Why the MSR2 non-paper should be a non-starter

The policy brief analyzes a June 2025 non-paper from 16 EU member states seeking reforms to the ETS2, the emissions trading system for buildings and road transport. The authors argue that while some suggestions—such as publishing more data and starting auctions early—are low-risk, proposals to modify the MSR2 trigger mechanisms, extend its lifetime beyond 2031, or strengthen price controls would increase the total volume of allowances in the market. Because MSR2 allowances are already additional to the emissions cap, the brief contends that these reforms would lead to higher greenhouse gas emissions, weaken the investment signal for decarbonization, and potentially jeopardize the EU's overall climate goals.

• The MSR2 is designed to regulate the ETS2 by adjusting the supply of emission allowances based on volume and price triggers. It holds 600 million certificates, which represent additional emissions above the ETS2 cap and account for approximately 5-10% of total ETS2 emissions.
• Two proposed measures in the non-paper could be implemented without significantly risking the emissions cap: regularly publishing updated information on emissions and heat pump/EV uptake, and launching ETS2 auctions in mid-2026 instead of 2027.
• Proposals to 'smooth' the MSR2 trigger mechanism or increase the volume of allowances released during 'tight market conditions' are likely to increase overall emissions, as current rules already project that only a small fraction of MSR2 volume will be used.
• The non-paper suggests removing the 'sunset clause' that deletes remaining MSR2 allowances in 2031. The authors argue that extending the MSR2 lifetime beyond 2031 would increase total emissions unless all allowances are used by the original deadline.
• Strengthening the 'soft price cap' of €45 by increasing the volume or frequency of allowance injections would lead to higher carbon emissions. The authors state that a 'hard price cap' is impossible without abandoning the existing hard cap on emissions.
• Reopening the MSR Decision to implement these changes carries the political risk that co-legislators may propose further measures to weaken the ETS2, potentially releasing all MSR allowances and increasing emissions supply by about 10%.

APA

Scott, E., & Haywood, L. (2025). Why the MSR2 non-paper should be a non-starter. Carbon Market Watch. https://carbonmarketwatch.org/wp-content/uploads/2025/09/MSR2-Reform-Explainer-1.pdf

Chicago

Scott, Eleanor, and Luke Haywood. Why the MSR2 non-paper should be a non-starter. Carbon Market Watch, 2025. https://carbonmarketwatch.org/wp-content/uploads/2025/09/MSR2-Reform-Explainer-1.pdf.

Wikipedia

{{cite report |last1=Scott |first1=Eleanor |last2=Haywood |first2=Luke |title=Why the MSR2 non-paper should be a non-starter |publisher=Carbon Market Watch |date=5 September 2025 |url=https://carbonmarketwatch.org/wp-content/uploads/2025/09/MSR2-Reform-Explainer-1.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{scott2025why, author = {Scott, Eleanor and Haywood, Luke}, title = {{Why the MSR2 non-paper should be a non-starter}}, institution = {Carbon Market Watch}, year = {2025}, month = sep, url = {https://carbonmarketwatch.org/wp-content/uploads/2025/09/MSR2-Reform-Explainer-1.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }