Brussels: Europe and the Arabs

The current Presidency of the European Union and representatives of the European Parliament have reached an agreement in principle on a targeted amendment to the Market Stability Reserve (MSR) for the EU Emissions Trading System for Buildings, Road Transport and Additional Sectors (ETS2).

According to a statement released in Brussels early Thursday, the MSR addresses supply and demand imbalances in ETS2 by adjusting the number of emission allowances available for trading. Today’s agreement will strengthen the MSR and ensure a stable and predictable market for emission allowances before the full launch of ETS2 in 2028. The current Cypriot Presidency of the EU stated, “Today’s swift agreement provides a robust and predictable MSR, which is essential for a smooth and stable launch of ETS2. The agreed adjustments will improve market liquidity, reduce price volatility, and enhance the system’s ability to respond to unjustified price increases. This will boost confidence and give households, businesses, and Member States the predictability they need as we move towards a cleaner future.” According to a statement by Maria Panayiotou, Minister of Agriculture, Rural Development and Environment of the Republic of Cyprus:

Key elements of the agreement:

Participating legislators affirmed the key elements of the Commission’s proposal, agreeing on the need to enhance market predictability, reduce volatility, and address excessive price increases.

The agreement extends the validity period of the market stabilization reserve beyond 2030, contributing to long-term price stability.

To further bolster market confidence, the interim agreement strengthens the existing price monitoring mechanism by doubling the number of allowances to be released from 20 million to 40 million when the cost of carbon exceeds €45 per tonne of CO2 equivalent (at 2020 prices).

Furthermore, the agreement ensures the gradual and effective release of allowances when the number in circulation falls below 260 million, helping to prevent market uncertainty caused by the “threshold effect.”

In addition to adopting the key elements of the Commission’s proposal, participating legislators agreed on a limited number of amendments. They agreed that the Commission’s future review of the Market Stabilization Reserve would take into account the number of allowances remaining in the reserve. They also added a clause addressing the review of the Emissions Trading System II (ETS2), including a comprehensive assessment of the price stabilization mechanisms and the rules of the Market Stabilization Reserve.

The legislators also noted the need for investments and the use of ETS2 auction proceeds to finance climate and energy transition measures in the building and road transport sectors, in line with existing EU regulations.

Next Steps
The interim agreement now requires ratification by the Council and the European Parliament. Following linguistic and legal review, it will be formally adopted by both institutions. The revised Market Stabilization Reserve will be implemented in due course for the full launch of ETS2. ETS2 is expected to be fully operational by 2028, as agreed during the negotiations on the European Climate Act. The second Emissions Trading System (ETS2) was launched as part of the "Fit for 55" package in 2023. It aims to reduce emissions from several economic sectors by 42% by 2030, compared to 2005 levels.

This system applies to fuel distributors in the building and road transport sectors, as well as certain other sectors. These suppliers are required to monitor and report the emissions from the fuels they sell and hand over carbon credits equivalent to those emissions. The total number of credits available within the EU decreases annually to incentivize carbon emissions reductions.

Following an initiative launched in July 2025, supported by 19 Member States, calling for a smooth start to the implementation of ETS2, the Commission proposed a specific amendment to the market stabilization reserve.