A surplus of emission allowances has built up in the EU emissions trading system (ETS) since 2009. The European Commission is addressing this through short- and long-term measures.
The surplus of allowances is largely due to the economic crisis (which reduced emissions more than anticipated) and high imports of international credits. This has led to lower carbon prices and thus a weaker incentive to reduce emissions.
In the short term, the surplus risks undermining the orderly functioning of the carbon market. In the longer term it could affect the ability of the ETS to meet more demanding emission reduction targets cost-effectively.
The surplus amounted to around 2 billion allowances at the start of phase 3 and increased further to more than 2.1 billion in 2013. In 2015, it was reduced to around 1.78 billion as a consequence of back-loading. Without this, the surplus would have been almost 40% higher at the end of 2015.
On 14 July 2021, the European Commission adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport and land use legislation, setting out in real terms the ways in which the Commission intends to reach EU climate targets under the European Green Deal.
As a short-term measure the Commission postponed the auctioning of 900 million allowances until 2019-2020.
This ‘back-loading’ of auction volumes does not reduce the overall number of allowances to be auctioned during phase 3, only the distribution of auctions over the period.
The auction volume is reduced by
The impact assessment shows that back-loading can rebalance supply and demand in the short term and reduce price volatility without any significant impacts on competitiveness.
Back-loading was implemented through an amendment to the EU ETS Auctioning Regulation, which entered into force on 27 February 2014.
As a long-term solution, a market stability reserve began operating in January 2019.
The 900 million allowances that were back-loaded in 2014-2016 will be transferred to the reserve rather than auctioned in 2019-2020.
Unallocated allowances will also be transferred to the reserve. The exact amount will only be known in 2020. However, market analysts estimate that around 550 to 700 million allowances could remain unallocated by 2020 (see impact assessment accompanying the legislative proposal for the revision of the EU ETS).
The reserve operates entirely according to pre-defined rules that leave no discretion to the Commission or Member States in its implementation.
Each year, the Commission publishes by 15 May the total number of allowances in circulation. This serves as the exclusive indicator on
In the context of the revision of the EU ETS, important changes were also made to the functioning of the MSR.
In 2019-2023, the percentage of the total number of allowances in circulation determining the number of allowances put in the reserve if the threshold of 833 million allowances is exceeded is temporarily doubled from 12% to 24%.
In addition, as from 2023, allowances held in the MSR above the previous year’s auction volume will no longer be valid.
Efforts to address the market imbalance are also supported by a faster reduction of the annual emissions cap agreed as part of the revision of the EU ETS. The overall number of emission allowances will decrease at an annual rate of 2.2% from 2021 onwards, compared to 1.74% in the period 2013-2020. The reduction rate is in line with the 2030 target of at least 40% cuts in EU greenhouse gas emissions.
Input into the debate on structural measures included: