In this online talk, we will look at the upcoming reform of the European Union Emissions Trading Scheme (EU ETS), particularly the Market Stability Reserve (MSR) Review, with Grischa Perino from the University of Hamburg.
The EU ETS is the cornerstone of the European climate policy covering about 45% of the EU’s greenhouse gas emissions. It follows the polluter pays principle under a cap-and-trade mechanism, whereby firms covered by the ETS purchase, sell and exchange emissions allowances representing one tonne of CO2-eq.
Within this carbon market, the Market Stability Reserve has the objective to increase resilience to demand shocks, deliver investment signals, and raise synergies with other climate and energy policies. It consists of a rule-based mechanism that adjusts the number of allowances to be auctioned to the market surplus by controlling the number of allowances in circulation in the carbon market. The surplus of allowances determines the response of the MSR:
If the surplus exceeds a certain threshold, a predetermined percentage of the surplus is withheld from auctions and added to the reserve;
if the surplus is lower than another threshold, some allowances are taken from the reserve and injected into the market through auction.
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