The carbon market experienced a surge in trading volumes and prices after the release of a compromise proposal for the Market Stability Reserve (MSR) by lead lawmaker Ivo Belet. The proposal, set to be voted on by the Environment Committee on February 24th, has received tacit support from the European People’s Party (EPP), sparking bullish sentiment in the market. Prices reached €7.46, the highest since December 2014.
Under the proposal, the MSR would begin in 2018, with all backloaded allowances being transferred directly into the reserve. Additionally, the proposal suggests including unused New Entrant Reserve (NER) allowances and other unallocated allowances resulting from installation closures and capacity reductions. The inclusion of unallocated allowances is a new twist that is expected to have a bullish effect on prices.
The start date for the MSR had been a contentious issue, with the original commission plan proposing a 2021 start, which was deemed too late by many. The Green Party advocated for a 2017 start, while the EPP favoured a 2021 start. The compromise proposal of a 2018 start is considered the bullish end of the likely compromises.
Another major point of negotiation was the future of the backloaded allowances. Previously, these allowances were set to be auctioned to the market in 2019 and 2020, potentially flooding the carbon market and driving prices down. With the new proposal, these allowances would go directly into the reserve, providing support at the back end of the curve and reducing volatility, which is a key outcome of the MSR.
The EPP, being the largest party in the EU parliament, holds significant negotiating power. In this compromise, the EPP likely secured a strong position on implementing the carbon leakage list, which protects industries covered under the EU ETS from re-location to areas with lower pollution costs. The proposal also aligns with the commission’s original plan on threshold levels but shortens the time lag for surplus calculations to one year.
The proposal will be voted on by the Environment Committee on February 24th, and if approved, it will require the support of a majority in parliament and member states to be implemented.
