EU ETS 2 Market Stability Reserve: Analysis of Reform Proposals

Abstract

Currently, policymakers are debating the design of the Market Stability Reserve (MSR) in the EU Emissions Trading System 2 (EU ETS 2) and its role in smoothing allowance supply, limiting price increases, and safeguarding the system’s environmental integrity. This report uses Veyt’s EU ETS 2 market model to compare seven reform options and analyse their impacts on prices, the Total Number of Allowances in Circulation (TNAC), the annual MSR releases and withdrawals, and system-wide CO₂ emissions. Overall, the results confirm a clear trade-off. More generous or prolonged MSR releases lower prices but inflate supply and cumulative emissions, which undermines cap integrity.