Is the MSR sale really a 'win-win'?

Calls grow for sale of emission allowances to fund Europe's energy transition

On 18th May the European Commission (EC) published their REpowerEU package detailing how the EU will secure energy independence from Russia and accelerate the decarbonisation of the EU economy.

The package included a proposal to sell €20 billion worth of EUA’s held in the Market Stability Reserve (MSR) in order to help fund the transition (see MSR explainer at the bottom of this article).

The EU carbon price fell sharply after the package of measures was announced, falling from €92.60 per tonne to €77.90 per tonne over the course of four trading days.

The initial EC proposal allowed for the auctions to last until end-2026 at the latest until the revenue amounts to €20 billion, reasoning that the sale should not have a significant impact on the carbon price.

The selloff sparked by concerns that the MSR had moved from being a “non-discretionary” mechanism perceived to be outside of the whims of EU politicians, to one that can be tapped when the circumstances suit. What if the EU decides to raid the MSR in the future should carbon prices rise too high, or further funding is required over and above the €20 billion earmarked?

The proposal coupled with comments from key political figures involved with the EU ETS gave me the inspiration to write Whatever it takes: Why forward guidance in the EU carbon market is here, and is set to stay. In short, my argument was that the era of unabated carbon price discovery is coming to an end, and with it emerges a new era in which the EU’s climate politicians will wield much more control over the direction of the carbon price.

Over the next few months there was little in the way of noise coming out of the EU regarding the MSR sale. However, as carbon prices rebounded towards the high €90 per tonne mark and inflationary and energy security pressures built across Europe, the MSR sale appears to be firmly back on the table.