EU member states ditch MSR sale proposal

EU member states appear to have finally torpedoed the European Commission’s (EC) proposal to raid the Market Stability Reserve (MSR).

I wasn’t alone in saying that this was a particularly bad idea, one that would threaten the long-term integrity of the EU ETS and make it very difficult for carbon prices to reach the levels required for industrial decarbonisation.

Instead, EU member states are proposing to raise 75% of the €20bn from the EU Innovation Fund and the remaining portion from the frontloaded auction of carbon allowances.

The European Parliament is likely to put up stiff resistance to the use of the Innovation Fund when MEP’s meet on 9th November to vote. Recall that the aim of the Innovation Fund is the “commercial demonstration of innovative low-carbon technologies, aiming to bring to the market industrial solutions to decarbonise Europe and support its transition to climate neutrality”.

Instead, many MEP’s appear to prefer that 100% of the €20bn comes from frontloading of auction revenue. I don’t think it matters a great deal what proportion comes from the Innovation Fund, but what does really matter is that raiding the MSR is now off the table.

As I noted in a previous article when discussing the MSR sale proposal, any suggestion that this was anything but a one-off will be a serious red flag for investors, and will forever compromise the single most important policy tool the EU has in fighting climate change (see Is the MSR sale really a 'win-win'?).

Analysis by Refinitiv conducted before this week’s meeting considered four different scenarios and what they would mean for the EU ETS market balance and the outlook for the EU carbon price.