On 8 July 2015 the European Parliament issued a decision establishing a market stability reserve (MSR) mechanism for CO2 emission allowances. The decision was approved by the Council of the European Union on 18 September 2015.
The MSR was created with the goal of gradually eliminating the existing oversupply of greenhouse gas emission allowances, which should lead to an increase in the price of allowances. The allowances in the reserve will be released to the market later if necessary to combat an excessive increase in price of allowance.
Allowances will be added to the reserve if the number of allowances in circulation in a given year exceeds 833 million. The European Commission will be notified of this fact by 15 May of the following year. In that case, from September of the year in which the Commission confirms the excess number of allowances in the preceding year, 12% of the allowances in circulation, according to the Commission’s communication, will gradually be drawn into the reserve over the course of 12 months. The number of emission allowances that a given member state can sell at auction will be reduced in this manner, unless the number of allowances to be withdrawn is less than 100 million (in which case the allowances will not be withdrawn from the market). In addition, in the first year in which the MSR mechanism is in force, from January through August 8% of the allowances currently in circulation will be moved to the reserve (at 1% per month).
Allowances will be released from the reserve when according to the Commission’s communication the number of allowances in circulation falls below 400 million or if there is an excessive increase in their market price (i.e. a price maintained for a period of longer than 6 months that is three times higher than the average price of allowances in the two preceding years—Art. 29a of Directive 2003/87/EC). In that case, 100 million allowances will be released from the reserve (more specifically, the number of allowances which the member states can sell at auction will be increased by 100 million). If there were fewer than 100 million allowances then in the reserve, all of them would be released.
In addition, 900 million allowances previously held back by the European Commission to stabilize the market by “backloading” will be placed in the reserve.
However, through the end of 2025 allowances that were additionally allocated to the poorest member states (including Poland) for sale at auction “for the purpose of solidarity and growth within the Community” (Art. 10(2)(b) of Directive 2003/87/EC)—known as “solidarity allowances”—will not be removed from the market. These allowances will be deducted from the number of allowances that would otherwise be placed in the reserve.
The first communication from the European Commission on the number of allowances on the market is to be issued by 15 May 2017. However, allowances will not begin to be withdrawn from the market and placed in the reserve until 1 January 2019. This is two years earlier than provided in the original proposal by the European Commission. Efforts by Poland and certain other member states to maintain the Commission’s original proposal did not gain sufficient support.
It is projected that the new MSR system will lead to an increase in the price of greenhouse gas emission allowances from the current level of about EUR 7 to EUR 19 in 2020.
Marek Dolatowski, Energy Law Practice, Wardyński & Partners