The European Commission has proposed the establishment of a market stability reserve at the beginning of the next Emissions Trading Scheme (ETS) trading period.

The ETS was designed to deliver emissions reduction goals in a harmonized and cost-effective manner across the EU. Companies are given the choice to purchase allowances to cover their emissions, or sell left-over allowances if necessary. However, the Commission admits that the economic crisis has created a structural imbalance between supply and demand. The surplus now stands at around 2bn allowances, built up mainly in 2011 and 2012, and is expected to persist for at least a decade.

Problematically, no changes are permitted to the system during a trading period that would allow the Commission to react to major changes in the demand for allowances. It hopes that the reserve will guarantee a more balanced market and encourage low-carbon investments.

To ensure transparency, the total number of allowances in circulation in the previous year will be published each May. From 2021, 12 percent of this number may be placed in the reserve if, and only if, the total amount is equal to or greater than 100m allowances. Allowances may be released from the reserve when fewer than 400m allowances are in circulation in a given year, and if, for more than six consecutive months, the carbon price is more than three times the average carbon price during the two preceding years.

Allowances placed in the reserve will be deducted from the allowances due to be auctioned by member states. When released from the reserve, the allowances will be auctioned by member states in accordance with the current rules. To mitigate the effects of undue end-of-period auction supply peaks, the Commission has proposed that the additional auction supply be spread over the final year of a trading period, and the first two years of the following period.

The Commission has submitted its plans to the European Council, Parliament, the Committee of the Regions, and the Economic and Social Committee for further consideration.