The Market Stability Reserve (MSR) is a mechanism within the European Union Emissions Trading System (EU ETS) designed to address the surplus of emission allowances and enhance the system's resilience to significant shocks. Established in 2015 and operational since 2019, the MSR automatically adjusts the supply of allowances to maintain market stability.
The MSR functions by:
- Absorbing Surplus Allowances: When the total number of allowances in circulation exceeds a predetermined threshold, a portion is placed into the reserve, effectively reducing supply and preventing price declines.
- Releasing Allowances: If the number of allowances falls below a certain level, allowances are released from the reserve to increase supply and mitigate potential price spikes.
This dynamic adjustment helps balance supply and demand within the EU ETS, ensuring a more predictable and robust carbon market. Recent data indicates that the MSR will reduce auction volumes by approximately 267 million allowances between September 2024 and August 2025, reflecting its active role in market regulation.