EU vote to extend 24% MSR withdrawal rate signals commitment to carbon market

Attention now focuses on upcoming TNAC estimate

The EU Parliament has voted through an extension of the Market Stability Reserve (MSR) annual 24% withdrawal rate until 2030. The vote signals the EU’s commitment to the EU ETS as part of it’s ‘Fit for 55’ package. It also ensures that the EU carbon market can continue to weather economic shocks and maintain a carbon price sufficiently high that decarbonisation targets are met.

The MSR, which began on 1st January 2019 has a uniform 2% monthly withdrawal rate (24% per annum) from the total number of allowances in circulation (TNAC). Under existing legislation the withdrawal rate would have dropped to 12% from 2024. The vote also confirms that the minimum number of EUAs to be placed in the MSR should continue to be 200 million.

The announcement of the vote outcome (which was supported by 95% of MEPs), was broadly expected by the EU carbon market. EUA futures barely budged on the news, anchored close to the €78 per tonne mark.

In the period 2019-2023 the MSR threshold levels are set at 833 million and 400 million allowances (EUAs). Recall that the MSR works by reducing new supply entering the market, via government auctions, until the TNAC falls below 833 million. Allowances in the MSR will only be added back into the market if the TNAC falls below 400 million.

Attention will now turn to the publication of the latest TNAC estimate by the EU.