Is a Market Stability Reserve likely to improve the functioning of the EU ETS?

The report investigates the potential for a Market Stability Reserve (MSR) to address market and regulatory failures in the EU ETS, such as limited banking capacity and regulatory myopia. Through a model comparison exercise involving twelve institutions, the authors assess different MSR designs—including the European Commission's proposal, an 'Early Start' version, and price-based mechanisms—across indicators of efficiency, price credibility, consistency, transformation, and robustness. The findings suggest that an MSR generally improves performance, with an Early Start MSR (2017) offering superior benefits over the 2021 proposal. The report emphasizes that the effectiveness of quantity-based MSRs depends heavily on setting trigger levels that accommodate the hedging needs of market participants, suggesting the use of REMIT Directive data for future adjustments.

• Market and regulatory failures, including limited banking capacity at social discount rates, myopia, and imperfect responses to complexity, impede the EU ETS from achieving an efficient abatement pathway.
• The European Commission's proposed MSR (EC MSR), planned for 2021, improves efficiency by avoiding almost two-thirds of the losses caused by market failures on average across models.
• An 'Early Start MSR' implemented in 2017, which places back-loaded allowances directly into the reserve, outperforms the EC MSR in efficiency, price credibility, and consistency, particularly over the first decade.
• A price-based MSR can be more effective than quantity-based MSRs if the trigger price is set close to the optimal abatement pathway; however, a low trigger price (e.g., /tCO2) has limited impact.
• Quantity-based MSR trigger levels must be set high enough to accommodate the hedging needs of market participants, such as power generators, to avoid driving carbon prices above the efficient abatement pathway.
• The French Proposal for an MSR, which includes a wider corridor (0.8-1.3 GtCO2) and faster response speeds, scored higher on efficiency, price credibility, and robustness than the Early Start MSR in DIW Berlin simulations.
• The introduction of an MSR generally increases the robustness of the EU ETS against external shocks, such as a 20% reduction in emissions between 2030 and 2034.
• Data from the European Union Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) Directive should be used to update MSR trigger levels to reflect evolving hedging volumes.

APA

Neuhoff, K., Acworth, W., Betz, R., Burtraw, D., Cludius, J., Fell, H., Hepburn, C., Holt, C., Jotzo, F., Kollenberg, S., Landis, F., Salant, S., Schopp, A., Shobe, W., Taschini, L., & Trotignon, R. (2015). Is a Market Stability Reserve likely to improve the functioning of the EU ETS? Climate Strategies. https://climatestrategies.org/wp-content/uploads/2015/02/Climate-Strategies-MSR-Report-Final1.pdf

Chicago

Neuhoff, Karsten, William Acworth, Regina Betz, Dallas Burtraw, Johanna Cludius, Harrison Fell, Cameron Hepburn, et al. Is a Market Stability Reserve likely to improve the functioning of the EU ETS? Climate Strategies, 2015. https://climatestrategies.org/wp-content/uploads/2015/02/Climate-Strategies-MSR-Report-Final1.pdf.

Wikipedia

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BibTeX

@techreport{neuhoff2015market, author = {Neuhoff, Karsten and Acworth, William and Betz, Regina and Burtraw, Dallas and Cludius, Johanna and Fell, Harrison and Hepburn, Cameron and Holt, Charles and Jotzo, Frank and Kollenberg, Sascha and Landis, Florian and Salant, Stephen and Schopp, Anne and Shobe, William and Taschini, Luca and Trotignon, Raphael}, title = {{Is a Market Stability Reserve likely to improve the functioning of the EU ETS?}}, institution = {Climate Strategies}, year = {2015}, month = feb, url = {https://climatestrategies.org/wp-content/uploads/2015/02/Climate-Strategies-MSR-Report-Final1.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }