Provisional deal would raise the point at which allowances held in the EU’s market reserve are permanently removed.
EU negotiators have reached a provisional agreement to keep a mechanism that permanently removes some carbon-market allowances, while raising the threshold at which those cancellations begin. The agreement concerns the market stability reserve, a part of the EU emissions trading system designed to respond to large imbalances in the supply of allowances.
The Council and the European Parliament reached the deal on 20 October. It is not yet law. Both institutions must endorse the compromise, after which the text is due to undergo legal-linguistic revision before formal adoption. Until those stages are complete, the existing rules remain in force.
Under the compromise, the invalidation mechanism would continue, but the threshold would rise from 400 million allowances to 700 million. Allowances in the reserve above the applicable invalidation threshold are permanently removed rather than being kept available for a later release. The higher threshold would take effect once the amendment has been formally adopted.
How the reserve works
The market stability reserve is a rule-based part of the EU emissions trading system. It was created to address a surplus that built up in the carbon market and to make the system more resilient to major shocks. The reserve changes the number of allowances heading to auction according to the total number in circulation, rather than setting carbon prices directly.
When the number of allowances in circulation is above a specified level, the reserve takes allowances out of auctions. When it falls below a lower level, the reserve releases allowances back to auction. Under the current rules, a total in circulation above 1,096 million leads to allowances being withdrawn, while a total below 400 million triggers the release of 100 million allowances.
Those operating thresholds should not be confused with the invalidation threshold at the centre of the new agreement. Invalidation concerns allowances already held in the reserve. Since 2023, holdings above the relevant threshold have been cancelled each year. From 2024, that threshold has been fixed at 400 million allowances. More than three billion allowances have been invalidated since the mechanism began.
A larger buffer, not a redesign
The provisional agreement would retain more allowances in the reserve before cancellations apply. EU negotiators said the larger buffer is intended to give the reserve greater scope for possible future releases if the market becomes tight as the overall cap on emissions continues to fall. The deal also retains a safeguard against excessive surpluses by keeping invalidation in place.
It does not change the overall design of the reserve. The adjustment is a targeted amendment, separate from a wider review of the emissions trading system and the reserve that is already under discussion. The negotiators also agreed that a gradual reduction of the invalidation threshold should be considered as part of that broader review.
The amendment forms part of a short-term policy response to high and volatile energy prices. Its immediate effect is limited by its provisional status: it does not change today’s auction supply, set a new carbon price or create a completed energy-support scheme. Its practical effect will depend on formal approval and the final legal text.
What happens next
The next decision rests with the Council and Parliament, which must each endorse the provisional agreement. The text is then expected to proceed through legal-linguistic revision and formal adoption. That sequence matters because the 700-million threshold is not yet an operative rule.
For companies covered by the EU emissions trading system, the agreement signals that the reserve is likely to remain a permanent part of market management rather than being halted as previously proposed. However, the broader review may still revisit the mechanism, including how the higher threshold could decline over time. The present compromise settles neither that wider review nor the future price of allowances; it sets a proposed framework for preserving a larger reserve buffer while maintaining cancellations above it.
