The Market Stability Reserve (MSR) in the European Union's carbon market has moved a step closer to implementation following an agreement reached in trialogue negotiations on the final wording of the bill. The draft will now undergo sign-off by EU member states and the EU Parliament, with a full vote expected on July 6th, 2015. While resistance is possible, it is unlikely to impede the progress of the bill at this stage.
The agreement reached in trialogue negotiations is more ambitious than the original proposal by the EU Commission and will bring about significant changes to the carbon market, particularly in terms of pricing. The key points of the agreement include a January 2019 start date, backloaded allowances going directly into the MSR, unallocated allowances being included in the MSR instead of being auctioned, a uniform 1% withdrawal rate per month (12% per annum), protection of the solidarity fund until 2025, and the potential establishment of an innovation fund.
With the blocking minority broken, a middle ground was found between the EU Parliament and the EU Council on this carbon market reform. However, there are concerns that the blocking minority may reform to hinder the process further, particularly since the solidarity fund was not protected in the MSR until 2030 as some countries had desired. The final wording of the agreement only safeguards the allocations from the MSR until 2025.
Attention now turns to the end of May when EU Council sign-off will likely be sought. What is significant is that EU Parliamentarians are excited about the deal as it allows them to shift the focus to permanently fixing the European Union Emissions Trading System (EU ETS). Change and uncertainty will continue to be regular features in the EU ETS, despite recent major developments.
