Brussels, 24 September, (Brussels Morning Newspaper) – European Union member states have agreed a negotiating position to change the EU carbon market, retaining more spare CO2 allowances as a buffer against sharp price increases. The position was approved on 23 September and will now form the basis for negotiations with the European Parliament.
EU countries agree to retain more CO2 allowances
The changes concern the Market Stability Reserve, which controls part of the supply of allowances within the EU Emissions Trading System.
Under current rules, allowances held in the reserve above 400 million are invalidated and permanently removed. The Council’s position would suspend that cancellation mechanism until the end of 2030, allowing a larger number of allowances to remain within the system.
From 1 January 2031, the proposed invalidation threshold would increase to 800 million allowances. The measure is intended to create a larger buffer that could help the carbon market respond when supply becomes tight.
More than three billion allowances have been removed since the existing invalidation mechanism began operating in 2023.
Council says changes will give businesses certainty
The reforms come as European governments consider how carbon prices affect electricity costs, industrial competitiveness and investment in decarbonisation.
Ireland’s Minister for Climate, Energy and the Environment, Darragh O’Brien, said:
“We are protecting the integrity of the EU carbon market while giving businesses the predictability they need to decarbonise.”
The reserve does not operate as a conventional fixed price cap. Instead, it adjusts the supply of allowances according to predefined market conditions, removing allowances when there is a significant surplus and providing mechanisms for additional supply when the market becomes unusually tight.
Parliament backs a different allowance threshold
The European Parliament has adopted a different negotiating position. MEPs voted by 367 votes to 240, with 59 abstentions, to maintain the invalidation mechanism while increasing its threshold from 400 million to 650 million allowances.
Parliament’s lead negotiator on the legislation, Pierfrancesco Maran, said:
“Today’s vote strikes the right balance between climate ambition and industrial competitiveness.”
The difference between the Parliament and Council positions will have to be resolved during negotiations before any final legislation can take effect.
Carbon prices affect European energy and industry
The EU carbon market requires covered power stations, factories and other installations to surrender allowances corresponding to their greenhouse gas emissions. Companies can trade these allowances, meaning their market price can rise or fall as supply and demand change.
Carbon costs are particularly important for energy-intensive businesses and electricity systems that remain heavily dependent on fossil fuels.
Keeping more allowances inside the reserve would not automatically place them back into circulation. Instead, it would increase the stock available within the system should existing rules permit additional allowances to enter the market.
Reform forms part of wider ETS review
The European Commission had proposed ending the invalidation mechanism indefinitely. Member states instead agreed on a temporary suspension through 2030 followed by the higher threshold.
The changes are part of a wider debate over how Europe can maintain its emissions-reduction policies while addressing energy costs and protecting industrial competitiveness.
Council and Parliament will negotiate final rules
Negotiations between the Council and European Parliament are expected to determine the final size and operation of the Market Stability Reserve.
The Council aims to conclude negotiations by the end of 2026. Until the institutions reach an agreement and formally approve the legislation, the proposed changes to the EU carbon market remain subject to negotiation.
