How can the EU Emissions Trading System support a union-wide coal phase-out?

The policy brief warns that the EU ETS is at risk of a new oversupply of allowances due to the fast decarbonisation of the power sector and the impact of the COVID-19 pandemic. It argues that the current Market Stability Reserve (MSR) is insufficient to manage the expected surplus from coal phase-outs, which could reach 1.55 billion EUAs by 2030 based on planned closures, or 5.31 billion EUAs if current trends continue. To maintain environmental integrity, the author recommends a one-off cap reduction of 450 million allowances, increasing the linear reduction factor to 3.1% from 2023, raising the MSR intake rate to 36%, and implementing a rule to cancel allowances held in the MSR for more than three years.

• The EU ETS faces a significant risk of oversupply because the power sector is decarbonising faster than the emissions cap is decreasing. Between 2013 and 2019, emissions from coal-based power generation dropped by 40%, while the cap only decreased by 10.5%.
• Carbon Market Watch estimates that planned coal phase-outs between 2021 and 2030 will result in emission reductions of 2.07 billion tCO2e. If the cap is not adjusted, this could lead to an accumulation of 1.55 billion EUAs; if current trends persist, the surplus could reach 5.31 billion EUAs, exceeding three years of total EU ETS emissions.
• The current Market Stability Reserve (MSR) parameters are deemed insufficient for managing the projected surplus. The author suggests increasing the intake rate to 36% to increase the volume of allowances absorbed and cancelled, noting that a planned decrease to 12% in 2024 would be inadequate.
• To prevent market instability and account for the decreasing need for power sector 'hedging', the MSR thresholds should be lowered and eventually decline to zero by 2030.
• The document proposes a new rule to automatically invalidate allowances that have been held in the MSR for more than three years to avoid maintaining a constant threat of new supply.
• The author recommends a one-off reduction of 450 million allowances to the EU ETS cap and an increase of the linear reduction factor (LRF) to 3.1% starting in 2023 to align with a goal of climate neutrality by 2040.

APA

Carbon Market Watch (2021). How can the EU Emissions Trading System support a union-wide coal phase-out? https://carbonmarketwatch.org/wp-content/uploads/2021/06/How-can-the-EU-Emissions-Trading-System-support-a-coal-phaseout.pdf

Chicago

Carbon Market Watch. How can the EU Emissions Trading System support a union-wide coal phase-out? 2021. https://carbonmarketwatch.org/wp-content/uploads/2021/06/How-can-the-EU-Emissions-Trading-System-support-a-coal-phaseout.pdf.

Wikipedia

{{cite report |author=Carbon Market Watch |title=How can the EU Emissions Trading System support a union-wide coal phase-out? |date=June 2021 |url=https://carbonmarketwatch.org/wp-content/uploads/2021/06/How-can-the-EU-Emissions-Trading-System-support-a-coal-phaseout.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{carbonmarketwatch2021how, author = {{Carbon Market Watch}}, title = {{How can the EU Emissions Trading System support a union-wide coal phase-out?}}, institution = {Carbon Market Watch}, year = {2021}, month = jun, url = {https://carbonmarketwatch.org/wp-content/uploads/2021/06/How-can-the-EU-Emissions-Trading-System-support-a-coal-phaseout.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }