of British Columbia. Tax Fraud from Emissions Trading in the European Union. 7 May 2010 -

Further reading

• Jorn C. Richstein, Emile J.L. Chappina, Laurens de VriesDelft University of Technology, Faculty of Policy, Technology and Management, Energy & Industry - http://www.usaee.org/usaee2014/submissions/OnlineProceedings/Richstein-MarketStabilityReservePaper.pdf
• Frédéric Gonand, Paris-Dauphine University - http://www.chaireeconomieduclimat.org/wp-content/uploads/2014/03/14-03-07-Policy-Brief-2014-01-EN-v2.pdf
• Dr. Alison Shaw and Dr. James Tansey, University of Victoria, BC, Canada - http://pics.uvic.ca/sites/default/files/uploads/publications/Market%20stability%20reserve.pdf
• Denny A. Ellerman and Paul L. Joskow, The European Union’s Emissions Trading System in Perspective, 2008
• Jonas Monast, Jon Anda, Tim Profeta, Duke University Nicholas Institute for Environmental Policy Solutions: Regulating emission allowances as financial instruments, February 2009
• Neil Thomson, Climate Intelligence Unit, CSSI, Sauder School of Business, University of British Columbia. Tax Fraud from Emissions Trading in the European Union. 7 May 2010 - http://pics.uvic.ca/sites/default/files/uploads/publications/Tax%20fraud%20in%20the%20emissions%20trading%20system%20in%20the%20European%20Union%20.pdf
• Market Stability Reserve under Kerry-Boxer, Natural Resources Defense Council, 26 January 2010. http://docs.nrdc.org/globalWarming/files/glo_10012702a.pdf
• Market Stability Reserve and 'set-aside' in Senate Bill - John Kerry, Breakthrough Institute, 2010. http://thebreakthrough.org/archive/kerryboxer_climate_bill_allowa
• Market Stability Reserve, Kerry-Boxer Bill, Yale University, 2009. http://www.law.yale.edu/documents/pdf/Alumni_Affairs/IssueAlert-KerryBoxer.pdf
• Market Stability Reserve, Kerry-Boxer Bill, http://kerry.senate.gov/cleanenergyjobsandamericanpower/pdf/bill.pdf
• Kerry-Boxer Bill, Heritage Foundation, 2009, http://kerry.senate.gov/cleanenergyjobsandamericanpower/pdf/bill.pdf
• Golombek, R., and Hoel, M. (2004). Unilateral emission reductions and cross-country technology spillovers. Advances in Economic Analysis & Policy, 3. doi: 10.2202/1538-0637.1318.